There was a great article by Martin Wolfe in the FT this week on Biofuel subsidy (it’s here). Prior to reading it my view on Biofuels was that they were ethically debatable, since it has raised the price of basic foodstuffs, so making American fuel inefficiency directly affect what people can afford to eat across the world. I knew that there were subsidies involved, which in general don’t sound a good thing. I hadn’t realised just how bad they sound. It’s well worth reading the article, but a few points that stood out for me – low carbon savings, subsidies, and multi-fuel use incentives.
Firstly, the saving in carbon isn’t very high -13% for rapeseed and 18% for corn based. So, given the subsidies involved, the cost of each ton of carbon avoided at least $150 and can reach $10,000! This is stratospherically higher than the avoidance cost of carbon emissions, so makes no sense at all. Secondly, the subsidies involved are huge, and largely on top of existing subsidies. US farmers (and EU ones for that matter) do not need subsidising beyond what might be required for safety of food supply. And finally fuel economy allowances in US vehicles production, which are largest for the largest engined vehicles, so putting more large engined vehicles on the street that are actually powered dominantly by petrol.
Of course the US subsidies may not be about carbon reduction. The US has stated that it wants to be more energy independent, and may well see this as part of that goal. At first sight it makes some sense. It might even give a shred of credibility to the US import duties on South American biofuel, given that it’s more efficiently produced than US. But, to be meaningful with current technology, the effect on world food prices would be huge. This is going to do nothing to improve the worlds view of the US, and I could easily see it decline from what is already a pretty low level. This could easily backfire badly, just like so much of US foreign policy (I’ve been reading ‘Failed States’ by Noam Chomsky and though he has a very negative view, it’s difficult to argue against many of the conclusions). It’s also not consistent with the US’s statements on carbon reduction – to whit that they would look to technology to reduce emissions, not caps or carbon trading. Here, they are rolling out the subsidies for the technology without waiting for the refinements. To not very much surprise, with even the small levels now produced that make no impact on energy independence, food prices are going up and the rest of the worlds view of the US is going down.
There is also an argument that this is all transitional. Just pump-priming to create capability, which can then be made efficient over time. Indeed there was another article in the FT on Thursday about EU/UA adoption of Jatropha to make biofuel. Jatropha is an inedible plant with ~ 40% oil in it’s seeds. So, it looks a good candidate for biofuel, and doesn’t directly affect food prices though it uses land of course. So maybe the pump is getting primed. But, it does not seem obvious to me why this pump needs priming at all. Oil majors and many others are already willing to take some pretty big punts – e.g. oil sands in Alberta that Shell are advertising that they persevered for 40 years to unlock. Why should biofuels have a jump-start beyond their potential carbon avoidance value?
The simple fact is that carbon and pollutants need reducing. We can make an estimate of the appropriate level, and use this to set emission caps. We can use emissions trading and inspections to allow normal market forces to work. There are investors who will innovate, but will do so rationally. There is a developed world vs. non-developed world issue, but we could again use market forces – set the carbon cap on a per-capita basis, and let the developed world buy their rights from the developing world. There would be a large outflow of funds to developing countries, but that feels just fine – it is their world too, and they do own the right to live in it now and in the future! It might even replace aid and allow debt repayment – all laudable.
Why do we always go for centrally planned solutions? Why are we surprised when they don’t work and fall foul of special interest groups? Why can’t the US and EU work as the market-driven economies that they declare themselves to be?