The fallacy of subsidized local ethanol production
by Tito F. Hermoso
The Government as Geomancer
The fatal conceit of government [and legislators] is that they think they can make predictions of what people will need in five years, the price they are willing to pay for it then without sacrificing wealth to inefficiency. Or so postulated the Nobel-prize winning economist, Friedrich Hayek. Thus paves the way for the enacting of the law of unintended consequences, almost always adverse, when a few hundred legislators are deemed wiser than the nearly infinite number of nuanced economic decisions made by millions of their constituents. Which is essentially, defines the market: all of us consumers.
Free trade of goods is the only efficient way of matching supply and demand. It is the only way to efficiently determine how much of that good is desirable for a given price. That's why subsidies, like raising tariffs against imports, are distorting to this efficient functioning of markets. Subsidies create opportunities for those who cannot sell their goods in a fair in free market by tapping the coercive and redistributive forces of government. Subsidies make their uncompetitive goods, artificially attractive by raising the price gap of the market competitive goods. Subsidies create an opportunity for manipulation of government by special interests and lobbies, and this is all at the general public's expenses. This damages any social welfare agenda of government because favoring a subsidy on one sector disadvantages another, in this case the general public. Instead of giving consumers the best goods at lowest cost, the subsidized, previously overpriced good now becomes viable, at the cost of the money used to subsidize it being taken away from more important uses. Subsidies are often inequitable.
Bio fuels subsidy and false economy
This take on subsidies go hand in hand with today's global clamor for bio fuels. The motivation of course is the world's energy dependence on fossil fuels, leading to scarcity and higher prices. There are ecological sustainability [global warming, non-renewable resource of fossil fuel], economic supply and energy independence issues tied to this. The success of Brazil and the predominance of locally available ethanol from cane sugar is held as an example that favorably answers all three issues and everyone wants to imitate it. But broad brush or one-size-fits-all solutions - like the ground swell for government to step in with huge subsidies to convert arable land from agricultural food production to bio-fuel plus the attendant refineries that go with it, is not the answer. Brazil's success owes to replacing something it did not have in abundance, namely, imported petroleum, to something that they had in abundance to begin with, cane sugar.
Food vs. fuel
Certain parts of Europe are already banging onto the limitations of this food vs fuel production. Rapeseed oil, used for cooking in Europe, is now in short supply as 60% of its production now goes to bio-diesel. Thus, Europe is now importing palm oil for cooking from Asia. But then, that puts pressure on the price of palm oil as Malaysia, one of the world's largest producers, is doing the Brazil model by converting their abundant palm oil into bio-fuel.
Economists understand the "Lou Dobbs" [the CNN TV journalist that mirrors right wing insular thinking of most Americans] effect in the United States and former President GW Bush's energy program, focusing more on keeping fuel supplies domestic rather than Middle East sourced, promised increases in corn based ethanol production, through subsidies. This, naturally, started a gold-rush into bio-fuels. In order to make this work, the US imposed a tariff on imports of ethanol, ensuring that local ethanol gains market share.
Take out all subsidies, ceteris paribus, it is far more efficient to produce ethanol from sugar than it is from corn. Gregory Stephanopoulus, a professor at MIT, estimates that to grow and refine enough corn to make 1.3 units of energy, needs at least 1 unit of fossil fuel. A gallon of ethanol puts out 30% less energy than a gallon of gasoline. The 5bn gallons of ethanol produced in the USA last year only displaced 1bn gallons of gasoline in terms of energy. Sucrose based ethanol extraction [cane, corn, etc.] is fairly advanced, but extraction of ethanol from cellulose based input like biomass still has some ways to go, even the ratios of energy improve from 1.3 units to 5, or roughly equal to the volume of gasoline replaced.
Thirsty and more expensive
So ethanol proponents in the US should prepare to embrace even lower MPG or kms/liter figures when using ethanol mixes be it E05 5% or E85 [85% ethanol]. It only becomes worth their while if the ethanol mix is considerably cheaper. But producing it costs a lot more than gasoline, so for ethanol to be cheaper, the subsidies will have to be huge as there is still not enough refining capacity or is there an optimum number of acreage to add to planting corn-for-fuel on top of existing acreage used for corn-for-food production. Guess who shoulders the cost of the subsidy?
Our country should learn from the misguided attempts to rationalize bio-fuels into our economy but it doesn't mean that we cannot readily adopt some of the successful ideas. Taking stock of existing capacity to produce cane sugar and the price that it is sold should alone decide if ethanol from sugar cane is viable. Imputing a subsidy, like raising tariffs, especially if laws are passed to force its mixed use, to lower the price already signals that this is distorted and therefore, economically inefficient. Demand for our sugar for food is far higher than our means to supply it. Why force what sugar we have into fuel?
The diesel difference
Bio diesel mixed with Coconut methyl Ester [CME] is another matter as 1. it has the highest energy factor compared to all oils made into bio-diesel - thus there is no need to get started on subsidized planting of the relatively energy factor inferior Jatropha - and, 2. we have an abundance of coconut already planted and sustained without subsidy. Depending on whose scientific research one accesses - whether the scientist is motivated by a clamor for more industry funding for their project or is funded to the extent of the loss of independence - the flaw of today's bio fuel law is that it imposed too little by way of being a minimum of 1% CME mixed with diesel. But then, that is only a minimum. If the production of CME ramps up and more and more local diesel motorists become, like their European counterparts - who think nothing of pumping 20% rapeseed bio-diesel mix into their BMW 530d fuel tank- the market, in its collective wisdom, may even clamor for 20% CME in their bio-diesel. A success, without the need of the public bearing the expense of a subsidy.