November 15, 2007 (Vol. 27, No. 20)

More Flexible Solutions Like Raising the Gas Tax Could Address Energy Concerns

Currently, the rush to promote biofuels with subsidies and regulations aims at reducing our dependence on fossil fuels and also decreasing greenhouse gas emissions. I’m all for that goal, but how far can biofuels really take us? Also, how cost-effective are they when compared to other approaches to achieving this same public mission?

Obviously, we cannot know in advance what technological innovations may emerge nor the extent to which costs may decline as we learn from experience and entrepreneurship. Wishful thinking, however, is a dubious basis on which to spend billions of dollars on specific kinds of yet unknown methodologies.

What we need is a broad and flexible approach that can nimbly shift attention away from less promising options and toward more advantageous ones, as advances are made (or not) and more information becomes available.

We should also take a closer look at those alternatives where we currently have some solid information such as corn ethanol and soybean/canola biodiesel, which are commercially produced, and cellulosic ethanol, where there is some data from engineering and other studies as well as pilot projects.

Cost Evaluation and Impact on Greenhouse Gases

To properly assess these biofuels, we need to pay attention to the amount of energy in the fuel as well as the amount of energy needed to produce the fuel, and finally look at the net contribution. If the aim is to replace a BTU of gasoline with a BTU of biofuel, then we want to know what the net reduction in fossil fuel inputs will be and the cost of that reduction.

When these three biofuels are evaluated closely, it is interesting to note how much corn ethanol will actually help our energy appetite. If all of the corn grown in the U.S. were used to produce ethanol and if this ethanol were substituted BTU for BTU for gasoline, the net contribution would amount to about 1.5% of our petroleum energy use and 0.6% of total energy use. This is based on the unrealistic scenario that all U.S. corn would go to ethanol.

To look at it another way, given that the projected growth in the nation’s energy use is about 1.8% per year, the contribution from all the corn grown in the country could delay the growth path for our use of petroleum energy by about 10 months, which seems like a trivial amount.

The cost of promoting energy independence in this way is about $50 per million BTUs of reduced fossil fuel inputs. To put that number in perspective, let’s compare it to the cost of lowering our fossil fuel input use with standard economic prescriptions such as raising the gas tax, which would be $1.75 per million BTUs, or tightening fuel economy standards on cars, which would be $3.22 million BTUs.

So, to reduce fossil fuels by one trillion BTUs, for example, promoting corn ethanol could achieve that goal, but at a cost that is 28 times the cost of a gas tax and 15 times the cost of higher fuel economy standards. And what about the costs for soybean, canola biodiesel, and cellulosic ethanol (made from woody biomass) as compared to a gas tax? Soybean is 11 times the cost, canola is 6 times the cost, and cellulosic ethanol is 14 times as costly as a gas tax and 7.5 times as costly as fuel economy standards.

I’ve noticed over the years that when it is learned that government costs are, say, even 50% more than necessary for a particular service or a given project, public outrage comes fast and loud. So why is it that few voices are being raised against this taxpayer-funded drive for biofuels, when their costs are 750% to 2,800% higher than the cost of well-established alternatives?

I can think of two objections that might be raised to the way I have framed this issue.

First, some have argued that the amount of input energy in BTUs is not as important as the kind of energy, and that we need to focus on the gallons of liquid fuel, not the net BTUs contributed. The argument adds that our transportation sector depends on a fuel you can put in a gas tank; so wind, solar, and even coal are not good substitutes for energy you can drive around with.

This is true up to a point, but various sources of energy are put to different uses. There are ways that we can shift some amounts of energy between uses including transportation. For relatively small changes in the amount of any given energy type available, price adjustments and other forces can usually push and pull various energy types into different uses.

So, given strong evidence that, at least over time, energy types and uses are somewhat fungible in the aggregate, this criticism should not be given too much weight.

The second dispute that might be raised is that the alternatives I have used as a benchmark for cost-effectiveness—the gas tax—does not produce any new energy the way biofuel promotion does.

This objection is simply false. The types of incentives that a gas tax or a fossil fuel tax represent are the kinds of economy-wide incentives that will induce innovation, adoption, and risk-taking. Entrepreneurs would base their decisions on whether the technology reduces fossil fuel use, rather than on whether the government can be counted on to continue subsidizing it.

If, for example, ethanol made from switchgrass really is the key to our energy independence, then a tax of fossil fuel inputs would make that fuel more competitive in the market and more profitable to the entrepreneur who found a way to make it at the lowest possible cost. So not only would this approach create new supply and restraints on demand, it would offer precisely that very broad and flexible approach I mentioned earlier; one that would nimbly shift attention away from less encouraging options and toward relatively more favorable ones as advances are made and as more information becomes available.

It is difficult to justify the current rush to subsidize and promote biofuels as the solution to our energy problems. We need to choose a path that makes the best use of our scarce resources, rather than one that while costly, offers little hope of achieving the desired goal. We require a solution with the potential to reduce our fossil fuel consumption by more than just 1 or 2%. This is especially true when it is clear that it would come at a very high cost and be extremely disruptive to food and agricultural markets.

Biofuels are popular for a variety of reasons including the notion that we can grow our energy right in our own backyards. My message is this: We need to look at the facts regarding biofuels in terms of their net energy contribution and the cost of that contribution in comparison to alternative options, especially broad market-based incentives. Let’s not put all our energy eggs in one basket, especially if the basket is nothing more than a gold-plated thimble.

William K. Jaeger, Ph.D., is a professor in the department of agricultural and resource economics at Oregon State University. This essay draws on a recent report, Biofuels Potential in Oregon: Background and Evaluation of Options. For more information go to [email protected].

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