My Car Is A Vegetarian And Part Of The Problem

On July 4^th, The Guardian newspaper in the UK published an news article about an unpublished report commissioned by the World Bank that cites damming evidence that demand for biofuels has pushed world food prices up by as much as 75%. This notably contradicts claims by the United States government that biofuel demand has affected world food prices by only 3%. There is some speculation that the World Bank has so far chosen not to publish the report precisely because it would embarrass the Bush administration.

Biofuels were once seen as a major components of plans to reduce greenhouse gases but over the past couple of years there have been a myriad of unintended consequences relating to governments’ support ofr biofuels that are making biofuels look less and less attractive all the time.

The controversy over rising food prices are just the latest, though perhaps the most obvious negative consequence. The British government already requires that all fuels sold in the UK contain 2.5% biofeuls and the EU is considering a requirement of 10% biofuel. The Guardian reports that the World Bank report says:

"Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate," says the report. The basket of food prices examined in the study rose by 140% between 2002 and this February. The report estimates that higher energy and fertiliser prices accounted for an increase of only 15%, while biofuels have been responsible for a 75% jump over that period.”

The Guardian article goes on to say that:

“It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.”

The United States is perhaps the biggest subsidizer of biofuels and is arguably the biggest distorter of food prices as a result. Biofuel subsidies have been one of the most popular topics of legislation over the past few years and there’s a myriad of bizarre ways in which the US government has given money to the biofuels industry.

In 2007, the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD). Commissioned a report simply to document and understand all the different ways that the US government subsidizes biofuels. The report titled, “BIOFUELS - AT WHAT COST ?” is freely available and is a fascinating read. It’s truly amazing how creative legislators can get when they want to hand out money to an industry.

Table 4.1 of the report is shown below, as you can see, there are no less than 14 different ways in which the US government supports the biofuels industry.

The estimated subsidy for ethanol in 2008 alone is somewhere between $9.2 billion and $11 billion and the 2008 subsidy for biodiesel is between $1.5 billion and $1.8 billion. When all the subsidies for both types of fuel are added up from 2006 through the estimates for 2012, the total subsidies add up to somewhere between $66 billion and $91 billion. FYI. That’s a lot of money!

The biggest subsidy by far is the Volumetric Excise Tax Credit. I had no idea what this is until I read the report, which states that:

The volumetric excise tax credits for blending biofuels remain the single largest implemented subsidy to both ethanol and biodiesel. Rates have remained the same over the past year, with every gallon of ethanol (including imports) receiving a 51 cents per gallon blender’s credit. For biodiesel, rates have remained at 50 cents per gallon for biodiesel from waste cooking oils and $1.00 per gallon for biodiesel made from virgin agricultural feedstock. No caps or linkage to oil prices have been instituted; as a result, the subsidy cost has risen linearly with domestic consumption.

Furthermore, the tax law for most subsidies of this sort is taxable. But not biofuel subsidies. Quoting from the report:

“In our October 2006 report, we noted the existence of a further tax loophole that enabled the excise tax credits to be excluded from taxable income (most tax credits are added to taxable income, reducing their cost to the Treasury). Sources within both the Joint Committee on Taxation of the U.S. Congress (JCT) and the U.S. Department of Treasury (Treasury) have confirmed that there have been no technical corrections in how the excise tax credits are treated by the Internal Revenue Service (IRS). As a result, the credits are still excludible from taxable income. The incremental benefit of this exemption was $ 1.2 billion for ethanol in 2006 on top of a direct revenue loss of $ 2.8 billion; and $ 105 million for biodiesel, on top of $ 250 million direct revenue loss. The incremental subsidy from this tax loophole, supposedly a policy accident, has become the third largest subsidy to ethanol and the second largest to biodiesel.”

These subsidies have lead to a practice called “splash and dash” among biodiesel producers. I found a good explanation of this practice in The Christian Science Monitor in a 2007 article which describes the practice like this:

Created under the 2004 American Jobs Act, the "blenders tax credit" was supposed to boost US production of biodiesel by encouraging US diesel marketers to blend regular petroleum diesel with fuel made from soybeans or other agricultural products. It succeeded, perhaps too well.

Attracted by the $1-per-gallon subsidy, US diesel-fuel marketers mixed away, setting off a nationwide boom in biodiesel refinery building. But no one anticipated splash-and-dash.

The maneuver begins with a shipload of biodiesel from, say, Malaysia, which pulls into a US port like Houston, says John Baize, an industry consultant in Falls Church, Va. Unlike domestic diesel-biodiesel blends, which typically contain from 1 to 10 percent of biodiesel, the Malaysian fuel starts off as 100 percent biodiesel, typically made from palm oil.

Then, the vessel receives from a dockside diesel supplier a "splash" of US petroleum diesel. It doesn't take much to turn it into a diesel-biodiesel blend that is eligible for US subsidies.

If the ship holds roughly 9 million gallons, it takes only about 9,000 gallons of traditional diesel (0.1 percent of the total) to make the entire load eligible for the blenders tax credit.

The US importer of the load applies to the Internal Revenue Service for the credit – a dollar for each of the 9 million biodiesel gallons, Mr. Baize calculates. The next day the tanker can set sail – dash – for Europe. There, the US importer resells the biodiesel, taking advantage of European fuel-tax credits that, in effect, keep biodiesel prices above US prices.

So for each tanker that does this, the taxpayers pay $9 million to the company and the fuel is not even sold to US consumers.

The other unintended consequence of biofuel subsidies is more like a lack of a consequence. The IISD report also crunches some numbers to calculate the efficiency of these subsidies in terms of reducing greenhouse gases and displacing carbon fuels and concludes:

“our basic conclusion remains the same: even using the most favorable assumptions regarding displacement values for biofuels, the cost per unit displaced was far higher than other options existing in the economy.”

So let’s recap where we are with biofuels and the U.S. subsidies that support them:

• The cost to US Taxpayers from 2006 -2012 is somewhere in the ballpark of $66 billion and $91 billion.
• US Consumers often don’t benefit from the subsidies due to “splash and dash practices”.
• a “policy mistake” exempts the biofuel subsidies from taxation
• there is at least one credible study that shows with some degree of certainty that the U.S. subsidies of biofuels is less efficient at displacing carbon fuels usage than other alternatives.
• the massive subsidies of the biofuels industry is arguably contributing to the massive rise in food prices.

The IISD report sums it up bureaucratically:

“Given the inefficiencies that have been identified, combined with the rising environmental costs of biofuel production around the world, there is no reason that this one particular approach aimed at addressing energy security and climate change concerns should be given a free rein.”

Don’t get me wrong. I’m all in favor of exploring as many energy alternatives as possible and in an era of $4 per gallon gas (and rising), a lot of the energy alternatives are becoming economically viable in their own right. But there’s a right way and a wrong way to explore energy alternatives. Massive government subsidies are becoming more and more obviously the wrong way to go about it.

The next time I see one of those smarmy bumper stickers like the “My car is a vegetarian too” sticker, I’m not going to be nearly as impressed as I used to be. In fact, I’m gonna start thinking of them more as a “part of the problem” than “part of the solution.”