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No Biofuels Bailout

Farm energy pork wastes money and harms the environment

Ronald Bailey
January 13, 2009

Clean Renewable Energy Bonds ("CREBs") Everyone wants a bailout. Last week, a coalition of mostly farm energy lobbyists sent a letter to the Congressional Democratic leadership begging for billions in subsidies and tax credits. Farm energy is an umbrella term that encompasses everything from the growing of crops for biofuel production to the infrastructure that turns those crops into fuels, and additional energy sources such as farmer-owned windmills. In their letter, the lobbyists claim that a farm energy bailout would "help resuscitate our nation's economy and create hundreds of thousands of well-paying jobs." First, the renewable energy lobbyists ask for $1.2 billion per year to build and operate "clean energy" facilities. Their letter specifically mentions additional funding for the Rural Energy for America Program, Bioenergy Crop Assistance Program, and the Biorefinery Assistance Program. This would be on top of $1.1 billion in farm energy subsidies authorized by Congress last year.

In addition, biofuel lobbyists want Congress to "extend the federal Production Tax Credits (PTC) for renewable energy, cellulosic biofuels, and biomass for five years," and make them "fully refundable." Generally, tax credits reduce the amount of tax a company or an individual owes. In this case, however, "fully refundable" means that if a company doesn't turn a profit, the Treasury will send them a check to offset the amount they've invested in their power plants and biorefineries. Roughly, if a company invests $1 million in a bioethanol refinery, makes no profits, and thus owes no taxes, the feds will still send it a check for $1 million as a production tax credit. In the past, money-losing renewable fuels companies could sell their tax credits to financial institutions like JP Morgan which used them to reduce their tax liabilities. Since the financial crisis, fewer firms are willing to buy up such credits, so now the lobbyists want the money to be "refunded" directly to their clients.

Finally, the coalition of lobbyists calls for the expansion of the clean renewable energy bond (CREB) program. This allows biofuels and other renewable energy companies to issue what are, in effect, interest free bonds. CREB issuers do not make interest payments; instead, the federal government provides a tax credit to the issuer. Purchasers of CREBs take the amount of the tax credit as a credit against their regular income tax liabilities. In all cases, taxpayers would be on the hook for the subsidies, credits, and loans.

The proposed bailout would apply not to just to bioenergy companies, moreover, but to bioenergy and farming groups that make up the majority of the 33 lobbying groups that signed the letter to Congressional Democrats. It's easy to see why: Numerous biofuels companies are shutting down and going bankrupt. The biofuels crash is occurring despite the federal mandate that requires gasoline refineries to blend billions of gallons of ethanol into their fuels and the federal tax credit worth 51 cents per gallon (lowered in December to 45 cents) handed out to ethanol refiners. Besides shoring up the faltering bottom lines of their industries (and incidentally contributing to job creation and energy independence), renewable fuels lobbyists argue that the biggest benefit of biofuels subsidies is that they will replace dirty fossil fuels and thus reduce the carbon dioxide emissions that are causing man-made global warming. But is this true?

To answer that question, Mark Jacobson, a professor of Civil and Environmental Engineering and Director of the Atmosphere/Energy Program at Stanford University, recently published a review of the environmental and health effects of twelve possible ways to power vehicles using renewable and low-carbon energy sources. Jacobson looked at combinations in which battery electric vehicles (BEVs) would be fueled using electric power generated by wind, solar, hydro, tidal, or nuclear plants, and where vehicles would use corn or cellulosic ethanol. Interestingly, Congress passed a cellulosic biofuels production tax credit for up to $1.01 per gallon. Cellulosic biofuels are produced using agricultural waste, wood chips, and perennial energy crops like switch grass.

Jacobson ranked each of the twelve proposed sources of renewable/low carbon energy for vehicles on the basis of their environmental and health effects. Corn and cellulosic ethanol came in dead last. Why? Among other things, Jacobson points out that biofuels use a lot of land and water, reduce wildlife habitat, contribute to air pollution, and boost the price of food. In addition to all those negative impacts, biofuels may not even reduce greenhouse gas emissions. As evidence for this, Jacobson cites a 2008 study in Science that found that producing corn ethanol nearly doubles greenhouse emissions over 30 years and that cellulosic biofuels derived from switch grass could increase such emissions by 50 percent.

Worse yet, even if such "tax subsidies" do result in marginal decreases in greenhouse gas emissions, they do so at a vast expense. In a 2007 study, Tufts University economist Gilbert Metcalf found, "The tax credit for ethanol is an example of a cost ineffective subsidy. The cost of reducing CO2 emissions through this subsidy exceeded $1,000 per ton of CO2 avoided in 2006." Keep in mind that proposed carbon dioxide taxes generally start at around $20 per ton.

Ultimately, Jacobson finds that "the biofuel options provide no certain benefit and result in significant negative impacts." He concludes that "the diversion of attention to the less efficient or non-efficient options represents an opportunity cost that delays solutions to climate and air pollution health problems." Biofuels represent one such "non-efficient option," and a bailout of that faltering industry would divert attention from more effective solutions. In a new study for the Manhattan Institute, a free market think tank, Metcalf calculates that around 50 percent of energy subsidies currently go to fossil fuels and 50 percent go to various renewable fuels. If Congress decides that greenhouse gases are a big problem, it should stop trying to pick energy technology "winners" by subsidizing favored sectors, and instead end all subsidies and put all energy technologies on a level playing field. Congress should then set a price on carbon dioxide, and let the most affordable and most efficient energy technology win—be it wind, solar, clean coal, nuclear, or whatever.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

This column first appeared at Reason.com.


Ronald Bailey is Science Correspondent


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