Several posts during the past week, and countless ones elsewhere, have asked people to support the Energy Bill making its way through Congress. Some people have no problem with one of its major provisions, which calls for substantially expanding the Renewable Fuels Standard (RFS) — the regulation that requires minimum amounts of ethanol, biodiesel, or other biofuels to be incorporated into the volume of transport fuels used each year. Indeed, some would even welcome the prospect.
Many others do not like the idea, but seem to feel that it is a price worth paying in order to preserve solar investment tax credits as well as production tax credits for large-scale renewable projects. (A national Renewable Electricity Standard has already been dropped from the bill.) Some of those people then argue, in effect, we can always go back and repeal the RFS next year.
As I have argued on a number of occasions, once a minimum use of a product becomes mandated, there is almost no chance of rolling it back, especially once investments are made to meet it.
But if you, gentle readers, think I’m exaggerating the problem, then I encourage you to print off a very handy (and accessible) report, Corn-Based Ethanol in Illinois and the U.S., recently published by the Department of Agricultural and Consumer Economics of the University of Illinois. In Chapter 9 of the report, Prof. David S. Bullock explains “Ethanol Policy and Ethanol Politics” (PDF) in the United States in very clear, straight-forward terms. Here is what he says toward the conclusion of the paper:
Another question is how flexible factors are in moving out of ethanol production and into an alternative use. It is crucial for policy makers to understand this concept and its implications. Some factors are reasonably flexible — the transportation trucks and rail cars can be moved to alternative activities with relative ease.
But other factors are considerably less flexible. It would be difficult to move some forms of labor and know-how out of the sector, especially in any kind of short run. Ethanol factories are built in rural communities, and thus one of the political justifications for providing subsidies to ethanol is to create factory jobs in rural areas. If workers and managers own homes in a small town, then when an ethanol plant shuts down it may be impossible for them to sell their homes without a huge loss in equity, and therefore they may not be able to get out of the town that they moved into earlier, when they anticipated that ethanol markets would remain strong, and government policy would remain favorable, for many years to come.
Even less flexible are the buildings and machines that make up the ethanol plant itself. Clearly it is not generally feasible to move the buildings. And many of the machines used in an ethanol plant are not very useful in other industries.
This irreversibility of bringing factors into ethanol production causes the subsidy policy to act like a political ratchet. It is easy enough politically to cause the subsidy to go up: corn farmers and ethanol producers influence their congressional representatives, and everyone refers to energy self-sufficiency and rural job creation. But once in place, it may well become politically infeasible to bring the subsidy back down. For, after the economy is finished building new ethanol factories, in response to the subsidy, what then?
We’ve already argued that when the building process is through, many ethanol factories will not be making large profits. The factories and their workers, then, would be quite vulnerable if, for example, any of the following transpired: 1) the government decided to remove or lower the subsidy, 2) world oil prices fell and remained low for an extended period, and/or 3) droughts led to poor corn harvests in consecutive years. In any such circumstance, it will be extremely difficult for government to tell factories that are losing money and workers who are losing jobs, “Sorry, but that’s the free market.” Rather, it will be politically expedient to raise subsidization levels. Thus, a major concern is that ethanol subsidies are relatively easy for governments to get into, but very difficult for governments to get out of. [My emphasis]
There are some who argue that the high prices for “program commodities” generated by support for biofuels will smooth the way for major reforms of agricultural policy. Well, one such reform, proposed by Senator Richard Lugar, has already been defeated. Senator Lugar is a big proponent of ethanol, by the way, but IMHO on the issue of farm subsidies he gets it right. (See his remarks in yesterday’s Fort Wayne Journal Gazette.) Interestingly, here is what a farmer interviewed about the Lugar amendment had to say on the matter:
Grain farmers were concerned that Sen. Richard Lugar’s amendment to the farm bill would provide too little protection if a drought or other disaster damaged crops, Woodburn farmer Roger Hadley II said. If the proposed crop insurance program had been tied to past revenues, it would not reflect the high prices and high production costs farmers are dealing with today, Hadley said. Demand for ethanol and other biofuels increased crop prices substantially in the past two years, but farmers need the additional income to cover the rising cost of fertilizer, seed and farmland. If a drought slashed farmers’ harvests in half, he said a crop insurance program based on past revenues could not cover current costs. [My emphasis]
So, once again the status quo rules. We’ll still pay for farm subsidies plus ever-increasing subsidies for biofuels.