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Environmental Accounting and Green Subsidies: The Biofuels Mistake

By Greg Rehmke -- December 4, 2018

Full-cost accounting turns out to be complicated. Ethanol from corn was a popular idea in corn-growing U.S. states like Iowa, as well as with those who wished to reduce dependence on foreign oil. Environmental groups joined farm lobbies to enact ethanol mandates and subsidies. But new research and mounting environmental costs have turned most environmental groups against ethanol.”

At tournaments around the world each year, high school and college students debate public policy resolutions and motions. One popular format, World Schools Debate, has teams of three debating announced motions after preparing to argue for and against. [1]

On December 14–16, some 90 teams from around the globe will compete in Zagreb, Croatia, in The Winter Holidays Open, where final motion will be (THW: “This House Would”):

WHO 2018 FINAL MOTION: THW oblige companies to price in environmental burden in the cost of their products.

The involved students are researching ways to measure, account for, and regulate the environmental costs from the various industries that support mankind: agriculture, textiles, manufacturing, mining, transportation, and energy production.

Background

The prices of the goods and services purchased and consumed should, theoretically, incorporate upstream and downstream environmental burdens in addition to money costs for raw materials, labor, rent, capital, and any other factors of production. To the extent that they do not incorporate so-called negative externalities, the goods and services are underpriced and overconsumed–again theoretically.

However, a cautionary note on many politically popular policies long-advocated by environmental organizations, such as mandates to fund “green” energy sources like ethanol and biofuels, as well as subsidies for wind and solar power. These policies not only raise energy and food costs to consumers and taxpayers but also have significant environmental problems.

Biofuels: A Lesson

Full-cost accounting turns out to be complicated. Ethanol from corn was a popular idea in corn-growing U.S. states like Iowa, as well as with those who wished to reduce dependence on foreign oil. Environmental groups joined farm lobbies and conservatives to enact ethanol mandates and subsidies.

But new research and mounting environmental costs have turned most environmental groups against ethanol. The secret environmental cost of US ethanol policy (AP News, November 12, 2013) looks back at earlier ethanol enthusiasm:

With the Iowa political caucuses on the horizon in 2007, presidential candidate Barack Obama made homegrown corn a centerpiece of his plan to slow global warming. And when President George W. Bush signed a law that year requiring oil companies to add billions of gallons of ethanol to their gasoline each year, Bush predicted it would make the country “stronger, cleaner and more secure.”

But the ethanol era has proven far more damaging to the environment than politicians promised and much worse than the government admits today.

As farmers rushed to find new places to plant corn, they wiped out millions of acres of conservation land, destroyed habitat and polluted water supplies, an Associated Press investigation found.

Unfortunately government subsidies are easier to start than to stop. From October this year: Trump’s Ethanol Plans Double Down on Bad Environmental Policy, (The Beacon, October 10, 2018). Though oil prices are down and U.S. production up, the subsidies and environmental burdens will continue:

Yet, instead of terminating the Renewable Fuel Standard (RFS)—which mandates a sharp increase in renewable fuel consumption by 2022—the Trump administration has doubled-down on biofuels. President Trump has said that he supports ramping up ethanol production even further by allowing gasoline containing 15 percent ethanol to be sold year-round. Doing so would expand ethanol use and encourage the EPA to ratchet that percentage up in subsequent years. Not surprisingly, the president made his announcement in Iowa, a major corn-belt state.

Similar environmental burdens have followed government energy subsidies and policies favoring other biofuels. Biofuels Digest reviews Biofuels Mandates Around the World: 2016:

The bulk of mandates continue to come from the EU-27, where the Renewable Energy Directive (RED) specified a 10 percent renewable content by 2020 but has been scaled back to the 5-7.5 percent range.

Thirteen countries in the Americas have mandates or targets in place or under consideration, 12 in Asia-Pac, 11 in Africa and the Indian Ocean, and 2 from non-EU countries in Europe.

Besides the EU, the major blending mandates that will drive global demand are those set in the US, China and Brazil – each of which has set targets – or, in the case of Brazil, is already there – at levels in the 15-27 percent range by 2020-2022.

Somehow for EU and US legislation, neither the higher domestic fuel costs nor the extreme international environmental burdens caused by these policies were considered or have much impact on current green subsidies.

Palm Oil Was Supposed to Help Save the Planet. Instead It Unleashed a Catastrophe (New York Times Magazine, November 20, 2018), gives readers a look at the environmental havoc biofuel mandates are causing on the island of Borneo, where tropical forests are being burnt away and replaced by rows of palm oil trees:

Most of the plantations around us were new, their rise a direct consequence of policy decisions made half a world away. In the mid-2000s, Western nations, led by the United States, began drafting environmental laws that encouraged the use of vegetable oil in fuels — an ambitious move to reduce carbon dioxide and curb global warming. But these laws were drawn up based on an incomplete accounting of the true environmental costs. Despite warnings that the policies could have the opposite of their intended effect, they were implemented anyway, producing what now appears to be a calamity with global consequences. …

A decade ago, the U.S. mandated the use of vegetable oil in biofuels, leading to industrial-scale deforestation — and a huge spike in carbon emissions.

See also Despite EU palm oil ban, biofuel problems will continue (DW, January 23, 2018):

The EU target of requiring 10 percent of transport fuels to be from renewable sources, adopted in 2008 for achievement by 2020, on the surface seems like a laudable goal.

But critics say this has converted land use from cultivation of crops for food to biofuel, which drives up food prices and threatens food security.

In addition, the change in farming practices has been increasing greenhouse gas emissions through a phenomenon known as indirect land use change.

Since old-growth trees in rainforests act as carbon sinks, when farmers clear those forests in order to grow biofuel crops, this releases carbon that had been locked up in those large trees.

European Union renewable energy policies lacked adequate environmental cost accounting. The push for replace fossil fuels with wind, solar, and biofuels has had unintended environmental consequences.

Advocates thought growing trees to burn for electricity could be “carbon-neutral,” that is, the growing trees would absorb carbon dioxide from the atmosphere before later released burning wood pellets. But biomass and bioenergy has environmental burdens not understood by early advocates and policymakers.

The dirty little secret behind ‘clean energy’ wood pellets (The Guardian, June 30, 2018) takes a look at this government subsidized green energy project:

It is touted as a smart way for Europe to reach its renewable energy goals. But try telling Lisa Sanchez thousands of miles away in America that burning wood chips is a form of clean energy.

The bucolic charm of her rural home in the Piney Woods forest region of east Texas is undercut by the big German Pellets manufacturing plant just beyond the bottom of her garden. The German-owned plant is capable of producing 578,000 tons of wood pellets a year, which are destined to cross the Atlantic to satisfy a vibrant market for the product there.

Burning forest biomass was supposed to be green substitute for burning coal:

The wood pellets industry claims that it uses tree branches and waste wood, but environmental groups say there is strong evidence that vast swaths of valuable, untouched forest have been felled in states including North Carolina and Florida to feed the growing sector.

UK-based researchers found last year that burning wood is a “disaster” for climate change because older trees release large amounts of carbon when they are burned and aren’t always replaced with replanted forests. Even when trees are replaced, it can take up to 100 years to cultivate a wooded area that soaks up as much carbon as was previously released. And the fuel burned in shipping wood pellets to Europe is also a significant source of emissions.

As with ethanol and palm oil, environmental groups that once advocated biofuel and biomass subsidies now oppose these costly and polluting programs.

Airport Noise

Policy makers face many challenges with efforts to “oblige companies to price in environmental burden in the cost of their products.” Political reality obliges politicians pursue donations and be reelected which often leads them to bend to business, labor, and environmental groups. Plus, labor, raw materials, rent, taxes, and other costs have actual prices that can be summed when calculating costs of production. Ideas about environmental burdens are harder to agree on and price.

For example, the few thousand people living near Seatac Airport, south of Seattle, experience the roar of airplanes taking off. For those under the flight path, windows and doors rattle, plus jet fuel emissions drift down to outdoor surfaces and are inhaled. These environmental burdens are not added to the cost of tickets or the landing fees charged airlines. (Instead, area residents pay additional taxes to subsidize Seatac airport operations.)

In addition to the ebb and flow of airport noise and pollution, since July 2016 a new flight path routes low-elevation airplanes directly over the town of Burien. The Quiet Skies Coalition website explains:

Historically, the greater Burien area has seen only sporadic overflights from aircraft departures from Seattle-Tacoma airport. This is because north flow departures historically remained on a northern trajectory until they were approximately five miles north of takeoff.

Now, upon north flow takeoff, aircraft are directed to turn immediately to the west and to cross through airspace at low elevation disturbing tens of thousands of residents.

Why isn’t airplane noise, highway noise, and factory noise disturbing neighbors priced onto goods and services? Such pricing would encourage airports, highways, and companies to search for ways to reduce noise pollution. Plus, fees charged for noise could compensate those harmed by noise externalities. Noise pollution, just like water and air pollution, are environmental burdens that legal systems should identify, mitigation, and provide compensation for.

Airport noise is a problem around the world and one of many environmental costs and burdens ignored by governments and legal systems. The evolving challenge of noise (International Airport Review, March 5, 2018) argues:

Over the last few years, one of the areas that ACI-NA and our member airports have focused on is the need for community involvement in addressing noise issues. Airports are the best advocates for the interests of their community stakeholders, including understanding the balance of air service needs, economic impacts, and noise impacts. We have long advocated for airports to have a seat at the table when FAA is considering airspace changes.

Contrary to this claim in International Airport Review, a trade publication, it is unlikely that “Airports are the best advocates for the interests of their community stakeholders” any more that ethanol refineries, wind and solar farms, or large factories are best advocates for their community stakeholders.

Hog Farms

Does anyone believe corporate hog operations are best advocates for their communities (or for hogs)? Like noise pollution from airports, hog farms release air and water pollution that impacts “community stakeholders.”

Giant Hog Farms Are Fighting for the Right to Keep Polluting. The Trump Administration Is on Their Side. (Mother Jones, May 5, 2018), reports:

A typical barn holds around 1,000 hogs. The brownish splotches are open-air cesspools known as lagoons, which store manure from all those animals before it’s sprayed on surrounding fields. I’ve been near operations like this, and the stench is blinding—pungent gases like ammonia and hydrogen sulfide permeate the air. In addition to revulsion, these gases can trigger ill health effects in neighboring communities, including eye irritation, chronic lung disease, and olfactory neuron loss.

Conclusion

Airports, hog farms, wind farms, solar installations, palm oil plantations, ethanol power plants, all have environmental burdens much as coal, oil, and natural gas power plants, farms, factories, cities, suburbs, highways, etc. Over time legal systems should advance procedures to reduce externalities from air, water, and noise pollution.

An earlier Economic Thinking post looked at various challenges of environmental cost accounting. The discussion above has focused on environmental consequences of green energy policies (and of course fossil fuels have environmental costs too). For more on this debate, see Does ‘green energy’ have hidden health and environmental costs? (The Conversation, March 20, 2017).

One of the dangers lurking in environmental cost accounting is the influence of special interests pushing policies and energy sources for clients. Most now agree corn-based ethanol subsidies and mandates should end. Yet they won’t end anytime soon because big corn and ethanol lobbies recycle millions of their subsidy income to flexible politicians. The oil and gas industry funds extensive lobbying operations as well. Elected officials are willing to listen to the concerns, and accept donations, of both green and fossil fuel industries and lobbyists.

No easy answers and no magic wands can wave away the world’s problems. But better approaches to accounting of environmental burdens are worthy of discussion and debate. —- 

[1] I direct a small nonprofit, Economic Thinking, and have posted articles on the economics of this environmental motion, plus the other two announced motions, 100% inheritance tax and STEM education. the posts are at  www.EconomicThinking.org along with many posts on the economics of other debate topics.

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Gregory Rehmke directs programs for Economic Thinking, a Seattle nonprofit. Economic Thinking is an Atlas Network Partner and a member of the PovertyCure partner network. Mr. Rehmke has a degree in economics from the University of Washington and is co-author of The Complete Idiot’s Guide to Global Economics.

 

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