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Wednesday, June 11, 2008

Bio-diesel: Pig with Lipstick?

Where will the next alternative energy come from? Perhaps from bio-fuels, perhaps from the sun, perhaps from areas politicians and talking heads aren't taking much about - for instance, carbon nano-tubes that can reduce the weight of a Hummer-sized vehicle to less than a ton but make it as strong as an Abrams Tank and allow a low-powered four cylinder (or less) engine to drive the sucker down the road at 50 mpg.

My dislike for government mandated alternative energy sources is similar to other like-minded economists: the government has insufficient information to propose the proper/correct alternative. If we are lucky and the government proposes the "right" alternative, well it probably would have happened anyway (repeat, probably). On the other hand, if the government chooses a wrong alternative, then we are likely saddled with that alternative and its associated opportunity cost.

I also dislike is when proponents of bad policy put lipstick on their pig and tell us how pretty she is.

An example came from this press release from the Bio-diesel industry.

Now, everything in that press release might be true, but then the director had to say this:

"Biodiesel is a good bargain for taxpayers, because the tax revenues for the industry exceed the cost of incentives for the fuel."

Biodiesel might be a "bargain" for some taxpayers because some people pay taxes on biodiesel and others do not. However, government making a "profit" on tax gimmicks really cannot be considered a bargain for taxpayers, either those who are forced to pay, er contribute, the up-front funding for the incentives or those who pay the taxes on the end product.

Consider that the government gathers taxes from Person A to give incentives to the bio-diesel industry (Person B). Person C pays a tax to consume the product produced by Person B. These taxes are remitted to the government, but the government does not remit any taxes back to Person A. Thus, Person A and Person C are out the taxes that Person B and the Government split!!

This is the hidden/under-appreciated aspect of the director's comment. It would have been so much better if he could have said something like: "Bio-diesel is a good bargain for taxpayers because the industry does not rely on incentives from the government." Alas, he cannot do so.

Finally, the director sneaks in a little stink-bomb (from the point of view of economists) at the end:

"Furthermore, bio-diesel production also helps the American farmer by creating additional markets, helping often the struggling family farmer and rural communities."

Why is this a stink bomb? Because it is essentially an interpersonal utility comparison. The "struggling family farmer" needs to be subsidized or "struggling rural communities" will continue to struggle. Meanwhile, those who live in the non-struggling (sub)urban communities can afford to pay a little more in taxes to help the rural guy. But wait a second, who is he to say that the taxes are justified to help the struggling farmer? How about the struggling engineer, the struggling property management executive, the struggling wine-shop owner, the struggling writer? No word for them.

If bio-diesel is an efficient alternative to crude-based diesel, what economists term a "back stop" technology, then it shouldn't’t need "incentives" or at least the incentives should be removed over time. Alas, industries that mature with incentives tend to be efficient up to the margin of the incentives. In other words, if the incentives are removed the industry is not profitable; this makes it politically difficult to remove them.

I hope market forces are allowed to guide the future of our energy supply and demand, but I am not confident.

Cross posted at Division of Labour

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Your point is well taken. However, the "original" ( as publically stated) purpose of the $1.00/gal incentive payment by the governmernt to a Bio-Diesel producer was intended to either reduce the consumer cost off the product making it advantageous to buy and/or to help reduce the taxable profit from which depreciation replacement income would be produced.

At the present time we have a bio-diesel producer in So. Pittsburgh. He charges the same price for bio-diesel as any other retailer does for petro-diesel. He presently is attempting to sell the business since he does not find it profitable. I question this because he buys his feed stock from Bunge Oil in Chattanooga. Bunge as you may know are the worlds leading producer of edible oils for lubrication of food processing machinery and other food processing operations. Therefore, his feed stock should and does cost him the same as that of any other Bunge Oil customer.

If he were pressing any other natural feed stock such as cotton-seed or soy or any of the several other oil bearing ag-products to obtain his veggie oil, then his bio-diesel would be very profitable.

The actual use of the $1.00/gal incentive has been taken over by oil processors who import petro-diesel, add an amount of bio-diesel to it and sell that oil to the European market. The un-intended result (or was it really intended) is that we import petro-oil, use our own resource of bio-diesel to make it into a Bio-product, collect the incentive, and then export that product to Europe. This further enhances the amount of petro-product we import without adding to the amount available for use.
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