The battle over renewable energy rages own, California recently adopted new fuel standards which could pose a serious threat to Midwestern corn farmers. It was projected that ethanol would eventually account for a third of US corn production. California has typically been a leader in automobile emission standards and the recent announcement could be the first domino to fall in a nationwide alternative fuel debate. On May 1, in an email to the DTN Ethanol Center, the US Environmental Protection Agency (EPA) stated that the EPA was considering revisions to the renewable fuel standards.
The University of Nebraska recently revised their report, Indirect Land Use Emissions in the Life Cycle of Biofuels; the report attempts quantify the opportunity cost of land, such as rain forests being converted to farmland for the production. The report highlights the competitive forces in biofuel markets. Corn has three main usages, food, feed, and fuel; as corn shifted from the first two alternative to the later, corn prices rose. Increased demand for corn led to the conversion of grasslands and forests to farmland. This conversion depletes the carbon offset opportunities.
This land conversion was previously not considering in assessing the most efficient and environmentally friendly fuel sources. The California Air Resource Board (CARB) used the Global Trade Analysis Program (GTAP) from Purdue University to evaluate various fuel options. The analysis assigned traditional gasoline a "life cycle intensity" value of 96 grams of CO2 per megajule. Prior to the life cycle analysis, corn-based ethanol was assigned a value of 69; however, the recent studies have assigned a value of 30 to the land use of corn. The new life cycle intensity of 99 has effectively eliminated corn as a viable alternative fuel in California and delivered a hard blow to corn farmers and ethanol producers.
On either side of the aisle, the role of the government is to provide public goods and correct market failures. Air quality is a public good that often suffers from the tragedy of the commons and thus requires government action to correct failures. The classic economic theory points to sheep grazing in England. Shepherds that utilized the land for grazing lacked incentive to prudently use the land, the would be over used, depleting the land. A regulatory body is required to manage the land and restrict the number of sheep grazing. Legendary links courses in Scotland are the greatest positive externality to arise from grazing lands. Deep burns and bunkers sheltered the sheep from the salty sea breeze.
Unfortunately, government action can create new distortions and market inefficiencies. Minnesota has recently opened the ethanol subsidy for debate, the state of Minnesota has awarded $314 million in subsidies since the program started. The subsidies were designed to incent building and production of ethanol in belief that as production came on line, the scale would enable plants to produce ethanol at efficient prices. In retrospect, state and national subsidies likely created overbuilding in the industry. Additionally, supply distorting practices by the OPEC countries artificially inflated oil prices, further incenting inefficient building of production capacity. The result has been financial difficulties for US ethanol producers, notably VeraSun with its October Chapter 11 Bankruptcy filing.
In the current scenario, the US Government originally picked, likely as a result of heavy lobbying, corn ethanol as the preferred alternative automobile fuel. Another example of the government picking winners; with another change of the rule in the middle of the game, now ethanol is the loser. An alternative route would be to tax fossil fuels, artificially raising the price of traditional options and leveling the playing field for new sources. The market would be free to choose petroleum, corn ethanol, sugarcane ethanol, or biodiesel. Similarly, the Government could provide an 'award' for developing new technologies, similar to the battery proposal.
Generally, the Government plays a vital role in correcting market failures, but should focus on not creating new inefficiencies. The environment is a public good that is easily exploited beyond an individual's allotment. Government action is required to correct this particular inefficiency, but has done so incorrectly in the past. New solutions are required that create prudent investment and usage of fuels. Energy independence is not easily achieved. However, when push comes to shove and oil, gas, and coal are no longer available, the market it innovate and solve the problems, with or without Government assistance.
The University of Nebraska recently revised their report, Indirect Land Use Emissions in the Life Cycle of Biofuels; the report attempts quantify the opportunity cost of land, such as rain forests being converted to farmland for the production. The report highlights the competitive forces in biofuel markets. Corn has three main usages, food, feed, and fuel; as corn shifted from the first two alternative to the later, corn prices rose. Increased demand for corn led to the conversion of grasslands and forests to farmland. This conversion depletes the carbon offset opportunities.
This land conversion was previously not considering in assessing the most efficient and environmentally friendly fuel sources. The California Air Resource Board (CARB) used the Global Trade Analysis Program (GTAP) from Purdue University to evaluate various fuel options. The analysis assigned traditional gasoline a "life cycle intensity" value of 96 grams of CO2 per megajule. Prior to the life cycle analysis, corn-based ethanol was assigned a value of 69; however, the recent studies have assigned a value of 30 to the land use of corn. The new life cycle intensity of 99 has effectively eliminated corn as a viable alternative fuel in California and delivered a hard blow to corn farmers and ethanol producers.
On either side of the aisle, the role of the government is to provide public goods and correct market failures. Air quality is a public good that often suffers from the tragedy of the commons and thus requires government action to correct failures. The classic economic theory points to sheep grazing in England. Shepherds that utilized the land for grazing lacked incentive to prudently use the land, the would be over used, depleting the land. A regulatory body is required to manage the land and restrict the number of sheep grazing. Legendary links courses in Scotland are the greatest positive externality to arise from grazing lands. Deep burns and bunkers sheltered the sheep from the salty sea breeze.
Unfortunately, government action can create new distortions and market inefficiencies. Minnesota has recently opened the ethanol subsidy for debate, the state of Minnesota has awarded $314 million in subsidies since the program started. The subsidies were designed to incent building and production of ethanol in belief that as production came on line, the scale would enable plants to produce ethanol at efficient prices. In retrospect, state and national subsidies likely created overbuilding in the industry. Additionally, supply distorting practices by the OPEC countries artificially inflated oil prices, further incenting inefficient building of production capacity. The result has been financial difficulties for US ethanol producers, notably VeraSun with its October Chapter 11 Bankruptcy filing.
In the current scenario, the US Government originally picked, likely as a result of heavy lobbying, corn ethanol as the preferred alternative automobile fuel. Another example of the government picking winners; with another change of the rule in the middle of the game, now ethanol is the loser. An alternative route would be to tax fossil fuels, artificially raising the price of traditional options and leveling the playing field for new sources. The market would be free to choose petroleum, corn ethanol, sugarcane ethanol, or biodiesel. Similarly, the Government could provide an 'award' for developing new technologies, similar to the battery proposal.
Generally, the Government plays a vital role in correcting market failures, but should focus on not creating new inefficiencies. The environment is a public good that is easily exploited beyond an individual's allotment. Government action is required to correct this particular inefficiency, but has done so incorrectly in the past. New solutions are required that create prudent investment and usage of fuels. Energy independence is not easily achieved. However, when push comes to shove and oil, gas, and coal are no longer available, the market it innovate and solve the problems, with or without Government assistance.
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