Ethanol subsidies live another year

NOOOOO!!! Despite promising earlier signs, the ethanol tax credit renewal managed to sneak into the tax bill, so it's been extended into 2011 at least. Very disappointing, even though Geoff Styles thinks the subsidy won't last past next year.

Ethanol quote of the day

Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time.

That's 17 senators from both parties, via the WSJ and Environmental Economics.

India's invincible fertilizer subsidies

Long but fascinating WSJ article on the history of fertilizer subsidies in India. A few choice quotes (and apologies for the lack of synthesis and commentary):

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities. Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter. Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.

Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it.

Hat tip to a colleague who first passed this on to me.

Growing the ethanol market

U.S. ethanol is not cost-competitive abroad, where it competes on an even playing field with Brazilian sugarcane ethanol, so to grow (and reach the RFS mandates) it needs to grow the domestic market:

"Without increasing the blend of ethanol to E15, it will be impossible to achieve the targets set in the Renewable Fuel Standard and there will be no market for cellulosic ethanol," said Jeff Broin, POET chief executive officer. "POET is spending tens of millions of dollars to commercialize the production of ethanol from harvest leftovers but needs E15 to be certain there will be a market for the product."

The clever (but erroneous) framing is that not meeting the ethanol RFS would be the end of the world.

Update: I learn a few things from a comment exchange with Geoff Styles.

R: I recently read Turning Oil Into Salt (which has a lot to like and a lot to dislike - I wrote a rambling review for anyone interested), which would have you believe that the incremental cost of making a car flex-fuel is minimal (in the low hundreds of dollars range above a normal car). If this is true (and I would be interested to hear informed views on whether it is), it would be worth at least looking at the cost/benefit of mandating or incentivizing flex-fuel vehicles, particularly if the alternative to satisfy the ethanol lobby is an E15 ruling that doesn't make economic and/or environmental sense.

Geoff: The Big 3 have already committed to making half their new cars flex-fuel, and with GM and Chrysler beholden to the govt. a 100% target won't be far behind. But even if 100% of all new cars were FFVs starting this year, there would still be many millions of cars vulnerable to damage from higher ethanol blends for many years to come. The problem isn't the FFVs, of which there are already enough to boost E85 sales dramatically. It's making the entire E85 proposition, with its high costs for service station owners and consumers alike more attractive. Does 75% of the energy of gasoline for 86% of its cost sound like a good deal to you?

R: Agree that E15 could be bad for legacy vehicles (I was thinking of FFVs as an alternative demand sink to raising the blending limit to 15%). I think raising the limit would be a bad idea.

And agree that expanding E85 infrastructure will take investment, but the economics of ethanol itself could become attractive enough to justify that investment (and the energy-adjusted price ratio with gasoline has and will continue to fluctuate based on ag supply-demand, crude prices and refining economics).

I don't really like corn ethanol, but if it's a choice between E15 or more FFVs to satisfy the ethanol lobby, the latter sounds more attractive to me.

Geoff: R,
When you put it that way, I agree, though the old saw about horses and water comes to mind. There are sufficient FFVs on the road already to absorb 10x the E85 currently sold. Understanding why they're not buying more of it could be key to figuring out how to make it work on a mass-market level. Is it a critical mass issue on either infrastructure or vehicles, or do consumers just not like the value proposition and attributes?

R: I hadn't realized there were already so many FFVs in the U.S. - sounds like that can't be a constraint now. Do you have any idea how much ethanol E85-equipped stations sell? That might shed some light on whether the issue is midstream infrastructure vs. poor value proposition.

Update 2: ... in which my poor reading skills and attention to detail are exposed:

Geoff: R,
The figure is cited and linked in the posting.

R: So it is :) Good stuff.

Styles on ethanol

Geoff Styles writes as well-reasoned an appeal for lifting corn ethanol subsidies as I’ve seen in a while. The trouble is, the case to abolish these distortionary subsidies was never lacking for logical arguments; the real trouble is the 30 to 42 ethanol Senators, without whom it’s pretty much impossible for an enterprising president to accomplish anything in Congress.

There are 42 farm senators

I know I've wanted to refer to this before, and couldn't find it, so I'm posting it now (and expect to link back to it soon and often). The question is how many farm (or if you prefer, ethanol) Senators are there? One answer is here:

As former Sen. Bob Dole of Kansas once explained to Texas oil baron T. Boone Pickens, “There are 21 farm states, and that’s 42 senators. Those senators want ethanol.” And the influence of those senators — 15 states now have ethanol production capacity of at least 200 million gallons per year —will be hard to overcome.

So 42 farm senators, at least 30 of whom have a sizable incentive to support the continuation of "the ethanol juggernaut." That is a formidable force to overcome.

Brazil's "ethanol subsidy"

Morgan Downey looks at the fact that ethanol is cheaper than gasoline in Brazil and concludes that Brazil, a vocal critic of ethanol subsidies in the United States, is slyly (and hypocritically?) subsidizing its own ethanol by taxing gasoline.

It may be true that Brazil taxes gasoline (something that might be nice for us to do in the U.S. as well), but the fact is that sugarcane ethanol production costs are often lower than even untaxed gasoline production costs at crude prices above $50/bbl. The key driver is feedstock cost (sugarcane), which tends to swing between a floor of its value to produce sugar (most ethanol mills can produce sugar instead if they prefer) and a ceiling of its value as fuel (in which case the miller and blender receive no margin). There are limits on the mobility of sugarcane, however – it must be crushed within 48 hours of harvesting or it rapidly loses its sugar content – which means that in practice mills often have pricing power over the nearby sugarcane growers, who have little other choice of buyer for their production.

Ethanol is also cheaper than gasoline on a volume basis because it has a lower energy content – about 70% of gasoline – so in an equilibrium market ethanol prices will be about 70% of gasoline prices (but Downey recognizes this).

Another factor which could effect the price is where in the country he was – São Paulo is the center of cane-growing, for example, and tends to have ethanol prices below the 70% parity due to oversupply, whereas more remote regions (like the northeast) tend to be above 70% parity due to transportation costs.

It could be the E25 tax is the primary factor, but it’s hard to determine how much without the amount of the tax, which Downey doesn’t provide.

My overall point is that there are many supply-demand factors which impact ethanol prices, and so a difference cannot be automatically attributed to government intervention without considering other plausible causes.

Chart of the Day 2: PV solar by country

From Climate Progress. Amply demonstrates the power of subsidies. I also can't help but notice that Joe Romm appears to have ripped off Thomas Friedman's punch line:

JR: Well, conservatives must love importing oil from Saudi Arabia, since they’ve blocked every effort to promote efficiency and alternatives, so I guess they will love importing solar panels.

Economists against ethanol subsidies

Via Environmental Economics; I am only surprised that >20% of economists do think ethanol subsidies are a good idea.

Government subsidies on ethanol in the U.S. should be (N = 120)

• eliminated - 55%
• reduced a lot - 11%
• reduced somewhat - 13%
• kept about the same - 12%
• increased somewhat - 9%
• increased a lot - 1%

I would love to see a breakdown by region (as a proxy for something like the dependence of the member's university or organization on farm-related funding).

Solar yelling match

Grist went ballistic over this WSJ article on the collapse of Spain's solar industry, but I'm not sure they really addressed the right points head-on. The story as I can tell it goes something like this:

WSJ: The sudden withdrawal of generous solar subsidies killed Spain's solar industry, which should be a cautionary tale for the U.S.

Grist: The U.S. solar subsidies in California are TOTALLY DIFFERENT than the Spanish subsidies, so conflating the two is a crime against humanity.

Yes, the subsidies are different, but they are still subsidies (as are Renewable Portfolio Standards). They are OK for now, but not forever. And despite Grist's blithe assertion that "Solar is getting cheap—cheaper than fossil fuel alternatives", even MIT seems a bit confused as to whether solar power is ready to compete with fossil fuel power generation on a level playing field (Geoff Styles runs the numbers and decides probably not). And ultimately, for solar to be a success, it needs to compete, and win, on a level playing field - subsidies can't last forever and won't do the trick alone. Which is why it will be interesting (and necessary) to see how the economics of truly large-scale solar installations like Desertec and this 2GW project in Inner Mongolia play out in practice. Few people are rooting for solar to stay expensive, but it is fair to want to see before believing that it won't.

Algerian cereal harvest triples

A report issued by the Algerian Agriculture Ministry showed that the country has produced nearly 6 million tons of cereals in 2009, almost three times more than last year, APS reported.

This year's production rise was made possible by good rains and new financial incentives from the government, the ministry said. Those incentives have included soft loans for farmers and subsidies for fertilizers and high-yielding seeds. Last year, the government also said it would almost double the price it pays farmers for their grain as part of efforts to boost domestic output.

I find this news interesting because it illustrates the availability of additional food supply with high enough prices (or in this case, high enough subsidies). We really aren't butting up against Malthusian/Ehrlichian resource constraints on food production yet.

Score one for free trade in agriculture

In a victory for anyone who believes that distortionary agricultural subsidies should be eliminated, the WTO has ruled against the U.S. over cotton subsidies.

A ruling against the U.S. in a long-running fight with Brazil over American payouts to cotton growers sets an important precedent for developing nations concerned by what they see as excessive U.S. support for farmers.

A World Trade Organization arbitration panel ruled Monday that Brazil is entitled to $295 million upfront, and nearly $150 million a year, for the U.S. failure to eliminate subsidies to the cotton industry.

If the U.S. does not comply, Brazil can retaliate with its own tariffs in completely different industries:

The ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property.

The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection.

Let's hope this is a step towards bringing down the existing edifice of American and European agricultural subsidies. Not only would the direct benefit be massive (one FAO study estimated that complete liberalization of agricultural trade would boost global incomes by $165 billion per year), but this would also clear the major obstacle to progress in world trade negotiations, success in which would carry even larger benefits to global welfare.

(with appropriate protections for poor countries, etc. - I am not a blind free trade fanatic, but even lefty economists acknowledge the enormous benefits that freer trade would bring)

Fuel subsidy anecdote of the day

From MR:

On arrival in Colombia, he found a stall set up by the side of the road where he regularly sells his fuel.

A 20-year-old "pimpinero" - as those who siphon off fuel are known - takes the petrol from Juan's car by sucking it out of the tank with his mouth and a hose, seemingly oblivious of any potential health risks.

The transaction is successful and Juan leaves with about $7-worth of Colombian pesos for what cost him about 50 US cents in Venezuela.

Recently, Venezuelan Energy Minister Rafael Ramirez announced that Venezuela would not be renewing an agreement on subsidised fuel with Colombia.

Here's the full story on the rise of smuggling between the two countries.

Biofuels still the hungry little sibling for government funds

DOE just announced $21 million in funding for five projects in second-generation biofuels research. Sounds nice, but that kind of money won't get anywhere near bringing second-generation biofuels across the Valley of Death - a single commercial-scale plant costs upward of $100 million.

Second-generation biofuels players like Range Fuels are likely looking jealously at the wind power sector, which has secured government support on a different scale:

Big banks including Morgan Stanley and Citigroup are underwriting wind farms worth more than $100 million each.

That’s partly a result of new government policy: For the first time, wind-farm developers have the option of receiving 30% of the cost of the project in cash, rather than getting tax credits over the life of the wind farm.

30% of $100 million is the kind of money that would definitely help a demonstrated second-generation biofuel build a commercial-scale plant... and it's more than the recent DOE grant in its entirety.

Update: Environmental Capital has the numbers on the wind grants. $500 million in total, with $294 million swept up by Iberdrola for five projects, or almost $60 million each on average.

Granted wind projects have much more commercial certainty than a first-of-its-kind commercial-scale plant for second-generation biofuels, but that's also an argument that the private sector should be able to bear the burden on its own. The next generation of biofuels is unproven, so there are broader public benefits of the "Valley of Death" being crossed, and the rationale for government intervention is stronger.

Maybe the government can take equity rather than give a guaranteed loan, in order to avoid accusations of favoritism towards one of the many second-gen biofuel companies out there?

Impending water crisis in India

Via FP Passport, India is worried it will run out of water, and rightly so:

Parts of India are on track for severe water shortages, according to results from NASA's gravity satellites.

The Grace mission discovered that in the country's north-west - including Delhi - the water table is falling by about 4cm (1.6 inches) per year.

Writing in the journal Nature, they say rainfall has not changed, and water use is too high, mainly for farming.

It's not news that profligate pumping is major threat to India’s water security, and India's energy subsidies for farmers are a classic example of a populist but terribly environmentally destructive policy. And despite recent droughts in some parts of the country, the NASA data confirms this view:

Weather and climatic factors are not responsible for water depletion in the northwestern states of Rajasthan, Haryana and Punjab, according to the NASA study.

"We looked at the rainfall record and during this decade, it's relatively steady - there have been some up and down years but generally there's no drought situation, there's no major trend in rainfall," said Matt Rodell, a hydrologist at NASA's Goddard Space Flight Center near Washington DC.

"So naturally we would expect the groundwater level to stay where it is unless there is an excessive stress due to people pumping too much water, which is what we believe is happening."

Democracy is a great form of government in many ways, but its vulnerability to populist policies and obstructionist minorities mean its ability to control environmental degradation is often weak. Although the environmental record of China, which doesn't think much of democracy, is not exactly stellar.