Transcript Presentation

Slouching Towards First Worst
Biofuel Policy: Life-Cycle
Accounting, Indirect Land Use
Change and the Sustainability
Standard Fiasco
Harry de Gorter and David R. Just
Cornell University
Slides for presentation at the conference The Economics of Alternative Energy Sources and Globalization:
The Road Ahead, Orlando Florida, 15-17 November 2009.
What is a sustainability standard?
Gallon of ethanol (BTU equiv.) must reduce
GHGs 20% relative to gasoline
 Measure with life-cycle accounting (LCA)

 “Well
to wheel” measure of GHGs for gasoline
 “Field to fuel tank” measure of GHGs for ethanol

Studies show ethanol reduces GHGs 20%
relative to gasoline it is assumed to replace
Why the focus on GHGs?

Historical motivation for ethanol policy:

energy security
 local air pollutants (as an oxygenator/octane
enhancer)
 improve farm incomes and reduce tax cost of
farm subsidy programs

Recent U.S. interest in GHGs was seized
upon by corn-ethanol lobby to tout ethanol
Corn-ethanol lobby strategy
back-fired…
…because LCA a flawed concept e.g.,
there are “leakages” e.g, “indirect land use
change” - iLUC (Searchinger et al.)
 Debate reached a fever pitch; CARB and
EPA to revise standard with iLUC included
 Farm state politicians threatened to vote
against climate change legislation unless
delete iLUC
 Result: iLUC delayed another 5 years

Scrap sustainability standard;
not climate change legislation
There are a host of problems with LCA
with or without measuring iLUC or any
“indirect use change”, input or output
 Sustainability standards for ethanol are
illogical, ineffective, inconsistent,
impossible to measure, illegal under the
WTO and ignore more important issues.
 Because of these six “i”s of sustainability
standards, we say scrap them

Bottom Line

Suppose there are two production
processes for ethanol
 Good
vs. Bad (ethanol itself identical)
 Expensive to track
 Policy will either penalize or reward both

Pigou was right
 Taxing
the negative externality at its source
makes sense
Sustainability standards are illogical
Ethanol (+ bourbon etc.) sustainable by
definition - the CO2 sequestered growing
corn offsets CO2 emissions from burning
the fuel in a car
 Nobel Laureate IPCC guidelines agree
with us: emissions form tailpipes and
smokestacks from burning bioenergy not
counted

Why a standard on ethanol only?
 “Why
should we suggest there is an
obligation on producers who export
sugar cane biofuel, but not on those
who export plain sugar cane?” Peter
Mandelson, Commissioner of the EC, The Guardian, 29
April 2008.
Sustainability standards are ineffective
“Shuffling”: ethanol uses “clean” inputs
and bourbon uses “dirty” inputs (or
Malaysia exports “sustainable” biodiesel
and consumes “unsustainable”
domestically)
 “Leakages” to other sectors or countries
not covered by the standard e.g., iLUC
 Sustainability standards do not assure a
decrease in GHG emissions.

Sustainability standards are
impossible to measure
“We will evaluate the land use and other
indirect effects of all transportation fuels”.
Mary D. Nichols, Chairman of the
California Air Resources Board
 How about oil pollution in Ecuadorian
jungle or military expenditures to protect
Mid-East oil?

Standards impossible to measure
(cont’d)
If measure iLUCs, how about other inputs
and “indirect use changes” (maybe ethanol
displaces oil and replaces coal? need to
look at potential market ‘leakages’ or
indirect output use change)
 Need impact multipliers of gigantic linear
programming model of world economy
 In U.S. alone, how much iLUC or is it due
to double-cropping or land from CRP?

Sustainability standards are inconsistent
Regional and proposed federal cap &
trade double counting
 “U.S. biofuels industry is urging Congress
to exempt the sector from climate capand-trade legislation over fears the fuels
could face ‘double jeopardy’ through
regulation under both...GHG cap and
…EPA’s renewable fuels standard.”

recent news caption
Sustainability standards are WTO illegal
Non-sustainable ethanol treated less
favorably so discrimination against imports
 Discrimination on like products due to
effects on processes or production methods
 U.S. would have to rely on Art. XX (‘to
preserve natural resources’) but “Chapeau”
requires policy to not be ‘arbitrary’ or
‘discriminatory’ and to be ‘necessary’ and
‘least-trade restrictive’

Standards are WTO illegal (cont’d)
Import tariff on more sustainable ethanol an
example of ‘arbitrary’
 Removal of U.S. trade distorting ethanol
tariffs and subsidies least-trade restrictive
 Requiring a 20% reduction seems arbitrary;
why not a 1% reduction?
 Sugar-cane ethanol from Brazil requires a
50% reduction (corn-ethanol only a 20%
reduction) – that is arbitrary

Standards are WTO illegal (cont’d)

UK fuel tax 7x U.S. and cap & trade
 Impose
standard to reduce GHG emissions
more?
Is the standard necessary? Why not tax
GHG directly (WTO forced Korea to change
from a regulation to a tax under Art. XX – so
how could U.S. get away with it?)
 WTO illegality based on correct reasons:
standards are inefficient and unfair

Debate over sustainability standards
ignore policy sins of commission

Adding tax credits to mandates means
subsidize gasoline consumption
 Cause
billions of DWC annually
Import barriers and production subsidies for
ethanol and corn discriminate against trade
 Water in the policy price premium and
“rectangular” DWCs

“Some people say ethanol is like cholesterol:
there is a good one and a bad one. The
good ethanol helps clean up the planet
and is competitive. The bad ethanol
depends on the fat of subsidies.”
President Lula, Brazil
17
U.S. GHG emissions due to tariffs and
subsidies; not iLUCs
Without tariffs and subsidies, no U.S.
ethanol production
 Brazil can produce U.S. ethanol on 1/2 the
land, higher annual net sequestration and
U.S. crops displaced require more land
(e.g., corn yields per acre 1/3 that of U.S.)
 U.S. ethanol should be disqualified from
consideration of any sustainability standard
until trade discrimination eliminated

Debate over sustainability standards
ignore policy sins of omission
What to do? Leave ethanol alone (literally;
as for sustainability standard, treat like
bourbon; eliminate all other policies except
maybe mandate)
 Tax/subsidize marginal cost of
externalities
 Collapse concern over GHGs from biofuel
production into global climate change
policy (cap and trade and carbon offsets)

How about on 2nd best grounds?

Economists ague little we can do about
policy sins of commission and omission
 Sustainability

standard used to counteract
Assumes political forces for policy sins not
in play with sustainability standards
 oops
- politicians have already punted and
delayed iLUC decision for another 5 years

May backfire as people will think all is well
once ethanol passes test (meanwhile,
ignores sins of commission and omission)
The Road to Copenhagen…
…is littered with a bevy of new policies:



Cap & Trade (mandate now contradictory)
Carbon offsets (biofuels part of Kyoto Protocol)
Provisos for ‘green’ tariffs and producer
‘rebates’ to counter ‘leakage’ of emissions to
countries with lower environmental standards
LCA with or without iLUCs is not a
true sustainability standard
Searchinger et al. simply provides CO2
balance calculations
 Does not provide criteria when and where
biofuels should be produced
 Does not tell you if it is a good deal or not
 What is an appropriate payback period?
 Need inter-temporal cost-benefit analysis
like global climate change economists do

Towards a true sustainability test…
Need to think of ethanol production as an
investment
 upfront
investment costs are the CO2 emissions from
land converted from forests and grasslands into biofuels
 annual costs are the foregone sequestration from the
land that otherwise would have been forests and
grasslands
 annual benefits are the net sequestration from ethanol
production
de Gorter and Tsur develop such a test and
show no U.S. land type passes (2 land types
pass in Brazil)
The End