25 Apr 2013

Energy subsidies and government failures

In the first post today, I highlighted how Ben Ho and I disagree on how to evaluate price subsidies. He says "subsidies should be left in place until you can prove they create net harm." I say that subsidies should be removed if you can show any harm.

We were discussing US subsidies for corn ethanol, but there are many subsidies affecting energy. This post has a roundup of stories that I've collected recently on how well those (don't) work.

The biggest news is the failure of the EU's Emissions Trading Scheme (ETS), a cap and trade system for carbon that's been killed by politicians' failure to undo their previous mistake (not! since it helps their friends) of issuing too many permits on the supply side.

The ETS story has two side stories. The first is the loss of funding for clean energy from the decline in revenue from selling permits. (Carbon indulgences are so cheap that EU energy companies are buying, importing and burning US coal.) The second is the perverse outcome of EU energy companies importing and burning wood from all parts of the globe (NOT a carbon neutral action) due to wood's administrative status as "renewable." Old growth German forests are, for example, being burned. A complementary report estimates that the EU is spending $10 billion a year on biofuel subsidies that have no positive impact.

The US ethanol program is also failing, but politicians are "defending it" from market forces in their quest to keep pork flowing back to agribusiness. One of their stupid ideas is to buy sugar from US farmers who are losing money in production (despite massive protection from cheaper imported sugar [pdf]) and give that sugar to ethanol refiners. Who loses money? Taxpayers. You.

Regulators, meanwhile, are trying to set up a nutrient trading program to shrink the dead zone at the mouth of the Mississippi. The voluntary program may not work, but I wonder if it would be necessary without subsidies that give upriver corn farmers the incentive to plant (and fertilize) corn everywhere. (Corn needs more fertilizer than other crops.)

The renewable sector is also under attack from "conventional" fuels, to the point where some pundits say that peak oil will never arrive (it will, farther in the future), due to shale gas and tar sands. The trouble is that those operations have got their share of problems (including deceptive astroturfing and misleading research, a la Tobacco Institute), which makes it hard to turn to them from renewables.*

So what's to be done? Well, the first thing we need to recognize is that the world's carbon intensity has not fallen. After we see that and agree that renewable policies have really done little good, then maybe we can think of a better idea.

Oh, I know -- how about we stop subsidizing conventional fuels? The IMF just estimated that the world would save $1.9 trillion be ending subsidies (mostly in poor petro-states). Such an end would please me by removing a distortion to energy prices, it would leave lots of money to help poor people directly (instead of profiting petro-producers), and it would make it relatively more expensive to produce carbon. Intensity would fall.

Bottom Line: Subsidies distort decisions by consumers, producers and politicians. End them if you want incentives and markets to work. End them for energy, and we'll get economic efficiency. If carbon is still a bad then tax it to get environmental efficiency.

* Lord Stern just released a report complaining about the $trillions of petroleum assets that would be stranded if the world went off carbon -- the flip side of my worry about $billions in stranded low-carbon assets (a worry that seems to be more justified). I'd love to see lower energy use but there's no sign of it.

H/T to AH and JR