Business Ethos Blog

Perverse Effects

Dr. David Mielke is the Retired Dean of the College of Business at Eastern Michigan University


Dr. David Mielke
The anti-carbon position of the EPA has produced unexpected results and at best can be seen as ineffective—if not counter-productive.  A new study by the National Academies provides insight about the wasteful spending on Green Energy subsidies, in particular targeting ethanol.  Should the US government continue to provide subsidies for green energy?  Is this the “Right Thing to do?”

Let’s look at some issues:

1. In 2008, Congress created a National Research Council special committee to comb the tax code to figure out how specific provisions increase or decrease greenhouse gases.  The study concludes that “several existing provisions have perverse effects, while others yield little reduction in greenhouse gas emissions per dollar of revenue loss.”

2. According to the report, ethanol and other biofuel subsidies are the most striking examples.  The 45 cent a gallon ethanol tax credit expired in 2012, but before it died it was increasing carbon emissions by 5 million tons every year, at a cost of $5.26 billion.  The ethanol credit grew over decades into the largest single US energy tax expenditure, while producing 5 million tons more greenhouse gas—about 0.1% of US emissions.  The credit had the effect of slightly reducing gas prices for consumers.  Because corn ethanol is still being produced today, the emissions continue.
3. One of the biggest debacles has been the law requiring that the oil and gas industry mix cellulosic ethanol, made from wood chips and switch grass, into gasoline.  The original law mandated the use of 1 billion gallons of cellulosic fuel in 2013, with even higher levels in 2022.  Even with taxpayer subsidies total cellulosic volume in 2012 was about 20,000 gallons.  The EPA reviewed the program last month and reduced the mandate to 6 million gallons from 14 million.  The oil and gas industry has to pay a fine for not buying enough cellulosic fuel that doesn’t exist.
4. The EPA also updated its corn ethanol mandate to 16.55 billion gallons, up from 15.2 billion in 2012.  However, refiners have hit the wall in terms of blending ethanol to a maximum of 10% in gasoline and can’t use what was already required let alone the increase.  Why?  Gasoline consumption has been falling due to the recession and also the higher fuel economy of the newer cars and trucks.  Again, the refiners are, in effect fined, because they are required to buy credits for not using more corn ethanol.  Currently the credits cost about $1.00 a gallon for ethanol it can’t use—adding about 5-10 cents a gallon at the pump.
5. The effect of the two mandates has been to raise gas prices and increase the cost of food because the corn goes to producing ethanol not food.
6. There are also major tax credits for solar and wind projects.  The committee found that the renewable electricity tax credit for wind and solar will reduce emissions by roughly 0.3% by 2035, which is miniscule globally.
7. The panel also looked at tax credits for home energy efficiency improvements, but these programs, “resisted analysis” because they are so complicated.  As they stated in the report, “the best existing analytical tools are unable to determine in a reliable fashion the impact.”
8. The US spends roughly $24 billion a year and yet there is little or no evidence, or even tools for analysis, to determine the benefits of the expenditures.
Should we continue to provide subsidies for green energy and mandate ethanol use?  Is this the “Right Thing to do?”  As the committee recommends, “Congress should abandon the “poor tool” of subsidies.  In my opinion, it is time to eliminate the mandates for cellulosic ethanol that doesn’t exist and for corn ethanol that in fact, increases emissions and the price of gasoline.