Sunday’s Post-Dispatch had a great story about expanded interest in hydropower along the Mississippi River. New technology is making it possible to generate power from rivers without the vertical drop, or “flow,” that has been needed in the past. That is why most of America’s hydropower has, to date, come from rivers that emerge from mountainous areas — they have a much greater flow. Anyway, the Post article details the renewed interest in Mississippi hydropower by private industry and public utilities. Of course, private investment is much more interesting to me, although most of the private proposals do involve using public dams along the river. It is exciting to read about these proposals, and I hope that local hydropower can take its place along with wind and solar power as an important auxiliary, peak, or complementary power source.

Of course, if you want clean and remewable baseload power generation for Missouri, there is really only one way to go. …

Many problems in public policy are government-created, and the best solution is not more government. Unfortunately and predictably, solutions involving more government will be supported by groups that are short-sighted and will benefit directly from them.

As the latest illustration of this, biodiesel producers in Missouri are calling for extending the $1-per-gallon biodiesel blender’s federal tax credit. In its Friday issue, the St. Louis Business Journal published two articles that profile a struggling biodiesel plant as it waits for extended handouts from the government.

Meanwhile, there exists a lack of demand for biodiesel in the market, and the government has responded by setting a mandate to create an artificial level of demand. From one article:

Environmental mandates that require oil companies to blend petroleum-based diesel with minimum levels of biodiesel [...] have increased demand, and therefore prices, for biodiesel and helped offset the loss of the expired tax credit.

The problem with mandates and production subsidies like those for biodiesel is that the government is encouraging energy producers to invest in an infrastructure that is neither efficient nor cost effective. Residents of Missouri and other states could achieve higher levels of utility if government stayed out of the market and allowed the profit-and-loss system to allocate resources. As another positive consequence of eliminating handouts to biodiesel producers, fewer resources would be distracted from the development of other alternative energies that are perhaps more viable.

Last week, MissouriNet reported on the president’s speech in Kansas City, in which he talked about clean energy:

President [Barack] Obama said in his speech that just a few years ago, the U-S accounted for 25% of the world’s economy, but was only making 2% of the world’s advanced batteries for hybrid and electric vehicles.

“But thanks to our new focus on clean energy and the work that’s taking place in plants like this one, we could have as much as 40% of the world’s market by 2014,” Obama said.

It is true that if we devote a large amount of our resources to clean energy, we could expand our share of the world’s market. If we wanted to, in fact, I’m sure we could devote exorbitant sums to clean energy and capture 80 percent of the world’s market.

Does that mean that it would be a good investment for the U.S. government? When someone invests her own money, she has a stake in that investment working out. Investors who make wise investments have more money to make additional wise investments. No matter how vital government officials think it is to invest in clean energy, they do not have that feedback; whether they invest wisely or not, their cash inflow is not affected. The government does not have the right competitive mechanisms in place, and thus may create more problems for clean energy than they solve.

Why is that? When the government favors certain types of clean energy over others (perhaps yet undiscovered) energy sources, they change the dynamic. As a result, those energy producers make money not because they efficiently produce energy, but because they have curried political favor. Energy producers who receive government monies are also restrained by government regulation and procedure, which stifles innovation.

From the aforementioned speech (emphasis added):

“[...] But my answer to those who don’t have confidence in our future, who want to stop, my answer is come right here to Kansas City see what’s going on at Smith Electric. I think they’re gonna be hard pressed to tell you that you’re not better off than you would be if we hadn’t made the investments in this plant,” Obama said.

I beg to differ. In the cases where clean energy is as good an investment as some proponents claim, private individuals will be willing to put money toward the venture. Many companies want to use efficient, environmentally friendly energy because consumers appreciate that. Clean energy, at its best, will lower costs, a condition necessary for it to become a primary energy source. Cutting the tax rate for all businesses would better promote the move toward clean energy sources than targeting incentives toward specific clean energy plants. If clean energy production is to become sustainable, it needs further exposure to market forces so that the most efficient product can succeed.

In the free market, supply and demand intersect at the point of equilibrium. At this point, the amount that individuals pay for an appliance equals its value. If more individuals were willing to buy an energy-efficient appliance but the suppliers were producing at full capacity, then the price would increase. For some individuals, the higher price will exceed the amount that they value the appliance, and they will not buy one. Additionally, the higher price will incite more firms to enter the market and manufacture energy-efficient appliances, which will push the price back to its equilibrium level.

By offering a rebate, the government distorts the market for energy-efficient appliances, resulting in a loss to the economy. I made the following graph to demonstrate how this happens. (Please keep in mind that I was an economics major, not an art major!) The critical error that many make when evaluating this policy is ignoring this loss.

Graph of Supply and Demand for Energy-Efficient Appliances

Let’s assume that the price of an energy-efficient appliance is $500. At this price, a certain number of people will buy one. For the sake of this example, lets assume that 1,000 individuals will buy one appliance at $500. Next, the government provides a rebate of $175 to incite additional people to buy them. At this lower price, a greater number of people will buy one.

Let’s say that 1,200 people are willing to buy them at this price. Now, these individuals consume a product that the economy-wide equilibrium values at $500, but which the individual values at $325. This means that there is a cost to the economy of $175 (the amount of the rebate) for each appliance sold under the new program. This number, multiplied by the number of additional of appliances sold, roughly equals the dead-weight loss to the economy. In this example, the dead-weight loss equals $175 * 200 = $35,000. In this simplified example, this represents the goods and services that would have been bought in the absence of the rebate, which constitutes destroyed wealth.

Another factor that contributes to the economic loss is the amount of the old appliances that are destroyed despite still being operable. This, too, is represented in the graph.

What’s more, this distortion does not increase the number of energy-efficient appliances sold in the long run. This is because the rebate incites transactions that would have occurred anyway in the future. As old appliances break down, individuals will replace them with new appliances that use improved technology.

Ultimately, the rebate program will destroy wealth and fail to hold down energy prices in the long term. Missourians would be better off if the state and federal governments considered the long-term negative consequences of this policy and let the price system work its magic without this kind of short-sighted intervention.

I guess the news has finally reached Washington. In a recent post on the Political Fix blog, Bill Lambrecht pointed out that the political heat around subsidies is increasing, and this time it is fueled by ethanol. Almost two years to the date after the Show-Me Institute’s release of its case study of the E-10 ethanol mandate in Missouri, another nonprofit research organization has published a study about the inefficiencies of federal ethanol subsidies. The Environmental Working Group’s analysis of the ethanol subsidies concluded:

Americans have spent $17 billion since 2005 to achieve reductions in gasoline consumption that could have been achieved for free.

Today, proponents of ethanol are attempting to piggyback on the recent oil crisis in the Gulf of Mexico in order to gain support for their most recent push to increase the amount of ethanol in the U.S. gasoline supply and keep their subsidies. In a Post-Dispatch article yesterday, Jeffrey Tomich pointed out:

The ethanol industry is also lobbying Congress to extend a tax credit for blending ethanol with gasoline and maintain a tariff on imported ethanol — measures implemented years ago to help a fledgling industry grow. Both the tax credit and tariff are set to expire at the end of the year.

Letting the tax credits and tariffs expire wouldn’t be such a bad thing. Who knows, besides saving the American taxpayers $17 billion dollars, we might actually come up with an alternative energy idea that works.

The State of Missouri recently announced that it would offer an extra $50 in rebates to consumers who participate in the Energize Missouri Appliance Rebate Program. The additional money comes as an incentive to help participants in paying the cost of recycling their old appliances.

But just what are the costs of recycling these appliances? Missouri’s State Energy Efficient Appliance Rebate program (SEEARP) is explicitly restricted to the replacement of existing appliances. Further, there are essentially no qualifications on eligibility for replacing older appliances.

Thus, a couple looking to buy necessary appliances for their new home are not given the government incentive to purchase energy efficient appliances, but homeowners with already functioning appliances are.

What happens to the old appliances? In order to qualify for the rebate, consumers must show proof that the appliance was “properly recycled.” Recycling appliances, however, is tricky business. Most of the materials aren’t biodegradable, so the appliances have to be broken down into their parts and either sold as scrap or, in the case of metals, reprocessed altogether. How much more earth-friendly could this process be compared to simply repairing and using an existing appliance for as long as possible? Further, for the appliance to be recycled, its parts need to be in a minimally workable condition in order to be repurposed. Otherwise, the scrap ends up in a landfill. On the other hand, if the appliance could be repaired, why would anyone replace it? Answer: because you can get a government discount on a new one.

Not only does the SEEARP program then distort the market, it incentivizes consumers, who by and large have no real need for new appliances, to wastefully and expensively toss workable ones. Supporters of initiatives like the rebate initiative may argue that the continued use of such appliances generates a negative environmental impact. While that might perhaps be marginally true, there remain serious environmental, and economic, problems with this argument. For one, the process of recycling old, functioning appliances itself requires a great deal of energy. Further, energy-efficient appliances may even encourage individuals to consume more energy overall. Incentivizing the disposal of viable machinery also misallocates resources that could have been spent on encouraging growth in other areas of the economy. Remember: The rebate program does not simply encourage people to buy energy-efficient appliances, but to replace their old — functioning or not — appliances.

Additionally, in order to qualify for the rebate, consumers are limited to select Missouri retailers. This might not be cost effective for the consumer, who, for instance, could potentially find a better deal online — and it’s certainly not cost effective for Missouri.

Because the rebate program only applies to recycling an appliance, consumers are further disincentivized from selling, or donating, these appliances to others who might need them. Those who actually need to purchase appliances, either new or used, are therefore harmed by the program, both because workable, used appliances would need to be recycled, rather than sold or donated, by owners replacing them with energy efficient appliances, and because those who want to purchase a new appliance do not qualify for the rebate.

The truly green solution is to let consumers decide without government prodding when, and how, to replace their appliances.

Photo from the Kansas City Star.

Sing along:

Go ahead and hate your gasoline,

Go ahead and scam a friend.

Do it in the name of subsidies,

You can justify it with an E-10 blend.

There won’t be any markets working,

Come the judgment day,

On the inefficient morning after …

One free marketer rides away.

(continue singing)

And, I should add, rides away with 3 percent less gas mileage.

Thanks to Billy Jack Combest for the KC Star link.

The St. Louis Post-Dispatch editorial board wrote a piece yesterday about a number of bills in the legislature that would allow utility companies to request rate hikes every six months, as opposed to the current policy that limits a change to every 11 months. The Public Service Commission regulates the rates of investor-owned utilities, like Ameren electric and Laclede gas.

From the article:

Under the proposed new law, rate hike cases could last no more than six months, meaning utilities could file two requests each year.

That’s not just two rate hike cases for each electric company, including AmerenUE. It also means extra rate cases for water companies, including Missouri American Water, which is seeking a 21 percent rate hike, and for gas companies, including Laclede Gas, which has a $52.6 million rate hike request before utility regulators.

Last year, when AmerenUE raised its rates by 8 percent after a 12.1-percent increase the previous year, the utility’s president justified it in order to continue “maintaining reliable electric service.” He also said:

“Much of the increase covers the costs of projects initiated to improve the reliability of our electric system, the costs of environmental and efficiency improvements at our generating plants, and the costs of fuel for those plants.”

It is hard to evaluate the validity of these claims without a field of competitors providing greater incentives for efficiency and cost reduction. That competition doesn’t exist, though, because utilities are generally viewed as a natural monopoly, an industry that requires economies of scale so large that it is most efficient to have a single supplier. As a result, municipalities generally restrict entry into utility markets. In The Concise Encyclopedia of Economics, economist David Henderson pointed out that this restriction is probably unnecessary:

Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway. If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense.

In “The Myth of the Natural Monopoly,” Loyola University economics professor Thomas J. DiLorenzo cited economist Walter J. Primeaux’s findings from more than 20 years of studying electrical utilities and competition:

• Contrary to natural monopoly theory, costs are actually lower where there are two firms operating;
• Contrary to natural monopoly theory, there is no more excess capacity under competition than under monopoly in the electric utility industry;
• The theory of natural monopoly fails on every count: competition exists, price wars are not “serious,” there is better consumer service and lower prices with competition, competition persists for very long periods of time, and consumers themselves prefer competition to regulated monopoly;

If a utility is providing the lowest price, a competitor’s challenge will not be a serious threat. Competition itself — or the potential for competition — can keep prices low. Regulatory boards, on the other hand, historically have not been successful in lowering prices, as DiLorenzo noted:

In one of the first statistical studies of the effects of rate regulation in the electric utilities industry, published in 1962, George Stigler and Claire Friedland found no significant differences in prices and profits of utilities with and without regulatory commissions from 1917 to 1932. Early rate regulators did not benefit the consumer, but were rather “captured” by the industry, as happened in so many other industries, from trucking to airlines to cable television.

If barriers to entry are low enough, the potential for competition can increase efficiency and cost reduction in existing utilities. Instead of a focus on how often a utility company can change its rates, Missouri residents would benefit more from lowered regulatory barriers to entry in utility markets. In that case, future rate increases — like the recent decision to increase rates by 3 percent in order to promote energy efficiency — will be weighed against the possibility of a competitor attracting market share through lower prices.

Writing in the St. Louis Beacon, Washington University professor of Earth and planetary sciences Bob Criss argues that raising the Missouri gas tax could solve a number of environmental and social ills. Although I’m opposed to pretty much all taxes, I’m somewhat amenable to Criss’ argument. If we have to tax something, it is far better to tax something no one wants, like pollution, than to tax something everyone wants, like income (or general consumption, for that matter).

However, the Missouri Constitution makes implementing Criss’ proposal somewhat problematic. The state Constitution requires that funds generated by the gas tax be dedicated to building and repairing roads, bridges, and highways. The goal of a higher gas tax for Criss is that people would use less gasoline by driving less or using more fuel-efficient vehicles, but more and better roads will at least marginally increase people’s incentive to drive by allowing them to reach more destinations more quickly and comfortably. Increased roadwork would also generate a fair amount of air pollution. Those effects probably would not completely eliminate the environmental gains of a higher gas tax, but they are worth considering.

Furthermore, if people drive less but there are more gas tax revenues to spend, we will end up wasting that money on underused roads and highways. In short, while Criss’ proposal is not without merit, implementing it properly would involve a much greater challenge than simply raising the gas tax.

The big news in Missouri today is President Barack Obama’s visit to an ethanol plant in Macon, so I thought it would be worth briefly rehashing the airtight case against ethanol subsidies, as we have done here so many times in the past.

Most obviously, ethanol costs more than gasoline, so consumers have to pay more for energy to run their vehicles. However, because ethanol diverts foods like corn from their more traditional use as energy for humans and farm animals, food prices are driven up by greater ethanol use. Ethanol backers like to claim that such costs are justified by the environmental benefits of ethanol, but those benefits appear to be completely illusory. From the abstract of a 2008 study on biofuels:

Most prior studies have found that substituting biofuels for gasoline will reduce greenhouse gases because biofuels sequester carbon through the growth of the feedstock. These analyses have failed to count the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels. By using a worldwide agricultural model to estimate emissions from land-use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years.

Research has repeatedly confirmed that ethanol subsidies only drive price inflation for both energy and food without cutting greenhouse gas emissions, and it is long past time for politicians to admit that such programs are nothing more than a means for buying favor with voters in agricultural states.

I’ll be appearing on the Mike Ferguson Show on The Eagle, 93.9 FM in Columbia, this afternoon to discuss ethanol. Everyone can listen live online, and I hope you will tune in.

A blogger, commenting on my recent editorial about the wasteful nature of Missouri’s green tax rebate program, recently expressed skepticism that promoting the purchase of energy-efficient appliances may also encourage individuals to consume more energy.

In the second part of his post, he links to an article on Slate that cites a study analyzing electricity consumption patterns in the wake of government policy intended to “nudge” consumers into using less energy. First and foremost, this study is not relevant to my argument. In the case of Missouri’s green rebate program, which is what I discussed in my commentary, individuals receive a cash rebate when they buy energy-efficient appliances. The study cited in the Slate article looks at a case in which the electricity company simply sent its customers a home energy report that included charts and a list of tips on how to improve energy efficiency. The program considered by this study included neither a financial incentive, nor an upgraded appliance. The only conclusion that I would feel comfortable making from the study is that pamphlets do little to influence individual behavior. The study suffers from additional shortcomings, as well. For example, I disagree that a change of 1 percent or 3 percent is significant. This variation could be attributable to multiple other variables, such as a change in the price of energy or a seasonal change in the weather. The study also did not prove that the customers it identified as “liberals” reduced their energy consumption as a result of the home energy reports. Again, this reduction could have stemmed from any variety of other factors. Furthermore, because the percentage change and the sample size are both so small, a completely different result could conceivably be selected from the raw data.

According to a report published by Peter Huber and Mark Mills at the Manhattan Institute, the claim that we can meet future energy demand through conservation and efficiency is a myth. They provide evidence that, despite dramatic gains in energy-efficiency, aggregate energy consumption has increased over history:

The American economy has experienced massive efficiency gains: for each unit of energy, we produce more than twice as much GDP today than we did in 1950. Yet during that period of time, our national total energy consumption has tripled. Paradoxically, when it comes to energy, the more we save, the more we consume. [...]

“Efficiency fails to curb demand because it lets more people do more, and do it faster—and more/more/faster invariably swamps all the efficiency gains,” Peter Huber and Mark Mills state in The Bottomless Well. Or, as Huber characterized this “efficiency paradox” in a 2001 Forbes column: “More efficient jet engines … cheaper tickets … more passengers … more jets in the air.” The same holds true for cars, lightbulbs, power plants, and everything else that uses energy.

Furthermore, an economic moral hazard problem is often associated with buying green products. Energy-efficient appliances make doing dishes and laundry cheaper, which subsequently encourages individuals to use these appliances more frequently than they had before. Increases in energy efficiency mean that there is a decreased need for the existing energy supply, which leads to a reduction in the cost of energy, consequently shifting the demand curve for energy to the right. Similarly, there is evidence that owning a fuel-efficient car encourages people to drive more. A person could become less inclined to turn off light bulbs when they are more efficient, just as a person could be more inclined to run his washing machine or his dishwasher when it is not full.

Today, I spoke with Maria Keena of KMOX about my editorial, published today, arguing that Missouri’s green tax rebates are a wasteful use of state funds. The interview is scheduled to air on KMOX radio in St. Louis around 6:00 p.m. and tomorrow during the morning drive-time show. I encourage our blog readers to tune in!

In a Kansas City Star article, Steve Everly reminds us that Missouri’s annual green tax holiday is coming up:

Beginning Monday, the state will offer $5.6 million in rebates to Missouri residents who buy energy-efficient clothes washers, dishwashers, furnaces, air conditioners and heat pumps.

That’s not all. The state from April 19 to 25 won’t collect its 4.225-percent sales tax on those products, plus energy-efficient refrigerators and freezers.

Contributors to Show-Me Daily have written extensively about how programs like Missouri’s green tax holiday and last year’s Cash for Clunkers program are ineffective. These are examples of government programs that provide an incentive to consumers (i.e., a rebate) to buy certain items (e.g., an appliance or a car) in an attempt to incite economic activity and change individual behavior (which will ostensibly help preserve the environment). The following is a digest of these arguments. If any Show-Me Daily readers know of additional disadvantages to these programs, please add to this post in the comments.

1. Instead of creating new economic activity, programs that offer rebates on products like appliances and cars only distort the market.

In a previous post, Charis Fischer explained that these transactions would have occurred anyway in the future, independent of a rebate in the present:

Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

2. The intended environmental impact is negated through the construction of the program.

The subsidy incentivizes the destruction of operational appliances and the construction of new appliances to replace them. It could also be possible that having an appliance that is more fuel-efficient would encourage a person to wash more dishes and laundry than he did before. Justin Hauke posted previously that, unless each Missouri resident buys a new appliances that week, the Green Tax Holiday would have no impact on overall energy usage in the state.

3. The money that is spent in rebates could be devoted to other programs.

Caitlin Hartsell explained in an earlier post how programs like Missouri’s Green Tax Holiday and Cash for Clunkers illustrate Bastat’s broken window fallacy.

[W]hen the government uses taxpayer money to stimulate one part of the economy, this comes at the expense of those other economic sectors that will no longer benefit from some measure of either consumer spending or invested savings.

4. This cements the idea that individuals should look to the government for approval of which products and services to buy and how to behave, which should not be the role of government.

Sarah Brodsky pointed out that, by eliminating state sales tax on only those appliances that have the Energy Star designation, the government favors certain products and behaviors over others.

A group of idealistic young whippersnappers marched in Columbia to protest the campus’ use — and, by extension, the entire state’s use — of coal as an energy source. I have to wonder whether these students have any idea what the economic effects would be if Missouri, or the rest of the country, just abandoned coal use overnight.

Coal miners have it pretty tough already, but I don’t think putting tens of thousands of them out of work is going to help them or their families much. I am also willing to bet that these exact same students would be leading the protests over higher tuition if Mizzou itself (somehow) suddenly went cold turkey on coal power and started using more expensive options. Finally, I’ll rescind these comments if I find out the protesting students were advocating that Mizzou should use nuclear power instead — but somehow I doubt that anything other than thousands of windmills and solar panels would satisfy them.

Thanks to Combest for the catch.

The St. Joseph News-Press ran an article this past week about the biodiesel industry’s fight for a tax credit extension. Show-Me Institute research analyst Christine Harbin wrote about the negative consequences of corn ethanol subsidies on our blog recently, and provided good analysis about why such subsidies hurt taxpayers. The St. Joe’s article is filled with quotes from people within the industry that exemplify why the tax credits are counterproductive:

“Any further delays will cause additional harm to the industry,” said Michael Frohlich, director of communications for the National Biodiesel Board. “(The expiration has) really been devastating. What you’ve seen is a complete drop in demand.”

Frolich essentially concedes here that the subsidy drives demand, implying that ethanol cannot, on its own, be a profitable endeavor. But the industry leaders interviewed in the article go on to argue that these subsidies will make the industry competitive in the future:

“(The tax credit) is crucial in order for (the biodiesel industry) to keep running,” said Brooks Hurst, a state director for the Missouri Soybean Association. “As we’re starting out, it’s critical to make us cost competitive with petroleum diesel.”

Soybean oil is a feedstock for the production of biodiesel.

If the tax credit were eliminated altogether, the industry would likely “cease production,” Mr. Hurst added.

“The biodiesel industry is an infant industry,” he said. “We’re trying to build demand.”

The nascent or infant industry argument is one used throughout history to protect emerging industries. It suggests that new industries need to be protected temporarily in order to gain the economies of scale that their competitors already enjoy. This is later expanded by Frolich, however, who says:

“Obviously, the long-term goal is for a multi-year (tax credit) extension.”

Ethanol needs the subsidy in order to be profitable, but subsidy proponents argue for more than just economic viability. Some claim that ethanol is better for the environment than standard gasoline, and suggest that it should be subsidized for that reason alone; however, there is a substantial body of research showing that this is not the case. A 2005 study in BioScience debunked that notion by looking at the effects of ethanol use in both Brazil and the United States, concluding that it did not bring net environmental gains. From the study’s conclusion (emphasis added):

The use of ethanol as a substitute for gasoline proved to be neither a sustainable nor an environmentally friendly option, considering ecological footprint values, and both net energy and CO₂ offset considerations seemed relatively unimportant compared to the ecological footprint. As revealed by the ecological footprint approach, the direct and indirect environmental impacts of growing, harvesting, and converting biomass to ethanol far exceed any value in developing this alternative resource on a large scale.
[...]
In the US case, the use of ethanol would require enormous areas of corn agriculture, and the accompanying environmental impacts outweigh its benefits. Ethanol cannot alleviate the United States’ dependence on petroleum.

Other studies have replicated these results, such as another piece from 2005, printed in the Renewable and Sustainable Energy Reviews. The authors reached a similar conclusion about E10, the ethanol mixture used for Missouri gasoline:

The study indicates that E10 is of debatable air pollution merit (and may in fact increase the production of photochemical smog); offers little advantage in terms of greenhouse gas emissions, energy efficiency or environmental sustainability; and will significantly increase both the risk and severity of soil and groundwater contamination.

A 2004 study published in Natural Resources Research concluded that ethanol creation uses more energy than the ethanol itself provides:

Specifically about 29% more energy is used to produce a gallon of ethanol than the energy in a gallon of ethanol. Fossil energy powers corn production and the fermentation/distillation processes. Increasing subsidized ethanol production will take more feed from livestock production, and is estimated to currently cost consumers an additional $1 billion per year. Ethanol production increases environmental degradation. Corn production causes more total soil erosion than any other crop. Also, corn production uses more insecticides, herbicides, and nitrogen fertilizers than any other crop. All these factors degrade the agricultural and natural environment and contribute to water pollution and air pollution.

Missouri is at a disadvantage because the state’s ethanol mandate requires at least 10 percent ethanol in the gasoline sold here. Show-Me Institute policy analysts David Stokes and Justin Hauke published a case study analyzing the effects of the mandate, concluding that it cost the taxpayers much more than it saved — the opposite of the cost-savings argument originally made in favor of the mandate. Requiring ethanol to be used in the state’s gasoline also discourages research toward better and more efficient forms of biofuel by propping up the corn ethanol industry.

The data shows that the ethanol mandate is expensive and does not help the environment. Ethanol may even harm the environment, by discouraging more efficient and environmentally solutions. That being the case, what justification is left to protect the ethanol industry with mandates and subsidies?

This month, the University of Missouri Food and Agricultural Policy Research Institute released its 2010 US Baseline Briefing Book (PDF). Among other topics, the report explores the effects of eliminating the credits and tariffs currently in place for corn ethanol. The current corn ethanol tax credit has many unintended negative consequences, and the United States would be better off if the program were scrapped entirely.

1. This production incentive encourages overproduction. This is undesireable from an environmental perspective, because it leads to deforestation. It’s also detrimental for the American economy because it results in an inefficient allocation of resources.
2. It increases the cost of fuel for taxpayers. Each gallon of ethanol that is produced costs them $4.18. This is separate from and in addition to the price that they pay at the pump. In a piece on The Huffington Post, Nathanael Greene explains how this happens:
   

   [N]ext year the oil companies will be required to buy 12.6 billion gallons of conventional corn ethanol, but because tax payers are giving them $5.85 billion they’ll consume 1.4 billion more than required. That works out to $4.18 per extra gallon.

3. It drives up the prices for corn, soybeans, and wheat. This is bad for consumers because they have to pay more for food. This is also bad for the environment because it leads to land-use change and further overproduction and deforestation. The FAPRI report quantifies that eliminating the tax credit for corn ethanol would cause the prices of these grains to fall. According to p. 64, if the production incentives were removed, the average corn prices would decrease by approximately $0.15 per bushel during the 2010-2019 period:
   
4. It discourages the development of biofuels that are cleaner and more renewable than corn ethanol. These alternatives are forced to compete at a disadvantage because they do not receive the financial favor that corn ethanol does.

The corn ethanol production incentive program is an application of the broken window fallacy. Politicians in Washington fail to consider the cost to taxpayers, and the aforementioned negative consequences. When taxpayers are forced to spend their money on subsidizing the overproduction of corn ethanol, they cannot spend it on something else, such as infrastructure or education or alternative renewable fuels.

Supporters of the production incentives will argue that discontinuing the program would hurt farmers’ bottom lines. However, government payments constitute a very small amount of their compensation relative to sales, as shown on p. 62 of the report. For this reason, eliminating the production incentives would not actually be detrimental to this group:

On Friday’s CBS “Early Show,” I saw a segment about a new government program that offers consumers cash rebates to replace their energy-inefficient appliances with new Energy Star–rated ones — “Cash for Appliances,” if you will. Sound familiar? Just like “Cash for Clunkers,” this program probably won’t increase the volume of sales significantly, but rather just shift the timing of these sales forward.

Some argue that this shift is the type of “stimulus” that the economy needs; after all, the money for this program was allocated from last year’s stimulus package. But will the effect of this program be worth the $300 million in taxpayer money that is being spent to finance it? I know “million” doesn’t sound like a big number anymore, with all of the billions and trillions being thrown around lately, but $300 million is still a lot of money — other people’s money. Using tax dollars to help people buy more energy-efficient machines is likely an inefficient use of funds, because purchases of these machines will become much more common within the next few years anyway, as older machines start to die. The fact that people can save money on energy costs by upgrading their appliances is already a significant incentive.

Each state has its own program, and Missouri has allotted $5.6 million in federal funding. The program will start on April 19 to coincide with the annual Show-Me Green sales tax holiday. If the funding only lasts for one day, which is likely given that Iowa’s $2.7 million ran out by 3 p.m. on the first day, no sales tax revenue would be generated. So, what genuine benefit will this expenditure have for our state? It will not add to the net state wealth, but is instead a mere transfer. Any benefit to appliance retailers will likely be very short-lived, and any arguable benefit to the state economy will be small at best. And, all the while, taxpayers will be able to watch their hard-earned money disappear down the drain into another ill-advised government program.

A number of people turned out in Columbia on Monday morning to call on Congress to pass a clean energy bill, which the activists claimed would create 36,000 jobs in Missouri. That sounds nice enough, but it would actually be a bad thing. Jobs are not goods; they are what people do to pay for goods. If people want work to do, they can come over to my apartment, and I can have them clean the place, cook meals, and start running errands for me. I’m not actually willing pay more than, say, $5 an hour for those services, but it would be a job.

What these activists are saying is that with a clean energy bill, we will get the same amount of energy, but it will take 36,000 more workers to create it, which means much higher energy costs. An economy is more efficient when it employs fewer resources (e.g., energy, labor, and steel) to make the same amount of a good or service, but the economic argument these activists are trying to advance is that we can get rich by doing less with more.

There are environmental arguments for supporting clean energy, and some of those may have merit. If you want to advance those arguments, there is a productive discussion to be had, but this jobs argument is completely specious and should be buried once and for all.

I’m currently reading Gridlock: Why We’re Stuck in Traffic and What to Do About It by Randal O’Toole, the Antiplanner. Although the book discusses the problems in America’s transportation system in general, certain parts of it are specific to light rail in Saint Louis and the debate surrounding the proposed MetroLink expansion. I’d like to share some passages from Gridlock that communicate why expanding MetroLink is unnecessary and cost-inefficient.

First, O’Toole provides evidence that expanding MetroLink hasn’t historically increased ridership in Saint Louis:

When St. Louis opened its first light-rail line in 1993, it was hailed as a great success because system ridership, which had shrunk by nearly 40 percent in the previous decade, started growing again. But when St. Louis opened a second line in 2001, doubling the length of the rail system, rail ridership remained flat and bus ridership declined. By 2007, total system ridership was no greater than it had been in 1998.

Second, O’Toole describes how Saint Louis experienced a reduction in energy efficiency after launching a light-rail line. He explains that this is because the city ultimately uses more fuel on buses that carry smaller average loads than it did before building the line.

For example, in 1991, before Saint Louis built its first light-rail line, St. Louis buses averaged for than 10 riders and consumed 4,600 BTUs per passenger mile. In 1995, after opening the light-rail line, average bus loads declined to less than 7 and energy consumption by bus and light rail together increased to 5,300 BTUs per passenger mile. CO₂ emissions also climbed, from 0.75 pounds to 0.88 pounds per passenger mile.

Third, MetroLink’s revenues add up to less than its expenses, and an expansion would exacerbate this deficit:

The transportation plan for St. Louis [...] notes that the transit agency’s projected revenues could not even cover its operating costs, much less the cost of light-rail expansion. The plan adds that county voters rejected a tax increase needed to support transit operations and that, even with that tax, the agency’s revenues would be insufficient to support the proposed expansions.

O’Toole has written several pieces on the subject of high-speed rail for the Show-Me Institute. His most recent study for the Show-Me Institute, “Why Missouri Taxpayers Should Not Build High-Speed Rail,” was published in September.

I have been thinking about ethanol lately because the hotel with which our office building shares a parking garage seems to be hosting some type of conference that has brought down some people from Iowa. Our garage contains several cars marked as belonging to “Iowa State” or “Iowa Department of Transportation,” and they all sport large bumper stickers proclaiming that they run on ethanol fuel. Good for them. I am glad they are visiting Missouri, where they get ethanol in their gas whether they like it or not. (I am pretty sure they like it.)

This is topical because just the other day the Government Accountability Office released a report recommending that we do away with the ethanol tax credit. The Post-Dispatch’s “Political Fix” has the story here. Now, the bad part is that the tax credit is no longer needed because another government mandate is forcing ethanol on us:

But the GAO said the tax break is no longer needed now that the industry has prospered under a government mandate for ethanol use, called the Renewable Fuel Standard.

So, the ethanol industry “prospers” because of a federal mandate, a federal subsidy, and an additional state mandate. But I guess getting rid of one of them amounts to some progress, at least.

Here is some of the work we have done at the Show-Me Institute about ethanol.

Copenhagen is becoming unlucky for the United States. Last Friday, Chicago lost its bid for the the 2016 Olympics there; this December, a summit will be held there to debate an international climate change treaty that, if passed, would critically damage the U.S. economy.

Some are pushing the “Clean Energy Jobs and American Power Act,” better known as “cap and trade,” to set the stage for this international treaty. In short, because of political compromises backroom shenanigans, the bill as it stands does more to raise the cost of energy — thus raising the cost of every product in the economy — than it does to reduce emissions. Missouri and other Midwestern states would be especially hurt by the regulations, given that much of our economy relies on carbon-emitting energy. (Read my previous blog post about cap and trade for more reasons why it is a bad idea.)

The student newspaper at Wash. U. wrote an article in favor of the international treaty, and about an upcoming event: In two weeks, Missourians will be marching in support of this treaty. Although everyone is entitled to their own opinion, this treaty and the support for it are misguided.

International treaties — especially in regard to environmental agreements — are difficult to enforce and are rarely effective. The Kyoto protocol, signed by 183 nations, was intended to reduce carbon emissions worldwide; however, the signatory nations have increased their emissions even faster than the world average and the United States.

This new treaty would only cripple the economies of the United States and other participatory countries. It would add an extra cost to business transactions with arguably negligible environmental benefits. Most of the world’s environmental damage is done by burgeoning industrial economies, like China and India, but they will not be party to the new rules. The United States can try to set a good example through productive and competitive efficiency measures, but cap-and-trade legislation would only hurt American businesses in an already uncertain global economy.

Today’s Springfield News-Leader has a rebuttal to a prior op-ed that quoted some information from the Show-Me Institute. The topic is Springfield’s pension problem, and the rebuttal questions how the Show-Me Institute writer (me) came up with a value of $75 million for Springfield’s water utility. From today’s piece:

- Neither the city staff, nor City Utilities, has any idea how the Show-Me Institute arrived at a $75 million valuation for CU’s water division. Regardless, there are two larger points here. First, the Show-Me Institute is not an unbiased source. Its mission statement is to promote free-market solutions for public policy. Maybe selling off some or all of CU’s assets is a good “market solution” for the buyer, but it would not be in the best interests of the CU consumer.

We may not be unbiased, but at least we are not lazy. As in, too lazy to do one minute’s worth of work to answer your own question. About three weeks ago, the Springfield Business-Journal ran my op-ed that cited the $75 million figure. I can’t link to the SBJ’s version of the piece online, but I can link to our copy. It very clearly states how I arrived at that estimate:

It is difficult to estimate the windfall Springfield might receive, because public utility valuations are very complicated, but Webster Groves, which has one tenth the population of Springfield, received $9.5 million in 2002 just for its water system. Using a rough per-capita calculation and adjusting for inflation, a similar sale might bring more than $75 million for Springfield’s water division alone.

I clearly stated that this was a rough estimated value, but as to how I came up with it, the answer was right there in black and white.

A commentary in the Springfield News-Leader today cited a recent op-ed of ours (OK, of mine) about city utilities in Springfield. The commentary noted how, despite its pension issues, the Springfield city government is far from broke, and offered as one piece of evidence the value of its utility holdings. That is where we came in:

Further, the Show-Me Institute estimated that City Utilities’ water division alone could be sold for $75 million.

That was a very rough estimate, as I readily admitted in the piece on Springfield and City Utilities that this figure came from, but it is nonetheless based on reasonable calculations that I discussed in detail. The author of today’s piece is right on: Springfield is not broke, and it does have options in fixing the city’s pension problems. Those options may or may not involve a tax increase, but selling the municipal utilities is a very realistic option that has already been done by Florissant and Webster Groves here in Missouri, to give just two examples.

The results of a new survey of members of the American Economic Association suggest that the Show-Me Institute is in good company.

The survey finds economists in consensus on several key policy issues:

• 51.6 percent agree: “The U.S. should place more stringent caps on medical malpractice awards.”
• 63.7 percent agree: “Barriers to entering the medical profession should be reduced.”
• 78.3 percent agree: “Government subsidies on ethanol in the U.S. should be” reduced at least somewhat.
• 42.4 percent agree: “State governments in the U.S. should eliminate mandates about what health insurance must cover.”
• 62 percent disagree: “Employers in the U.S. should be required to provide health insurance to their full-time employees.”

Other interesting results:

• 83.3 percent agree: “The U.S. should eliminate remaining tariffs and other barriers to trade.”
• 70.3 percent agree: “The U.S. should allow payments to organ donors and their families.”

David Catanese blogs over at ky3 political notebook that Sen. Claire McCaskill is highly unlikely to cast a yes vote for the cap-and-trade legislation that recently passed out of the U.S. House of Representatives (link via Combest):

“If there is going to be enough support for the bill, it will be a very gradual implementation as we move toward changing to wind and solar and other kinds of energy,” McCaskill told conservative Missouri talk radio host Mike Ferguson. “I’m going to be one of those trying to craft it in a way that is very gradual, that is not going to hurt a state like Missouri that is so coal dependent.”

McCaskill also said she’s in no rush on cap-and-trade because other world powers haven’t agreed to do their share.

“We need to be a leader in the world but we don’t want to be a sucker. And if we go too far with this, all we’re going to do is chase more jobs to China and India, where they’ve been putting up coal-fired plants every 10 minutes,” she said.

It is good that the Senate recognizes the harms that Missouri would incur upon passage of the cap-and-trade legislation as it is currently structured. We’ve been blogging about this often recently.  Cap and trade would significantly diminish the competitive ability of the state of Missouri. And I say this not as a global warming skeptic; I’m pro-environment. Still, this is not the way to go.

Show-Me Policy Pulse cited an AP article that appeared in the Kansas City Star on Sunday about the “energy efficiency” charge that would be added to energy bills beginning in August if the governor signs pending legislation authorizing the charge. The new fee was designed to fund energy-conservation initiatives by utilities like AmerenUE:

For example, the commission last week approved a program in which St. Louis-based AmerenUE can offer credits to businesses that voluntarily shut down or scale back their electricity use during peak demand. AmerenUE will be able to recoup the cost for the program that starts Thursday by increasing the rates it charges business customers.

Instead of providing more efficient or environmentally friendly energy, this program would cost most consumers more money in order for utilities to provide less energy. It’s a short-term solution to a long-term problem: As Missouri’s population grows, and our economy produces more, we will need more energy — or a more efficient way of getting energy. If the state insists on instituting some sort of environmental energy cap or tax, it would make more sense for the program to focus on increasing efficiency in energy production and fostering alternative energy sources.

The program currently under consideration would add 3 percent to energy bills in order to fund what amounts to education efforts, and utilities would remotely control some aspects of participating customers’ energy usage, such as air conditioning. From the article:

One of the company’s more popular energy-saving initiatives has provided free programmable thermostats to about 34,000 residential customers in Missouri and Kansas. [Kansas City Power & Light] can remotely control the devices to reduce the frequency at which air conditioners run during peak demand times. The power company overrode customers’ air conditioners four times last year and twice so far this summer, [KCP&L's senior director of public affairs] said.

A better solution would involve a way for companies to choose to buy green or more efficient energy from a competing company. Deregulating the energy monopoly would force utilities to become more efficient themselves, or give way to more efficient competitors. This competitive process should be encouraged here, rather than just paying existing utilities more to produce less.

David Frum has a great post up about how France handles the nuclear waste generated by its vast civil nuclear program. This goes a long way toward answering one of the open questions I had in my piece arguing for an expanded nuclear presence in Missouri. In short, France reprocesses and reuses the waste, although I readily admit my own limitations in explaining it much beyond that. (I originally found the article thanks to Andrew Sullivan.)

On a closely related point, I recently found one reason why AmerenUE was so intent on expanding within Callaway County — a project that hopefully will succeed eventually. Callaway County has a commercial property tax surcharge of just 11 cents per hundred dollars of assessed valuation, one of the lowest surcharge rates in Missouri. (Only two counties are lower: Reynolds and Camden.)

The Kansas City Star reports on the increasing support for a plan to scrap and replace the fuel tax. The article cites rising public concern that the current revenue stream for highway and transportation projects, structured around fuel taxes, is unsustainable.

In recent years, public highway funds have been shriveling. In response to concerns about environmental impact and personal budget costs, the public’s automobile preferences are slowly and surely shifting toward increasingly efficient cars with higher gas mileages, or cars that bypass gasoline fuel altogether. Is implementation of a mileage tax the best way to confront these trends?

On the state level, Oregon has experimented with this idea, with some degree of success and enthusiasm by the trial participants. Adam Stein of Grist explains how the system worked:

A small GPS receiver in participants’ cars tracked miles driven. When participants went to the gas station to fill up, a wireless scanner at the pump detected the GPS receiver and recorded the car’s current mileage, which was then sent to a central database to determine miles driven since the last payment. No specific location data was transmitted. The payment system at the gas station applied either the standard gas tax (for cars that didn’t have a GPS system) or the mileage tax (for participating cars). The experiment was designed to be revenue neutral, so fees were about the same in either case.

The Oregon experiment produced high satisfaction (91 percent of participants preferred the system to a fuel tax), and curbed both congestion and average driving times.

On the national level, Transportation Secretary Ray Lahood is a vocal supporter of phasing in a mileage tax system, a view which has been shot down by the Obama administration.

Problems abound with mileage tax systems, including — but certainly not limited to — high compliance costs (imagine retrofitting thousands of old cars with GPS transmitters!), interference of privacy rights, and ineffective distortion of driving behavior. Further, as economist Mike Moffatt notes, by removing incentives for purchasing fuel-efficient cars, mileage taxes feature all of the drawbacks of the fuel tax (regressive, decreasing travel, increasing prices of transported goods), while sharing none of its virtues. His solution? Make up for lost revenue by raising the fuel tax even higher.

In Missouri, revenues have been facing downward pressure for the past few years and have been falling at an average rate of 3 percent. The state’s highway budget is hobbling on, despite inflows of stimulus money. Missouri needs to act. Should Missouri join the ranks of other states like Ohio, Pennsylvania, Florida, Colorado, North Carolina, Oregon, Idaho, and Minnesota by experimenting with a mileage tax system? Should we raise fuel taxes? Should we stand by and do nothing, allow the system to die, and replace it with a private one? Your thoughts, please!

Good news for opponents of cap-and-trade policy in Missouri (via the Kansas City Star’s Prime Buzz):

The climate bill passed by the House last week now goes to the Senate, where capping greenhouse emissions could face a rougher ride.

Its fate could depend upon a group of about 15 moderate Democrats who have generally staked out a middle ground on President Obama’s domestic agenda.

One of them, Missouri Sen. Claire McCaskill, said on Twitter over the weekend: “I hope we can fix cap and trade so it doesn’t unfairly punish businesses and families in coal dependent states like Missouri.”

The realization that cap and trade systems are ineffective and highly injurious to state and national economic welfare is not a partisan issue. I will keep this pithy, and point you all to read Caitlin’s excellent discussion of the matter. The environment is worth saving, but it is important to remain open to other alternatives, and to not exploit the conveniences of one tool to silence discussion of all others.