Pop Quiz: Which Policy Is Worse?
If you are like most people, you probably spend a lot of time wondering, “What is the absolutely worst environmental policy on the planet?” And if you are like most people, you probably think it is America’s ethanol policy. So Virginia’s recent decision to subsidize what will be the largest ethanol plant on the East Coast might strike you as doubling down on the dubious.
Don’t be too hasty. We have some competition.
True, America’s policy of blending corn-based ethanol into gasoline is unbelievably awful. For decades, Congress lavished billions of dollars on fuel producers to encourage the practice. As a result, almost half the U.S. corn crop gets pumped into gasoline tanks. Owing in no small part to that, corn prices more than doubled from 2006 to 2011. This raised the price of food both for people and for animals that people eat, such as farm-raised pigs. As a result, notes Bloomberg Businessweek, “ethanol mandates have acted as an efficient way to funnel cash from the world’s disadvantaged to its agro industry conglomerates.”
So the mandate is bad for poor people. But at least it raises gasoline prices! For one thing, ethanol costs more to produce than gasoline. And when Washington replaced ethanol subsidies with a renewable-fuel standard, it set increasingly high – and increasingly unrealistic – targets for the amount of ethanol to be blended with gasoline. Since there is not enough ethanol to go around, some gasoline producers have to buy ethanol credits known as renewable identification numbers (RINs). The trading of RINs has driven their price sharply higher, which has raised prices at the pump.
(Bonus point: Federal rules are driving refiners up against a “blend wall” – the point at which the ethanol content in gasoline exceeds 10 percent. Using more than a 10 percent ethanol blend voids many car warranties.)
But ethanol is helping to stave off global warming, right? Wrong. Corn needs farming, and farming needs fertilizers and tractors and hauling and so on. In some cases ethanol production requires more energy than the fuel delivers to your engine. Analyses differ, but by some estimates ethanol actually raises carbon-dioxide emissions from the tailpipe 12 percent over non-ethanol blends. (Even the federal government – which imposes the mandate – concedes “the ethanol program has little effect on the environment.”)
Ethanol is therefore one of the few subjects on which all corners of the ideological map agree. U.S. ethanol mandates are “catastrophically idiotic” (Mother Jones); “costly and unnecessary” (the Heritage Foundation); and “blatant corporate welfare” (the Cato Institute). Aside from that, they’re great.
So naturally, last week Virginia Gov. Terry McAuliffe boasted that he had played “a significant role” in using state subsidies to revive a defunct ethanol plant in Hopewell, south of Richmond. Osage Bio Energy built the $200 million facility a few years ago in the hope of raking in federal incentives for turning barley into gas. That didn’t pan out, and the plant never even lit the boilers. Last year Vireol, a British firm, bought the plant, intending to disassemble it and ship it overseas.
But thanks to Riley Ingram, Hopewell’s representative in Virginia’s House of Delegates, the company is going to stay. He sponsored legislation ensuring that for the next three years it will get up to $1.5 million in state support to produce about 170 million gallons of ethanol. The company also will get a $250,000 state development grant, matching tax breaks from Hopewell, employee training incentives, and Enterprise Zone incentives. This is supposed to create jobs – if you don’t count the jobs that would otherwise be created if not for the economic inefficiency of all that government meddling.
Upshot? Virginia taxpayers will shell out millions to help make food and gasoline more expensive while making global warming worse. ’Twas a famous victory.
It’s hard to find a policy that makes less sense – but London’s Daily Mail has done so. According to a story it ran in March, vast swaths of North Carolina forest are being clear-cut to make wood pellets for use in Britain, which is supposed to almost triple its renewable-energy use in the next six years. Subjects of the British crown are paying hefty subsidies to underwrite the cost of shipping a million metric tons of wood pellets a year 3,800 miles across the ocean – the ships leave from Virginia ports – so they can be burned at the Drax power station in Yorkshire.
If you think that sounds incredibly inefficient, you’re right. It actually generates 20 percent more carbon dioxide than burning coal would – and twice as much as burning natural gas would. Meanwhile, the trees being mowed down to feed the insatiable Drax maw will take about a century to regrow. But since they do regrow, that technically makes wood pellets a “renewable” resource. (By that logic, so is coal.)
For this, British taxpayers shelled out more than 62 million pounds – about $100 million – in green-energy subsidies last year. Britain’s government also is going to make them pay 105 pounds ($176) per megawatt-hour for this “green” energy, which is seven times what they’ll pay for nuclear energy, which really does help reduce global warming.
Nigel Burdett, Drax’s environmental manager, explains why this is happening: “Our whole business case is built on [the] subsidy, like the rest of the renewable energy industry,” he told the Daily Mail. “We develop our business plan in light of what the government wants – not what might be nice.”
So back to the question at the start of this column: Which policy is worse? To answer that one, the judges might need to go to the videotape.
An Electrifying Case of Government Folly
Anyone searching for a case study to explain what is wrong with capitalism in America today can stop looking. We have the perfect specimen: Tesla Motors. Federal and state programs have conferred huge advantages to help the electric-vehicle company sell its cars — which state laws then make almost impossible to sell.
Left to its own devices, Tesla one day might have epitomized everything good about market economics. In an industry whose fundamentals have changed little since the introduction of the Model T, the California-based company, led by the visionary Elon Musk, made a long-term bet that it could prevail through disruptive innovation and superior products (Motor Trend named its Model S the 2013 Car of the Year, and Consumer Reports raved about it). Instead, Tesla now epitomizes the folly of government intervention.
Start with all the special benefits Tesla receives — including a $465 million loan from the Energy Department, conferred in January of 2010. That is two-thirds more than Tesla initially raised from private investors, and more than double the $226 million the company raised from its initial public offering five months later, even though the loan surely encouraged investors to buy.
On top of the loan, add the $7,500 federal tax credit for purchasing electric vehicles. That amounts to a discount of more than 10 percent for the base Model S, whose purchase price is a hefty $70,000. Many states also offer their own incentives, including tax rebates, property tax reductions or exemptions, and sales tax exemptions worth thousands of dollars more. Some states also offer perks such as exemption from annual inspection requirements and use of HOV lanes.
And then there is California, a world unto itself. Not only has California given Tesla a $10 million grant, it has ordered car makers to sell an increasing number of electric vehicles; Gov. Jerry Brown insists that 1.5 million zero-emission vehicles ply the state’s roads by 2025. (“Zero-emissions” is a grievous misnomer, since electric vehicles need charging, and all power plants produce emissions. In fact, electric vehicles in regions where coal makes up a large share of the generation capacity are more carbon-intensive than high-mpg cars with internal combustion engines.)
But there are two problems with setting quotas for electric vehicles. Most car makers don’t manufacture them. And so far, most consumers don’t want them — even with the large financial inducements. So California lets other car makers meet the rule by purchasing credits from EV makers, which for now means Nissan and Tesla.
In August, the left-wing Mother Jones magazine reported that Tesla’s profits in the first and second quarters of 2013 — its first profits ever — would have been losses if not for the tens of millions it has collected through the credit-purchase program.
Still, some people who can afford to do so want to buy Teslas. Unfortunately, states across the country are doing their best to stop them.
In Virginia, for instance, you can visit the company’s showroom in Tysons Corner to kick the Tesla tires. But until recently that was about all you could do. You couldn’t take a Tesla for a test drive. The company reps couldn’t even discuss pricing with you. And you absolutely, positively could not buy a Tesla then and there.
Those restrictions still exist in most other states: Forty-eight states forbid Tesla to sell cars directly to consumers, which is how the company likes to do business. (Tesla has a variety of reasons for that: Among them, the company charges a single flat price for its cars, but couldn’t sustain such a policy if middlemen got involved.) And independent automobile dealers are fighting furiously to keep Tesla out of their backyards.
Texas’ rules resemble Virginia’s. In New York, lawmakers introduced legislation that would have shut down Tesla’s three locations by forbidding the registration of any vehicle not purchased through a dealer. In North Carolina, the State Senate passed a bill to forbid vehicle sales except through a franchised dealer.
Both of those measures ultimately failed, but until a couple of days ago, when a lawsuit-averting deal was announced, Tesla had not been able to win an exemption from Virginia’s rules. Some Virginia dealers wanted to keep it that way. “Tesla believes it should be allowed to sell cars without licensed dealers. This can’t be,” wrote Gerard Murphy in The Washington Post earlier this year. Murphy is president of the Washington Area New Auto Dealers Association, whose members include dealerships in Northern Virginia. “If Tesla won’t have a dealer network, it doesn’t belong in the automobile business.”
The dealers contend they are simply trying to protect local jobs and the welfare of the consumer. But their motives are not solely altruistic. If Tesla succeeds in challenging the franchise model, other car makers might do the same — and then dealerships would be in for a world of hurt. They would still make money, but probably nowhere near as much as they do now.
That’s rough on them — but it’s no rougher than the transition other industries have endured in recent decades. And the rationales the dealers offer to justify government-enforced protection of their turf make no more sense than similar justifications would make in other industries. Imagine, for instance, if states insisted that bloggers and advertisers who want to reach the public could do so only through newspaper websites, in order to preserve local jobs and the fact-checking process. That’s the sort of nonsense the dealers in other states are peddling now.
But then, there’s very little good sense in the tale of Tesla — a company that government advances with special preferences one moment, and impedes with schemes for the protection of market incumbents the next. Tesla’s cars might qualify as revolutionary. But its treatment at the hands of big government is as old as Appian Way.
EPA Backs Down on Creek Fight
It’s a win for Fairfax, Ken Cuccinelli, and common sense.
Fracking Lowers Teen Pregnancy
I did a double-take, too. But that’s not a headline from The Onion. It’s the conclusion of the Guttmacher Institute:
Research suggests that women are more likely to delay pregnancy when they perceive future opportunities to climb the social and economic ranks.
And in North Dakota, where teen pregnancy rates have fallen recently, the fracking boom has produced a lot of economic opportunity.