Biofools (the US Congress) and your money

Which is the smaller of the following two numbers: $25 or $750?

We knew the cost of CO2 avoidance for the US biofuel subsidies was high. But this CBO study shows how bad the picture actually is. The raw cost to the US taxpayer to avoid a ton of GHG is $750, $275, and $300 for corn ethanol, cellulosic ethanol, and biodiesel respectively.

Regular readers will know that the direct cost of these subsidies is only a small part of the true life cycle cost [PDF, "Cost and Life-Cycle Analysis of Biofuels" by the Institute for Energy and Environment gGmbH Leipzig, Germany.]

The CBO estimate of $750 per ton GHG avoided is a minimum cost — to mention just a few: the $750 does not include the loss of forest, loss of food production, high food prices for the global poor, expropriation of precious fresh water supplies, or the opportunity cost of capital that was diverted from productive investments.

An excerpt from the CBO report:

The costs to taxpayers of reducing consumption of petroleum fuels differ by biofuel. Such costs depend on the size of the tax credit for each fuel, the changes in federal revenues that result from the difference in the excise taxes collected on sales of gasoline and sales of biofuels, and the amount of biofuels that would have been produced if the credits had not been available. The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol and $3.00 for cellulosic ethanol. The cost of reducing an equivalent amount of diesel fuel (that is, a quantity having the same amount of energy as a gallon of gasoline) using biodiesel is $2.55, based on the tax policy in place through last year.

Similarly, the costs to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits vary by fuel: about $750 per metric ton of CO2e (that is, per metric ton of greenhouse gases measured in terms of an equivalent amount of carbon dioxide) for ethanol, about $275 per metric ton of CO2e for cellulosic ethanol, and about $300 per metric ton of CO2e for biodiesel. Those estimates do not reflect any emissions of carbon dioxide that occur when production of biofuels causes forests or grasslands to be converted to farmland for growing the fuels’ feedstocks (the raw material for making the fuel). If those emissions were taken into account, such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing emissions through the use of different biofuels—in some cases, by a substantial amount.

A straightforward revenue-neutral carbon tax (or fee and dividend if you prefer) would be on the order of $25 per ton CO2 by 2015 on an “aggressive” ramping up of the tax rate. And that $25 would not be a net tax as the full amount would be refunded to all taxpayers (either as direct cash payments, or e.g., by reducing the payroll tax, reducing taxes on capital, etc.).

Final exam question: which is the better US energy policy? Mandate and subsidize corn ethanol? Or a simple fee-and-dividend carbon tax?

HT to Greg Mankiw for the link., and to Sen. Bingaman (subscription required):

Senate Energy and Natural Resources Chairman Jeff Bingaman served notice to Corn Belt lawmakers Wednesday that they won’t easily get an extension of the expiring ethanol blenders’ tax credit. (…)