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Interview with Harry de Gorter on biofuels policy - Transcript

Kristin Agard: Welcome to the Applied Economic Prospectives and Policy podcast. A production of Oxford Journals and the Agricultural and Applied Economics Association; I’m Kristin Agard, Executive Director of the Agricultural and Applied Economics Association. Recently I spoke with Harry de Gorter, Professor in the Department of Applied Economics and Management at Cornell University about his article “The Social Costs and Benefits of Biofuels: The intersection of environmental energy and agricultural policy.” This featured article is published in the first issue of Volume 32 of AEPP. Thanks for joining us, Professor de Gorter.

Harry de Gorter: It’s a pleasure to be here.

Kristin Agard: At present what sort of biofuel policies are in place here in the US?

Harry de Gorter: Well there are two broad categories of policies, those that do not discriminate against international trade and these are mandates and blenders tax credits. Mandates is a required minimum level ethanol to be blended with gasoline and tax credits are consumption subsidies funded by tax payers. Then you have policies that discriminate against international trade and these are production subsidies for ethanol itself and for its feedstock corn, import tariffs and import quotas and finally sustainability standard that requires a 20% reduction in greenhouse gases relative to the gasoline it’s assumed to replace.

Kristin Agard: The title of your paper is “The Social Costs and Benefits of Biofuels: The intersection of environmental energy and agricultural policy” so in a nutshell what are the social costs and benefits of biofuels?

Harry de Gorter: Well it depends on how you look at it. Given that there would be no ethanol production in the US without these policies that discriminate against trade then you have all the social costs of having high cost production. You also have the social costs of much more land being used because in Brazil, ethanol, you can produce the same amount of ethanol on half the land, so you don’t have to convert so much forest into crop land and so you have those savings in greenhouse gas emissions. You also get more greenhouse gas emission sequestration, CO2 sequestration with ethanol production in Brazil. Plus you wouldn’t be using staple food crops like corn and soybeans, instead you’d use sugar cane and that would only have an indirect effect on food prices, not like the direct effects US production has now. This adversely affects the poor and developing countries. Now if you look at mandates by themselves you have gasoline consumption going down and so you have benefits now in increased energy security and possibly you could reduce greenhouse gas emissions with mandates because a mandate is a tax on the gasoline market to finance the higher ethanol price. So it’s possible for total fuel consumption to go down. It’s also possible it can go up, it’s ironic but it’s possible that you’re better off. Now tax credits by themselves unambiguously increase total fuel consumption and so you increase the social cost of traffic congestion and traffic related accident

Kristin Agard: Your paper seems to favor mandates over consumption subsidies, why do you think they are more effective?

Harry de Gorter: Well only because it results in lower fuel consumption and we’re trying to reduce the social costs of consuming too much fossil fuel, so it’s substituting for a fuel tax in some way and so that’s the first best thing to do.

Kristin Agard: You write that sustainability standards are both ineffective and WTO illegal, why are they ineffective; what makes the WTO illegal?

Harry de Gorter: Well sustainability standards are ineffective because of what economists call shuffling and leakages. Shuffling refers to ethanol producers using the clean inputs and producers of other corn products use the dirty inputs like coal-fueled electricity so there’s no net benefit from the standard of having a standard on ethanol production alone. You also have leakages. For example the sustainability standard measures greenhouse gas emissions using lifecycle accounting which is a wheel to well measure of emissions for gasoline and a field to fuel tank measure for ethanol. But the problem is that lifecycle accounting assumes each gallon of ethanol produced on an energy equivalent basis replaces a gallon of gasoline. But we know that’s not true. If you increase total fuel supply, say with a tax credit then the market price of fuel declines and so total fuel consumption increases and some of the ethanol is displacing gasoline and some it is replacing. In fact we find about half and half, every gallon of ethanol you put on the market, half of that replaces gasoline, the other half displaces gasoline. So they’re not effective. And why are the sustainability standard WTO illegal? Well it’s just the WTO is all about trade discrimination and if you discriminate against trade based on production processes or production methods then some country can argue that you’re being trade discriminating and the US would then have to rely on the general exception for

Kristin Agard: Some studies suggest that corn prices increased between 39 and 87% as a result of US ethanol policy. Would it be better to simply offshore biofuel production? How would this effect US agriculture?

Harry de Gorter: Well yes, we should definitely offshore biofuel production. Corn producers and other crop producers would be worse off in the United States but not as much as you might think because Brazil will produce the sugar cane ethanol and so Brazil will produce less corn and soybean so the US gets to pick up the slack on that. But for sure the livestock, poultry and dairy sectors will benefit and the processing sectors of those meat industries because the prices of grains would be lower. So overall agriculture would be better off in the United States and if crop farmers aren’t getting enough money then give it through all the subsidy programs we have for crop farmers in the United States. Don’t try to use biofuel policy to achieve other goals, just use your farm subsidy programs to help farmers.

Kristin Agard: In 20 years do you see biofuels as still being relevant or will we have moved on to some other technology?

Harry de Gorter: Oh dear that all depends on government policy, it depends on the price of oil and it depends on technology and not just the technology for biofuel production but also the technology for improving yields in agricultural production in general. So that’ll determine whether or not biofuels will be diverting precious resources for food, so it just depends on too many parameters and I don’t have a crystal ball to predict that. So I just can’t tell you but it will really depend on those three things: policy, the price of oil and technology. Kristin Agard: Well thank you, Professor de Gorter, for talking with me today.

Harry de Gorter: Thank you, I enjoyed it.

Kristin Agard: That was Professor Harry de Gorter from Cornell University; look for his featured article on biofuels in Volume 32, Issue 1 of AEPP. If you have any feedback or follow up questions for Professor de Gorter, please send an email to podcasts@oxfordjournals.org. If you are interested in learning more about AEPP or signing up for free AEPP content alerts, visit www.aepp.oxfordjournals.org. Or for more information about the Agricultural and Applied Economics Association visit www.aaea.org. I’m Kristin Agard thanks for listening.