Energy economics

To the annals of market manias and regulatory follies, a new chapter is being added: The Great Ethanol Bubble of 2008. It is possible that someday a fuel made from a cheap, abundant, renewable crop may replace oil. But it won't be food-based ethanol. It's time not only to stop subsidizing the stuff but to revamp the chaotic, politicized and wasteful system of subsidies for alternative energy.

It is now well established that inefficient corn ethanol actually pumps out more total life-cycle carbon emissions than gasoline, and total emissions from ethanol coming even from the most advanced refineries offer at most a 25% improvement over gasoline in terms of greenhouse gases -- at a staggering environmental and financial cost.

Despite a growing international outcry, biofuels are not a major culprit in the global food crisis. Droughts, high oil prices, commodities speculators and the weak dollar are more to blame. But under U.S. law, biofuels production must quadruple in the next 14 years. As ethanol production soars from 8 billion to 36 billion gallons in 2022, subsidized fuel crops could displace less-profitable food production and contribute to world hunger. Still, politicians hate to phase out popular giveaways like the 51-cent-a-gallon ethanol subsidy.

The ethanol bubble is a textbook demonstration of why government shouldn't try to pick winning and losing technologies. That's best left to the market. What the market can't do, without a politically unpalatable carbon tax, is pick winning energy technologies that will also reduce carbon emissions. That's because, at the moment, carbon emissions are free and unregulated. That must change.

But who's to say which technology will turn out to yield the cheapest energy with the lowest carbon output? Will the winner be the ConocoPhillips and Tysons Food venture that is already producing high-quality biodiesel from pork and beef fat? That high-cholesterol stuff turns out to have a carbon footprint about 60% lower than gasoline's, it's being pumped directly into a Texas pipeline, and it burns cleanly in existing diesel engines -- but it didn't qualify for the federal tax credits that would help make it commercially viable. Why not? Because animal fat didn't have a powerful lobby like corn when the subsidies were drafted. ConocoPhillips later took its case to the White House and Congress, and came home with a tax credit. Less-powerful supplicants are unlikely to fare as well.

Or perhaps the market winner will turn out to be the Department of Energy's current favorite, "cellulosic" ethanol made from switchgrass, which will probably be commercialized decades before the agency's last pet project, liquid hydrogen. Both are great ideas and "greener" than corn. But meanwhile, nuclear power is also heavily subsidized, as are heating oil and natural gas, hidden in the form of more than $2 billion a year in federal home heating assistance to the poor. In short, taxpayers are haphazardly subsidizing nearly everything -- and getting trouble in return.

A saner approach is emerging based on the idea that what ought to be regulated is the carbon intensity of fuels -- meaning the ratio of greenhouse gases emitted to the energy produced by a unit of any given fuel over its entire life cycle. California has adopted low carbon intensity as a goal, and Congress has a number of different bills pending that would set up national standards for low-carbon fuel. Even President Bush proposed this approach last month in a speech that called for long-lasting carbon-weighted incentives. The idea is to make lower-emission energy sources cheaper than higher-emission ones.

Carbon-weighted incentives would be rational, predictable and market-based -- a smart idea. But there won't be money to develop good ideas if we can't ever bring ourselves to pull the plug on mistakes like corn ethanol.

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