Slouching Towards First Worst Biofuel Policy: Life-Cycle Accounting, Indirect Land Use Change and the Sustainability Sta

1. Slouching Towards First Worst Biofuel Policy: Life-Cycle Accounting, Indirect Land Use Change and the Sustainability Standard Fiasco Harry de Gorter and David R. Just Cornell University Slides for presentation at the conference The Economics of Alternative Energy Sources and Globalization: The Road Ahead, Orlando Florida, 15-17 November 2009. Slides for presentation Woodrow Wilson Center “Biofuels and Economic Development” Washington D.C. July 23-24, 2009

2. What is a sustainability standard? • Gallon of ethanol (BTU equiv.) must reduce GHGs 20% relative to gasoline • Measure with life-cycle accounting (LCA) • “Well to wheel” measure of GHGs for gasoline • “Field to fuel tank” measure of GHGs for ethanol • Studies show ethanol reduces GHGs 20% relative to gasoline it is assumed to replace

3. Why the focus on GHGs? • Historical motivation for ethanol policy: • energy security • local air pollutants (as an oxygenator/octane enhancer) • improve farm incomes and reduce tax cost of farm subsidy programs • Recent U.S. interest in GHGs was seized upon by corn-ethanol lobby to tout ethanol

4. Corn-ethanol lobby strategy back-fired… …because LCA a flawed concept e.g., there are “leakages” e.g, “indirect land use change” - iLUC (Searchinger et al.) Debate reached a fever pitch; CARB and EPA to revise standard with iLUC included Farm state politicians threatened to vote against climate change legislation unless delete iLUC Result: iLUC delayed another 5 years

5. Scrap sustainability standard; not climate change legislation There are a host of problems with LCA with or without measuring iLUC or any “indirect use change”, input or output Sustainability standards for ethanol are illogical, ineffective, inconsistent, impossible to measure, illegal under the WTO and ignore more important issues. Because of these six “i”s of sustainability standards, we say scrap them

6. Bottom Line • Suppose there are two production processes for ethanol • Good vs. Bad (ethanol itself identical) • Expensive to track • Policy will either penalize or reward both • Pigou was right • Taxing the negative externality at its source makes sense

7. Sustainability standards are illogical Ethanol (+ bourbon etc.) sustainable by definition - the CO2 sequestered growing corn offsets CO2 emissions from burning the fuel in a car Nobel Laureate IPCC guidelines agree with us: emissions form tailpipes and smokestacks from burning bioenergy not counted

8. Why a standard on ethanol only? • “Why should we suggest there is an obligation on producers who export sugar cane biofuel, but not on those who export plain sugar cane?”Peter Mandelson, Commissioner of the EC, The Guardian, 29 April 2008.

9. Sustainability standards are ineffective “Shuffling”: ethanol uses “clean” inputs and bourbon uses “dirty” inputs (or Malaysia exports “sustainable” biodiesel and consumes “unsustainable” domestically) “Leakages” to other sectors or countries not covered by the standard e.g., iLUC Sustainability standards do not assure a decrease in GHG emissions.

10. Sustainability standards are impossible to measure “We will evaluate the land use and other indirect effects of all transportation fuels”. Mary D. Nichols, Chairman of the California Air Resources Board How about oil pollution in Ecuadorian jungle or military expenditures to protect Mid-East oil?

11. Standards impossible to measure (cont’d) If measure iLUCs, how about other inputs and “indirect use changes” (maybe ethanol displaces oil and replaces coal? need to look at potential market ‘leakages’ or indirect output use change) Need impact multipliers of gigantic linear programming model of world economy In U.S. alone, how much iLUC or is it due to double-cropping or land from CRP?

12. Sustainability standards are inconsistent Regional and proposed federal cap & trade double counting “U.S. biofuels industry is urging Congress to exempt the sector from climate cap-and-trade legislation over fears the fuels could face ‘double jeopardy’ through regulation under both...GHG cap and …EPA’s renewable fuels standard.”recent news caption

13. Sustainability standards are WTO illegal Non-sustainable ethanol treated less favorably so discrimination against imports Discrimination on like products due to effects on processes or production methods U.S. would have to rely on Art. XX (‘to preserve natural resources’) but “Chapeau” requires policy to not be ‘arbitrary’ or ‘discriminatory’ and to be ‘necessary’ and ‘least-trade restrictive’

14. Standards are WTO illegal (cont’d) Import tariff on more sustainable ethanol an example of ‘arbitrary’ Removal of U.S. trade distorting ethanol tariffs and subsidies least-trade restrictive Requiring a 20% reduction seems arbitrary; why not a 1% reduction? Sugar-cane ethanol from Brazil requires a 50% reduction (corn-ethanol only a 20% reduction) – that is arbitrary

15. Standards are WTO illegal (cont’d) • UK fuel tax 7x U.S. and cap & trade • Impose standard to reduce GHG emissions more?  • Is the standard necessary? Why not tax GHG directly (WTO forced Korea to change from a regulation to a tax under Art. XX – so how could U.S. get away with it?) • WTO illegality based on correct reasons: standards are inefficient and unfair

16. Debate over sustainability standards ignore policy sins of commission • Adding tax credits to mandates means subsidize gasoline consumption • Cause billions of DWC annually • Import barriers and production subsidies for ethanol and corn discriminate against trade • Water in the policy price premium and “rectangular” DWCs

17. “Some people say ethanol is like cholesterol: there is a good one and a bad one. The good ethanol helps clean up the planet and is competitive. The bad ethanol depends on the fat of subsidies.” President Lula, Brazil

18. U.S. GHG emissions due to tariffs and subsidies; not iLUCs Without tariffs and subsidies, no U.S. ethanol production Brazil can produce U.S. ethanol on 1/2 the land, higher annual net sequestration and U.S. crops displaced require more land (e.g., corn yields per acre 1/3 that of U.S.) U.S. ethanol should be disqualified from consideration of any sustainability standard until trade discrimination eliminated

19. Debate over sustainability standards ignore policy sins of omission What to do? Leave ethanol alone (literally; as for sustainability standard, treat like bourbon; eliminate all other policies except maybe mandate) Tax/subsidize marginal cost of externalities Collapse concern over GHGs from biofuel production into global climate change policy (cap and trade and carbon offsets)

20. How about on 2nd best grounds? • Economists ague little we can do about policy sins of commission and omission • Sustainability standard used to counteract • Assumes political forces for policy sins not in play with sustainability standards • oops - politicians have already punted and delayed iLUC decision for another 5 years • May backfire as people will think all is well once ethanol passes test (meanwhile, ignores sins of commission and omission)

21. The Road to Copenhagen… …is littered with a bevy of new policies: Cap & Trade (mandate now contradictory) Carbon offsets (biofuels part of Kyoto Protocol) Provisos for ‘green’ tariffs and producer ‘rebates’ to counter ‘leakage’ of emissions to countries with lower environmental standards

22. LCA with or without iLUCs is not a true sustainability standard Searchinger et al. simply provides CO2 balance calculations Does not provide criteria when and where biofuels should be produced Does not tell you if it is a good deal or not What is an appropriate payback period? Need inter-temporal cost-benefit analysis like global climate change economists do

23. Towards a true sustainability test… Need to think of ethanol production as an investment • upfront investment costs are the CO2 emissions from land converted from forests and grasslands into biofuels • annual costs are the foregone sequestration from the land that otherwise would have been forests and grasslands • annual benefits are the net sequestration from ethanol production de Gorter and Tsur develop such a test and show no U.S. land type passes (2 land types pass in Brazil)

24. The End