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Ed Dolan

Ed Dolan

Edwin G. Dolan holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth…

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Looking for Alternatives to the Renewable Fuels Standard

During the debate over the Obama administration’s health care policy, Republicans came up with the catchy phrase “repeal and replace.” I’ll get back to health care in another post, but for now, I’d like to filch the phrase for the increasingly lively debate over the federal ethanol mandate, or Renewable Fuels Standard (RFS), as it is formally known. “Repeal and replace” is the right approach when a problem is real and existing policy addresses it in so clumsy a way as to make it worse.

With every passing day of drought in the American Midwest, the outcry against the RFS grows louder. The latest to weigh in is Jose Graziano da Silva, Director-General of the Food and Agricultural Organization of the United Nations. Writing in the Financial Times, he urges the U.S. government to suspend the ethanol mandate, which is expected to consume up to 40 percent of the reduced 2012 corn crop. Otherwise, he fears, the world will approach a tipping point where further supply shocks could cause a global food crisis.

Worries about corn state votes have so far kept both major party presidential candidates on the side of ethanol, but opponents of the RFS also have significant support in Washington. Backed by livestock interests, among others, more than 150 members of Congress have urged the EPA to suspend the ethanol mandate for the duration of the drought. Some livestock producers are hoping that emergency drought-relief legislation will include a clause forcing the EPA to act.

Suspending the RFS for the duration of the drought is not enough, however. The ethanol mandate is bad policy that should be scrapped permanently. It should be replaced with a policy that directly addresses the problem of overconsumption of carbon-based fuels. A carbon tax on transportation fuels—or better, on all forms of energy—would be an excellent choice.

Time was when conservatives favoured a carbon tax as a market-based alternative to command-and-control environmental regulation. N. Gregory Mankiw, formerly  Chairman of George W. Bush’s Council of Economic Advisers and more recently an adviser to Mitt Romney’s presidential campaign, argued forcefully for the idea in a 2007 New York Times op-ed. In doing so, he pointed out that Martin Feldstein, formerly chief economic adviser to Ronald Regan, had supported the same policy decades earlier.

Today’s GOP is reluctant to pronounce the word “tax” without appending the word “cut,” but logically, that should pose no problem.  Yoram Bauman and Shi-Ling Hsu have recently been pushing for a revenue-neutral form of carbon tax that ought to satisfy the most Norquistian tax-pledge purists. Their version of the tax would have a nominal rate of $30 per ton of carbon. They would return the estimated $145 billion in gross revenues to the tax-paying public though reductions in personal and corporate income tax rates, and possibly other tax cuts or rebates as well.

As Bauman and Hsu point out, there is a real-world model for such a tax right across the border in British Columbia. Revenues from the B.C. carbon tax have allowed that province to lower its corporate tax to 10 percent, one of the lowest rates among G-8 nations, and cut its personal income tax to the lowest rate in Canada.

Even if you are a climate-change denier (I hear that there are still a few left, despite recent defections), there is something for you to love in a carbon tax. Climate change aside, such a tax would promote energy security and independence by giving new impetus to the wider use of low-carbon domestic natural gas as a motor fuel. CNG is already widely used in cars and trucks around the world, but it has been slow to catch on in the United States. Regulatory barriers that now artificially restrict conversion of U.S. cars and trucks to CNG could be eased as part of carbon-tax legislation.

A carbon tax should even appeal to corn farmers and ethanol distillers, at least if they believe their own propaganda. Although most studies I have read disagree, the industry insists that corn-based ethanol has a lower life-cycle carbon content than gasoline. If further research shows that they are right, a carbon tax would give an at-the-pump cost advantage to ethanol.

The ethanol mandate is an idea whose time has come—and gone. Already the industry has lost the tax credits it once enjoyed, which, until recently, seemed as politically invulnerable as the RFS does now. Hopefully, the moment for repeal of this ill-conceived policy is at hand. But why be satisfied with repeal when “repeal and replace” would be so much better?

By. Ed Dolan

"This post originally appeared on Ed Dolan's Econ Blog at Economonitor.com, and is reprinted here with permission."




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