John's Blog

Boohoo. Poor Monsanto and ADM. Why credits don't work.

So the good news is that biodiesel use is way up this year; whether this is due to geopolitics (choosing to use less foreign oil), simple economics ($60/bbl oil makes renewables competitive), or federal subsidies (producer tax credits up to $0.99 a gallon) is unclear to me.

In the US, commercial biodiesel is almost exclusively made from soybean oil. This oil is essentially a byproduct that is leftover when soybeans are crushed to make animal feed.

Interesting thing is, the National Biodiesel Board was successful in getting a producer tax credit pushed through for biodiesel made from "virgin oils, including . . . oils from corn, soybeans, sunflower seeds, cottonseeds."

Under the IRS rule making, for every percentage point of virgin biodiesel, the producer can claim a one cent tax credit up to 99%; thus, a B20 blend gets a twenty cent credit compared to a ninty-nine cent credit for B99. Yet, under the law, the credit for biodiesel made from recycled oils only qualifies for a 50% credit, nevermind that using recovered oils is more environmentally sound. That wouldn't have anything to do with the fact that the NBB is supported using Soy Board checkout dollars, would it? I've discussed this in the past, so why am I writing about it again? Mainly because the Soy lobby is now complaining about the unindended consequences of the legislation it bought and paid for. It turns out that the problem is with the word "including". Because Congress used the word includes, virgin oils that aren't explicitly listed are eligible. This includes palm oil that is produced on massive plantations in Indonesia. Because palm oil is cheaper than soybean oil, the Soy industry is upset that someone else is getting the government handouts they lined up for themselves. Of course, the IRS and Congress can't really do anything about it now because the WTO doesn't like protectionist policies.

This is the problem with subsidies; you will always have unintended consequences. For this reason, I prefer straight taxation.

If you tax the behavior you want to curtail, the market will decide the solution. We currently see the exact same problem with hybrids. Instead of taxing inefficient vehicles, which would have let lean burn FSI engines, electric hybrids and turbodiesels slug it out in the market, we got a tax credit specifically for hybrids. Now the manufacturers are doing exactly what they have with any other engine advance; increasing power while economy constant instead of holding power constant while increasing economy. Witness the Accord hybrid and the Lexus RX400h hybrid. The RX400h costs $12k more than the gasoline version and gets a whopping 3 mpg improvement in economy. Likewise, the Accord hybrid increases economy by a whopping 8 percent. Neither one of these vehicles reduces our consumption of foreign oil or our carbon emissions, yet they each qualify for a $2000 federal tax deduction and other deductions depending on the state.

Conversely, my biodiesel powered Jetta does not qualify in spite of the fact that it gets 47 mpg and runs on a renewable domestic fuel. This isn't a anti-hybrid rant mind you; I'd happily drive a Civic or Insight hybrid if I lived in a dense city. Instead, this is a complaint about the unintended consequences of tax credits as opposed to direct taxation. Credits cannot help but favor one technology or product over another whereas taxation lets the market decide.

As a general rule, I'm certainly not for increased taxation. However, as Garrett Hardin wrote in 1968:

"To say that we mutually agree to coercion is not to say that we are required to enjoy it, or even to pretend we enjoy it. Who enjoys taxes? We all grumble about them. But we accept compulsory taxes because we recognize that voluntary taxes would favor the conscienceless. We institute and (grumblingly) support taxes and other coercive devices to escape the horror of the commons."

In other words, Hardin's view has been summarized as "mutual coercion, mutually agreed upon." Given that 9/11 changed everything, or so we've been told, I hold that increasing taxation to curtail our petroleum addiction is something that we should be ready to agree upon as a nation.

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