Wednesday, May 10, 2006

Evil market-distorting subsidies come good - Exception that proves the rule

The amazing force for good that high petrol prices have shown to be, even made a previously insanely counterproductive Brazilian ethanol subsidy almost return a break even after all those years of being a junk bond investment. High petrol prices also help our sugar farmers, only due to the Brazilian swing production status which connects the two. The advent of carbon trading has made Uranium more financially desirable. It is time to make a global pollution emissions trading system. Radiation emissions/waste products trading for instance, should be trialled to counter the "carbon bias" of current environmental regimes. Nasty coercive regulation should be contrasted with "minimum necessary regulation" which is better than self-regulation or free for all. Flexible regulation involving trading of the "commons" resource is good if it can prevent the tragedy of the commons, which is what we should be fearing. Technologies that "can" save the world are useless if there is no individual incentive to research and apply them.




evildrclam says:Hooray for rising petrol prices! Rising petrol prices are a much better engine to drive the development of sustainable energy resources than nasty coercive regulation or evil market-distorting subsidies: rising prices focus pressure precisely where it is most needed, while government intervention spreads the burden with majestic impartiality over the just and the unjust alike...

'The rain it falleth on the just, and also on the unjust fellow;
But chiefly on the just, because, the unjust steals the just's umbrella.'

And, I am doing the responsible thing what you told me to, and reading the Skeptical Environmentalist. This means that sooner or later I will have to go to the trouble of constructing a great big post pointing out the errors in sites pointing out the errors in discussions of Bjorn's pointing out the errors in speeches of Al Gore's... Curses!

9 comments:

Dr. Clam said...

Ah, for 'minimum necessary regulation'! In most things we are far too willing to sell our souls and submit to massive over-regulation for a mess of pottage.
In the long term, I think ethanol subsidies are still a bad investment: the best biomass source in terms of energy density per hectare is coppiced wood, as grown for European power stations.

Marco said...

I agree that ethanol subsidies are a bad investment, especially new ones. When the ethanol price is high in the cycle governments should be taxing it for their return on the original investment. However, it is only due to the wrong-headed Brazilian subsidies that we have quote ethanol production capacity as an elastic buffer to cushion shocks in oil and/or sugar/wheat prices. The oil price would be even higher now had there not been the infrastructure and spare production capacity in Brazil. Admittedly, coppice wood could do the same for coal, Uranium etc. once some infrastructure and production capacity is in place. I can't see the required infrastructure happening without evil market distorting subsidies in place at some point.

Dr. Clam said...

The main buffer for shocks in wheat price is the vast amount of quasi-discretionary production fed to livestock, rather than humans, and the most cost-effective way to buffer shocks in oil price is to maintain more refining capacity. It is silly to maintain a bio-ethanol industry just to buffer fluctuations in the sugar price, when it is more economical to make ethanol from petrochemical sources. Fuels are one of the least value-added products around: we ought to think of something more valuable to make from sugar, and build some manufacturing capacity for that.

Marco said...

In Brazil at the moment, it is cheaper to make ethanol from sugar than from petrochemical sources, even without subsidies and based on commodity prices.

Dr. Clam said...

I can believe that! But is it really less costly to make ethanol from sugar than to import ethanol made from petroleum in Texas or Venezuela or whatever? Show me your sources! (Please)

Marco said...

Sorry - can't summon the energy for sources - Just thought experiments and economic logic. No time for even that now - maybe later.

Marco said...

Costs aren't a static thing intrinsic to the process, but a dynamic number dependant on supply, demand, scalability and infrastructure. A few things we can say for sure however - It is not cost effective to produce ethanol from sugar in the US. At prices of around $60 per barrel, Importing ethanol from Brazil is a slightly better deal than importing ethanol from Texas or Venezuela. In some cases, more energy can be consumed than generated making ethanol from sugar. This is not the case in Brazil. For our local sugar industry, sugar derived ethanol can only be a niche. Buying Brazilian ethanol puts upward pressure on sugar prices anyway. Growing peanuts while sugar prices were low seems to have paid off handsomely for some farmers, that realised that the crop rotation dramatically increased their recent sugar yields. I predict the oil price will head back south in a couple of years, and they will be back to growing peanuts or bananas or something.

Dr. Clam said...

You are right! Once before I have googled something I knew little about and found something I wrote among the top responses- this is the first time I have done the same and found something I wrote that was *wrong* near the top... sadly, I seem to be contributing to the deluge of half-baked misinformation sloshing around the world. Woe is me, I had not properly sorted out the 'industrial ethanol' and 'fuel ethanol' sectors in my head. It now seems that by far the majority of the ethanol produced in the world is fuel ethanol made by fermentation, overwhelmingly in Brazil and the US. On unsubsidised terms production of ethanol from ethylene was cheaper throughout the 90s, but almost certainly is not now. An analysis from 2001 I found only puts ethanol from sugar ahead by including the sale of byproducts... will have to follow up more links and do a proper post later!

Marco said...

Hmmm. I think getting things sorted in one's head is more important than the sum of the details of fact. I still think it is only an example of the fragmentation of the fuel market rather than a progression into biofuels. Ethanol subsidies coming good is just luck. Thousands of hairbrained enviro-ideas have been subsidised to death and only a few have become almost mainstream. No-one can really predict what will "win" in advance. That is why I think it is wrong to keep pushing Hydrogen as a future fuel any more than any other. Infrastructure issues have certainly played in ethanol's favour, due to the blending, flexfuel and the quick and easy conversion of petrol stations. These helpful factors are on top of the flexibility of switching crops or to sugar production without too much wasted investments.