Think Before Subsidizing

Posted Jan. 13, 2010, at 7:19 p.m.

We’ve seen this play before: A new, cleaner form of energy comes along and the federal government offers billions of dollars worth of subsidies to spur its production, only to find some time later that there are unexpected negative consequences. A couple years ago, it was about ethanol. Today, it is biomass.

Rather than continuing to repeat this scenario, research must first be conducted to uncover and quantify the pros and cons of new energy sources before the government throws cash behind one or another.

With regard to biomass, the Washington Post reported that a biomass crop assistance program in the 2008 farm bill has grown to a half-billion subsidy. Maine recently received $150 million as part of the Department of Agriculture program.

A major problem with the program is that it does not distinguish between waste products with little financial potential — such as corn husks — and products with value — such as sawdust. Sawdust sells for about $45 a ton, according to the paper, and subsidy has encouraged lumber mills to sell their sawdust as a potential energy source rather than to traditional users, such as companies that use it to make fiberboard and other low-cost wood products that are used in furniture and cabinets.

This is not to say that fiberboard is a better use of sawdust than converting it to energy, but the fact that the subsidy would change the market dynamics should have been considered. Distinguished between true waste products and byproducts that have additional uses also makes sense.

Sen. Tom Harkin, an Iowa Democrat who helped write the 2008 farm bill, told the Washington Post that he now questions the subsidy program. “My bottom line is we have to examine those rules and make sure payments incentivize the use of new, additional biomass for energy,” he said.

In other words, the ethanol conundrum should be avoided.

A 2008 report from the World Bank concluded that biofuels are a major contributor to rapidly rising food prices around the world. The report, by the bank’s top agricultural economist, estimated that the use of fuel crops for fuel was responsible for up to 75 percent of the 130 percent rise in food prices since January 2002; 56 percent of that increase came since January 2007.

The use of ethanol made from corn grew rapidly between 2004 and 2007, gobbling up 70 percent of the increase in global production. The United States used 20 percent of its corn crop for ethanol.

Studies have also found that using corn for fuel is inefficient.

Government subsidies may be necessary to get new technologies off the ground. Ensuring that the subsidies don’t have unintended consequences should be done before the government support is given, not after damage is done.

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