Rational Rationality

Dr. Robert M. Gresham, Contributing Editor | TLT Commentary April 2018

Too many government policies are based on good intentions but poor conception and execution.
 

© Can Stock Photo / Pancaketom
KEY CONCEPTS
• Often well-intended governments pursue popular policies without examining the science behind them.
• This can lead to laws that endorse energy fads that don’t have much economic benefit or true efficacy.
• The best response to energy fluctuations is to let the market adjust to price signals.

I’ve longed railed about policy makers not considering the whole picture when writing laws or regulations, especially where technical matters are involved. In particular, they do not consider all the costs or outcomes associated with some initiative. Thus, I have been critical of initiatives in the name of renewable, sustainable energy, food, emissions, etc., that, when you peel back the layers, often involve politics, greed and subsidies to pet companies or groups more often than not, ultimately, to buy votes.

Yeah, I know, cynical. The good news is that occasionally we apply rational rationality to our thinking and begin to see the errors of our ways. Here’s a small example.

Biodiesel is a renewable fuel that can be used instead of the diesel fuel made from petroleum. Biodiesel can be made from vegetable oils and animal fats. Biodiesel is most often blended with petroleum diesel in ratios of 2% (B2), 5% (B5) or 20% (B20). Biodiesel also can be used as pure biodiesel (B100). Biodiesel fuels can be used in regular diesel engines without making any changes to the engines. Biodiesel also can be stored and transported using diesel fuel tanks and equipment. These are good things.

In 2016 soybean oil was the source of about 55% of the total feedstock used to produce biodiesel in the U.S. This year the U.S. will burn about three billion gallons of biodiesel fuel that was made from soybean oil. Canola oil and corn oil were the source of about 22%, recycled grease about 13% and animal fats about 10% of the total feedstock. (Rapeseed oil, sunflower oil and palm oil are other major sources of the biodiesel that is consumed mainly in other countries.)

However, we burn biodiesel not because it is better or cheaper, which as near as I can tell it is not, but rather because we are required to by a law, the Renewable Fuel Standard (RFS). While this is great for Midwest farmers (who make money and provide votes), it is a waste of soil nutrients that could be used to feed the population.

As we know from STLE’s recently updated Emerging Trends Report (available for free at www.stle.org), there is a rapid global increase primarily from emerging nations for food, goods, services and, of course, energy. This increase necessitates rational thinking to provide for the growing needs of these nations, as well as our own. The real goal is to improve efficiency and productivity as economically and sustainably as possible while managing emissions.

Biodiesel is one of the more wasteful aspects of the RFS. For example, ethanol is grown from corn and mixed into gasoline, again as required by the RFS. However, gasoline companies would likely blend in some ethanol anyway (regardless of whether the gas is bio or petroleum based) because it adds value as a fuel additive.

Not so of biodiesel. Biodiesel is very expensive compared to petroleum-based diesel. According to Scott Irwin, an economist at the University of Illinois, biodiesel costs about $1.80 a gallon more than conventional diesel, which results in a cost to U.S. citizens of about $5.4 billion a year. Further, Irwin notes that the use of biodiesel is driven under the RFS to meet a specific quota for biodiesel, to meet the demand for the use of Advanced Biofuels and to meet the overall quota for use of biofuels of all types, since there is a limit to the amount of ethanol that can be used in gasoline. Further, EPA claims that biodiesel use will cut greenhouse gases by 50%.

According to Dan Charles, NPR (National Public Radio), “A growing number of environmentalists, however, say this calculation is dead wrong. They say that if more soybeans are needed to make fuel in addition to food, it inevitably means that people somewhere on Earth will have to plow up grasslands or cut down forests in order to grow that additional supply—and clearing such land releases huge amounts of carbon dioxide into the atmosphere.” I would add that it also destroys trees that absorb CO2 and turn it into oxygen.

Charles continues, “Two environmental groups—ActionAid USA and Mighty Earth—just released a report connecting America’s biodiesel demands directly to deforestation in Argentina. Investigators from the two groups documented a widespread clearing of Argentine forests in order to expand cultivation of soy beans. Simultaneously, Argentina expanded its exports of soy bean-derived biodiesel to the U.S. In 2016, in fact, Argentina shipped more than 400 million gallons of biodiesel to the U.S., equivalent to 15% of all biodiesel that is consumed.”

Further, apparently the U.S. claimed that Argentina subsidized its biodiesel producers to allow for dumping in the global market. So the U.S. imposed taxes on all Argentine biodiesel, which essentially stopped the imports and required use of the more expensive U.S.-produced biodiesel. A tax on Argentine biodiesel results in an indirect tax on the U.S. economy—hmmm.


© Can Stock Photo / rclassen

To further muddy the waters, according to Irwin, China has recently developed a huge appetite for soy meal to feed its growing hog and chicken industry, which in turn significantly competes in the global market for soybeans versus U.S. demand. Thus, Argentina has a new customer—sorry, trees. But as an interesting consequence, when you produce soy meal, a byproduct is soy oil. With China’s demand for meal, we now have a lot more oil in the market, which brings the overall cost down to everyone but the U.S.—hmmm.

So as best I can sort all this out, in the U.S., driven by RFS laws, we are forced to use a lot of biodiesel. Domestically produced biodiesel is disproportionally expensive (like an indirect tax on U.S. citizens) and by virtue of our trade laws, we cannot import cheaper oil. In Argentina, they continue their deforesting practice to grow more soy beans, and China now provides a growing market for its soy meal, and the overall cost of soy oil globally is reduced.

As I previously said, I have been critical of many of our efforts in the name of renewable, sustainable energy, food, emissions, etc., initiatives that, when you peel back the layers, often involve politics, greed and subsidies. This example with the soy bean market is only a small part of the bigger energy issue and feels like another situation where we need a little rational rationality.

Indeed, it seems the best response to energy fluctuations is to let the market adjust to the price signals. This will create an environment that encourages innovation, such as with fracking a number of years ago, which ultimately increased supply and lowered prices of crude oil and natural gas.

Instead, as oil prices soared in the latter half of the last decade, politicians panicked and rushed to ban certain light bulbs and subsidize and mandate cellulosic ethanol, biodiesel and other energy fads. The media fed the panic and cheered the politicians on. We were back in the 1970s at so-called peak oil and the end of fossil fuels. 

Today, once we finally allowed market forces to act, one can only ask, “How’d that work out?” Yet we continue to emit ever more CO2, while continuing to tax U.S. folks with the latest energy fads that don’t seem to have much economic benefit or true efficacy.

We really do need a little rational rationality.
 
Bob Gresham is STLE’s director of professional development. You can reach him at rgresham@stle.org.