Tuesday, January 03, 2012

I Will Not Be Running a Benefit

For the ethanol producers (based on the first paragraph), but I'll stop short of declaring the Renewable Fuels Association a microeconomics-free zone (based on the second paragraph).  As Robert Pear reports in Sunday's edition of The New York Times:
“We may be the only industry in U.S. history that voluntarily let a subsidy expire,” said Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers. “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago. Ethanol is 10 percent of the nation’s gasoline supply.”

In response to a question about how the loss of the subsidy might affect prices and supply, Mr. Hartwig said: “We don’t expect the price of corn to fall or rise just because the tax incentive goes away. We will produce the same amount of ethanol in 2012 as in 2011, or more.”

Representative Jeff Flake, Republican of Arizona, said, “With record deficits and a ballooning national debt, it was ludicrous to expect taxpayers to pay billions to prop up a mature industry that should be able to fend for itself.”
I would still prefer a carbon tax on nonrenewable fuels, but this is a step in the right direction.  Let's hope the subsidy doesn't "unexpire" with election-year politics.


Vivian Darkbloom said...

I agree that letting the ethanol tax subsidy expire is a good thing. But, I'm somewhat puzzled by the following:

"I would still prefer a carbon tax on nonrenewable fuels, but this is a step in the right direction. Let's hope the subsidy doesn't "unexpire" with election-year politics".

First, "prefer" to what? Letting the ethanol tax subsidy expire?

If you prefer a tax on "nonrenewable fuels", do you consider ethanol to be a "renewable"? If so, doesn't this more or less move us back to the status quo ante with ethanol being indirectly subsidized because its main competitor is being punished? Isn't giving ethanol a "carrot" more or less the same as giving its competitor a "stick"?

Andrew Samwick said...

Prefer to these piecemeal approaches like subsidizing one fuel or another -- make it comprehensive.

Also, a carbon tax would make ethanol more expensive to the extent that it relies on nonrenewables in its production process.

Vivian Darkbloom said...

Of course, one alternative against a "piecemeal approach" would be to not subsidize or penalize one industry over another. That is the *most* comprehensive alternative.

Of course, giving someone a subsidy costs the fisc money and taxing someone on a competing product raises funds. For the mere fiscal point of view, it should reduce dieficts. But, I'm more interested here in the competitive landscape.

If we know for sure that burning carbon is not something desirable, then I guess it makes sense to tax it in the true Pigovian spirit. This leaves the market open for other non-offensive fuels to compete on equal footing (or for other technologies to emerge). I was hoping *that* would have been your answer. It is probably easier to know what we *don't* want, then it is to know what we *do* want, particularly when those alternatives may not be readily apparent.

As for ethanol, I am not convinced that is something we *do* want and that is the problem generally with government managing the market through incentives or disincentives. As we have belatedly learned, ethanol has problems of its own (raising food prices perhaps) and other environmental concerns that may be equally or more harmful than carbon emissions. Taxing carbon could result, unwittingly, on something even more offensive emerging. This can turn out to be a classic game of "whack-a-mole" which is not particularly economically efficient.

Tom said...

If we believe in an efficient market that is just a little confused because we can't factor in externalities, then the carbon tax is a more efficient approach but not perfect. Essentially, everyone who can will get rich while pouring their poison by-products on someone else's lawn. The only mechanisms we have to correct this are regulation and taxing. The fact that the carbon tax hits both the fuel itself and the energy it takes to produce it covers some of those externalities.

Now, if only there were some fair way to impose the health costs associated with various alternatives on the people who make money (shareholders and corporate managers) that would cover most of the rest of the externalities.

BadTux said...

They have simply changed tactics. Rather than demand a subsidy, they have demanded that their product be legally required to be added to gasoline. In areas that adopt the California emissions standards, that pretty much legally requires gasoline vendors to blend 10% ethanol into their gasoline whether it's cheaply subsidized or not, meaning the ethanol producers can simply pass on the cost of lost subsidies to the consumer, since the consumer has no choice but to pay if he wishes to buy gasoline.

Now for the carbon tax: right now the consumer has no choice but to buy gasoline if he wishes to work, shop, or basically do anything except sit at home watching television, given our non-mass-transit systems in our cities and suburbs. There exists functioning mass transit systems where you can exist as a full citizen without the automobile in only two locations in the entire United States -- New York City and San Francisco. Those two cities account for less than 2% of the population of the United States, the other 98% of the United States has no access to a real functioning mass transit system (and no, I don't consider a mass transit system that takes two hours to get me to work when I could walk there in 90 minutes or drive there in 10 minutes to be a functioning mass transit system, it's a deranged joke, that's all).

So despite free market ideology, raising the price of fuel won't reduce fuel consumption significantly just as raising the price of food won't reduce food consumption significantly -- it is a necessity of daily life and due to the Great Recession people have already cut back fuel consumption to the minimum needed to live their daily lives. All it will do is add more misery to the daily lives of people who are barely getting by due to the decline in effective wages over the past decade.


Andrew Samwick said...


I am no fan of the requirement to blend in the ethanol, either. I also don't think we can assert that increasing the price of fuel will not lead to less fuel used -- there are many margins on which improvements can be made, including the fuel efficiency of cars, the amount of carpooling and mass transit, and even over time, location and housing decisions.

Plus, focusing on ethanol (or CAFE or other regulations) often causes us to miss other sources of conservation. Here's a post from a few years back that makes the point:


And I don't think of this as a way to raise net revenue -- it would be fine to offset the higher carbon tax revenue with lower taxes on wages or other consumption.

BadTux said...

Andrew, my point was that *people have already made the low-hanging fruit choices* due to the economic problems of the Great Recession.

My problem with most economic models is that they have no provisions in them for biological necessity. They assume a mathematical relationship where they should instead be focused on a biochemical one. If you raise the price of food, people will make the choice to, e.g., buy lower-quality food that is less expensive. But they will *not* stop eating, and past a certain point they simply will be unable to reduce their food costs because they will have already made all the possible choices that can be made to do so. Food is a necessity of life. Once people have made the low-hanging-fruit choices, increasing the price of food results in less consumption elsewhere, not in less consumption of food. And if they can't reduce consumption elsewhere... then you see starvation, disorder, food riots, but you do *not* see the reduction in demand for food that pure free market ideology predicts.

And my point is that for most people, *fuel* is a necessity of life -- without fuel they cannot obtain food, since fuel is how they get to work to earn the money to buy food, and fuel is how they get to the market to buy food. And furthermore, this dependency *cannot* be reduced significantly by individual choices past a certain point. People can choose to drive Toyota Corollas rather than Hummers, but the people who would be impacted by a carbon tax are *already* driving Toyota Corollas because even at current fuel costs, gas guzzlers are not practicable for the bottom 20%. People can move closer to work, but the people who would be impacted by a carbon tax can't afford to move closer to work. I, with an income in the top 20% of Americans, drive a Jeep Wrangler that gets 17mpg on a good day and live within bicycling distance of work because I can afford the outrageous housing costs of the central Silicon Valley. The cleaning lady at my office, with an income in the bottom 20% of Americans, *already* drives a Toyota Corolla because a clapped-out old Toyota is all she can afford, and she lives in the far South Valley more than twenty miles from the place she cleans because that's all she can afford (and she's lucky to be able to scrape together the cash for that, a lot of low-income workers commute in from the Central Valley, a distance of forty miles or more, because the further you get from the Silicon Valley, the cheaper the housing becomes). There are also several other engineers at my office (again with incomes in top 20%) who drive Toyota Priuses, but it is because a Prius is a status symbol in the Silicon Valley, not because they are at all impacted by the cost of fuel (or, for that matter, because the Prius actually reduces fuel costs compared to a Corolla -- it simply shifts them to elsewhere in the system, since the specialized materials used to construct a Prius require significant fuel to manufacture them, thus why a Prius is so much more expensive than a Corolla). So where is the savings?

Furthermore, your notion of redistributing income from carbon-guzzling me (top 20%) to my cleaning lady (bottom 20%) in the current political climate is a non-starter. Or have you missed the entire Reagan Revolution and its aftermath of gutting pretty much every income redistribution program under the sun that politicians can get away with gutting?

But I forget, this is actual observed reality. I'm sure that there's some model, somewhere, which predicts significant fuel savings beyond what has been accomplished by the economic dislocations of the Great Recession. The problem is, models are supposed to correspond to reality, and as far as I can tell the only reality these models predict *given current circumstances* (always an important disclaimer) are one where pink unicorns and cotton candy trees are both real. Which, err, isn't this one.

Andrew Samwick said...


Not everyone has to change every behavior in order for a price change to affect aggregate behavior. Those at subsistence levels won't change behavior much. But if there were a carbon tax increase that was passed through to the prices of carbon-intensive products, I would consider:

-- Vacationing closer to home
-- Turning down the thermostat
-- Buying a more fuel efficient car at my next opportunity

There are plenty of margins along which conservation can occur, even if for some people consuming some goods, no more reductions can happen.

BadTux said...

So, Andrew: If your theory is correct, why has per capita consumption of oil been basically constant since 1982 (other than the sharp decline caused by the mass unemployment of the Great Recession starting in 2007) regardless of the price of oil? Someone collected those statistics for us, in case you're wondering. The price of oil has fluctuated quite a bit in that time -- see this interesting graph -- but if you can see any relationship at all between the price of oil at the second link and consumption of oil, you have far better eyesight than me.

In short, you have a nice theory. But said theory does not appear to match the facts on the ground, while my theory of demand inelasticity for oil does appear to match the facts on the ground, at least up until 2007 when suddenly everything changed and demand for oil plummeted.

Now, it *could* be that the persistence of higher prices during the 'oughts finally signalled to Americans to reduce their consumption of oil. But if that is the reason, rather than my theory that the sharp decline in the economy caused the decline by removing the need to drive to work and otherwise causing a decline in economic activities that require oil, why did the decline take four years to start rather than starting in 2003 when oil prices started ramping up? At the very least you must admit that this indicates significant lag between any increase in oil prices and any decrease in consumption.

Andrew Samwick said...


Oil demand may be inelastic, but you cannot infer the elasticity from a time-series correlation that does not control for other factors.

Oil consumption since 1982 has been held down by a number of factors. One that is referred to in the source you link is the tightening up of CAFE standards. Another is a shift into the consumption of other sources of energy. Consumption of natural gas and particularly coal have grown more rapidly over the past 30 years than consumption of oil. See the latest Energy Perspectives release for the precise numbers.

BadTux said...

My fundamental point regarding elasticity was the lack of relationship of price of oil to demand for oil. Basically per-capita demand was flat from 1982 to 2006. Then it fell off a cliff in December 2007, at the same time that the Great Recession started, but from 1982 to 2006 it was basically constant. If oil demand appears to be relatively impervious to price, as I believe those two graphs (demand vs. price) show, then by definition oil demand cannot be significantly price-elastic at any price levels encapsulated by the period 1982-2006.

Does that say that if we impose a carbon tax that, say, doubles the price of gasoline, that we won't see demand decrease? No, because you're talking about increasing the price of gasoline far beyond what any historical data represents. What I *would* say is that the historical data *strongly suggests* that demand for oil will not be decreased as heavily as you appear to believe, because the historical data does suggest that demand for oil is not anywhere near as elastic as you appear to believe.

Is this proof? No. Without actually doing it, there's no way of knowing what the actual effect would be. Which I might point out may be a reason to *not* do it. If you're right about elasticity, everything will work out okay, but you have no (zero) historical data supporting your assertion of elasticity, meaning you're throwing dice with the economy of the United States. Right now, the *only* evidence we have regarding elasticity is this: *Massive unemployment is correlated with a reduction in demand for oil*. Of course correlation is not causation. But the implication is rather chilling, and I certainly wouldn't want to be throwing dice and gambling with the economy under current circumstances.

But then, I'm fundamentally conservative in the old sense of the word, i.e. I don't like taking extravagant risks when there are proven solutions (you inadvertently mentioned a couple of them -- higher fuel economy standards and higher efficiency standards -- despite not knowing what you were saying, from what I can tell). Same reason why I supported Medicare For All rather than the risky Obamneycare setup that required setting up an entirely new parallel system of health care finance alongside an already-existing system that we knew worked (we have the healthiest old people on the planet -- if you manage to survive to age 65, you'll live longer and healthier in the USA than in pretty much every other Western country). Embarking upon grand social experiments *that have no data supporting the notion that they'll actually work* fundamentally appalls me. So it goes.