Take or Pay at the EPA

A story by Matthew Wald in the New York Times on January 9th demonstrates the poverty of governmental attempts to pick “winners” in the realm of green technologies, the wasteful subsidy programs supporting that policy goal and the huge costs for the private sector of being unable to march to Washington’s tune.

Among its other provisions, the Orwellian Energy Independence and Security Act of 2007 required the refiners of gasoline and diesel fuel to mix 6.6 million gallons of cellulosic biofuel into petrol products shipped to market in 2011; the quota for this year is 8.65 million gallons.

Cellulosic biofuel is derived from plant materials such as wood chips and corn cobs and, hence, represents a “renewable” alternative to the fossil fuels that are anathema to environmentalists and to those wanting to reduce America’s dependence on foreign oil.

The problem, though, is that processes for producing cellulosic biofuels exist only in laboratories and in small-scale workshops. None is yet commercially available. Of the technologies being worked on to produce such energy sources, “there are some that are closer to the beaker and some that are closer to the barrel,” according to the executive director of the Advanced Biofuels Association.

Yes, Virginia, there is a special-interest group to promote the manufacture and sale of a make-believe product.

The Environmental Protection Agency nevertheless is poised to slap refiners with $6.8 billion in penalties for failing to meet last year’s cellulosic biofuel quota; the penalty for 2012 will be even larger.

Meanwhile, companies are lining up for taxpayer handouts to ramp up production although a scalable technology for cellulosic biofuels is still a pipe dream. Mascoma, partly owned by General Motors, plans to build a plant in Kinross, Mich., to make fuel from wood waste. It will receive up to $80 million from the Energy Department, an unknown amount from the State of Michigan and additional funds from Valero Energy Corp. to start construction.

KiOR, a Texas-based company, hopes to begin producing gasoline and diesel fuel components from yellow pine chips late this year at a plant in Columbus, Miss., where ground has been broken. Perhaps it will be more successful than Range Fuels, which received more than $150 million in government grants for a factory in Soperton, Ga., that was to turn pine chips into fuel. The facility closed more than a year ago after encountering insurmountable technological problems.

Even if congressional dreams would have come true—the 2007 law actually set goals of 250 million gallons of cellulosic biofuels for 2011 and 500 million gallons for 2012—the program’s contribution to energy “security and independence” would have been miniscule. This year the EPA expects Americans to buy 135 billion gallons of gasoline and 51 billion gallons of diesel.

Despite evidence to the contrary, the EPA continues to believe that the 8.65 million gallon quota for 2012 is “realistically attainable.” In justifying the imposition of production quotas on refiners, EPA spokeswoman Cathy Milbourn was at least honest in saying that quotas “avoid a situation where real cellulosic biofuel production exceeds the mandated volume”, a scenario that in the tortured economic logic of the New York Times, “would weaken demand”!

One of the two, perhaps both, needs to retake Econ 101. What the statements taken together imply is that if refiners actually could produce more cellulosic biofuels than the EPA wants them to produce, the product’s price would fall too far and too fast, too many gallons of it would be purchased and producers’ economic profits (rents) would be in jeopardy.

It could just as well be that the profitability of cellulosic biofuels already has been undermined by the anticipated billions of dollars in penalties the refiners will pay to the EPA, and the agency therefore wants to keep the price of cellulosic biofuels jacked up high enough so that the refiners can recover the penalty payments if and when the product enters the market.

Try as it might, Washington cannot pass a law that makes a new technology commercially viable. The policy effort to promote cellulosic biofuels is another example, if one were needed, that the private sector and taxpayers sometimes will have to double-down, financing investments in an unproven technology and paying penalties for not using the product of that technology even if it is available only in beaker-sized quantities.

Unless or until the process of turning plant materials into fuels usable in gasoline and diesel engines becomes reality, the only “green” from this ill-conceived governmental program will be flowing into the coffers of the EPA.