The Great Biofuel Swindle

Want to make $100? It’s easy. You send me $550. Cash or cheque. In exchange, I will send you a cool $100. Cash or cheque. Or a money order, if you prefer.

Is that a deal or what? No? Only a fool would fall for this? Well, then, the government of Canada is run by fools — because it is about to implement a new environmental regulation which delivers $1 in benefit for every $5.50 it costs.

By September, if the new law comes into force, an average of five per cent of the fuel content of gasoline will have to come from renewable fuels made from corn or wheat. Long discussed, the government formally announced at the beginning of April that it would go ahead with the regulation.

Why wouldn’t they? Environmentalists love it because it will reduce emissions of the greenhouse gases that cause climate change. In combination with other regulatory changes, the reductions will be “up to about four megatonnes per year,” a government press release says, which is “the equivalent of taking one million vehicles off the road.”

Farmers and agri-business love the regulation, too. Mandatory biofuel content means a huge volume of guaranteed sales. That’s big money.

So the Conservative government wins praise from across the political spectrum. And, just as importantly, the Tories get to say they’ve done something big to fight climate change. What’s not to love? Group hug!

But then reality barges in and spoils the moment.

A week after the politicians in charge of the government announced the regulation was going ahead, civil servants working for that same government quietly published the results of a cost-benefit analysis of the regulation. By assigning a reasonable price of $25 per tonne of emissions, the analysts concluded the regulation would deliver $580 million worth of reductions over 25 years. On the cost side, the regulation will not only raise the price of gasoline, but it will also require the construction of new plants and infrastructure. Total bill: $3.2 billion.

So it will deliver $1 in benefits for every $5.50 it costs. Impressive, isn’t it?

To be fair, this cost-benefit analysis — like most such analyses — may not capture the full range of costs and benefits. But the big stuff is certainly included. And, when the gap between benefit and cost is as wide the Grand Canyon, you can be quite sure the regulation is a stinker.

And, yet, it will soon be law. For that, we can thank the cowardice and venality of politicians.

The goal of this policy is not complicated. We want to reduce greenhouse gas emissions. That’s it. So how do we do that? Ask any economist who specializes in environmental public policy and you will be told the key is to put a price on emissions and let the free market work its magic.

Right now, the atmosphere is a dump with no tipping fee. Emit a small volume of greenhouse gases and it costs you nothing; emit lots and it costs you nothing. Obviously, there is no incentive beyond moral suasion to reduce your emissions. And moral suasion just doesn’t cut it as public policy.

Put a price on emissions and everything changes. People and industries who merrily pump out greenhouse gases will be punished with higher costs, while those who reduce their emissions will be rewarded with lower costs. This will create demand for alternative energy, for energy-efficient goods and services, for new conservation technologies. And demand creates supply: That’s the first line in the catechism of the free market.

So why aren’t we doing this? Because the simplest, fairest, and most efficient way to put a price on emissions is to introduce a carbon tax. Yes, a carbon tax. Prior to the federal election of 2008, politicians were afraid to even discuss such a thing. Then came the earnest and inept St├ęphane Dion. Today, federal politicians would sooner double the GST and close every hospital in the country than introduce a carbon tax.

A cap-and-trade system puts a price on emissions, as a carbon tax does, but there are differences. For one, cap-and-trade hides the cost to consumers, which is why politicians like it. Worse, cap-and-trade systems are also big and hideously complicated, which creates lots of opportunity for bungling and finagling. Anyway, this may be moot. The government may have promised to introduce cap-and-trade, but, at the speed it’s going, Greenland will be blanketed with forest several decades before that happens.

So we are left with direct government intervention to do the job. And do it badly.

Lacking the informational dexterity and raw creativity of the free market, pulled this way and that by political considerations, governments are simply not suited to this sort of hands-on work. Cost-benefit turkeys like the biofuels regulation are all but inevitable. There will be more like it. Some — I’d bet on the McGuinty government’s alternative energy subsidies being one — will turn into classic boondoggles.

Meanwhile, the clock ticks and the climate changes.