How Good Politics Results in Bad Policy: The Case of Biofuel Mandates

Introduction

Biofuels have become big policy and big business. The United States, Europe, and Brazil require blending biofuel-liquid fuel derived from plant material-in transportation fuel. Often, production is subsidized and tariffs restrict trade from other countries. Additional government support includes loan guarantees for biofuel plant construction, subsidies to farmers who grow biofuel feedstocks, and funding for biofuel research and development.

Government targets, mandates, and blending quotas have created a growing demand for biofuels. Some say that the U.S. biofuels industry was created by government policies. Between 2000 and 2007, global production of ethanol for transport fuel tripled, from 17 billion liters to more than 52 billion liters. Investment in biofuels production capacity probably exceeded $4 billion worldwide in 2007. Recent figures show continuing growth in biofuel use. Between 2007 and 2008, the percentage of ethanol in global gasoline use increased from 3.78 percent to 5.46 percent.^[1]

Biofuels have been promoted to deal with a number of problems. Some biofuel supporters argue that the fuel represents an ideal combination of benefits, saying production and use of biofuels improves the environment by reducing greenhouse gas emissions (GHG), contributes to rural prosperity, helps farmers, creates development opportunities in poorer countries, improves engine performance, offers a renewable alternative to oil and other fossil fuels, and provides energy security as a domestically-produced fuel. In the United States, for example, George W. Bush supported biofuels during his presidency, particularly corn ethanol, and the United States became the largest ethanol producer in the world.^[2] As Bush put it,

Ethanol is good for our rural communities. It's good economic development for rural America. You know, new bio-refinery construction creates jobs and local tax revenues. When the family farmer's doing well, it's good for the local merchants. Ethanol is good for the environment. I keep emphasizing that we can be good stewards of our environment and at the same time continue with our economic expansion. And ethanol will help meet that strategy. You don't have to choose between good environment and good economics. You can have both by the use of technology. And ethanol is an example of what I'm talking about. And ethanol's good for drivers. Ethanol is home-grown. Ethanol will replace gasoline consumption. It's a good-ethanol is good for the whole country.^[3]

Different countries have emphasized different reasons for supporting biofuels. In the United States, though leaders tout a variety of benefits, the primary reasons for supporting biofuels have been supporting farmers, increasing energy security (reducing U.S. dependence on foreign oil) and improving the environment. The United States has required the use of 36 billion gallons of biofuel in the nation's transportation fuels supply by 2022. In Europe, where biofuel production is primarily biodiesel from rapeseed, environmental legislation has mandated that biofuels make up 10 percent of transport fuel by 2020. In Brazil, where ethanol is produced from sugar cane, biofuels represent a way to increase economic independence by reducing the need for foreign oil and supporting the country's sugar cane production. With many flexible-fuel cars that can run on gasoline, ethanol, or a mixture of both, Brazil's drivers often find that ethanol is a cheaper choice at the pump.

But recently, biofuels have become increasingly controversial. Some environmentalists challenge the assertion that biofuels, particularly corn ethanol, offer a meaningful reduction in greenhouse gas emissions. Environmentalists are also concerned that biofuel feedstock production threatens water supplies and undeveloped land, such as forests and wetlands. Many have also argued that expanding production of biofuels puts pressure on available agricultural land, increasing food prices and seriously impacting poor consumers. As a result of these concerns, some say that biofuels represent a diversion from creating the tough polices necessary to mitigate climate change, increase rural prosperity, and increase energy security. Some criticize using government money to support biofuel programs, especially corn ethanol, arguing that public resources are being wasted on an ineffective program. "The corn-based ethanol program is going to be considered one of the biggest follies ever implemented in energy policy anywhere in the world in the history of energy policy," says Amy Myers Jaffe of Rice University's James A. Baker III Institute. "Ethanol is not a solution to greenhouse gases."^[4]

In addition, there is inconsistency between what biofuel supporters say and what they really want from government policies. Government policies reflect these muddled priorities. For example, though European biofuel targets are said to be implemented solely to reduce green house gas emissions, tariffs on imported biofuels remain in place, benefitting local farmers as part of European agricultural policy.

In this paper I will argue that these unfortunate outcomes-namely, the growing list of concerns about the impact of biofuel targets and mandates-are the predictable result of a failure to follow the basic principles of good policy-making. Good policy-making requires developing a policy goal or target (i.e., reducing greenhouse gas emissions, reducing oil consumption, or increasing rural economic development) and designing an instrument to efficiently meet that particular goal. The more precise the goal, the better. In addition, for each target, there should be at least one policy instrument. You cannot meet two goals with only one instrument. I will argue that the current U.S. biofuels mandates do not represent the most efficient or precise instrument to meet any of the policy's stated goals.

Although current biofuel mandates are not good policy, they certainly represent an issue that has achieved political success. In the United States, both Republicans and Democrats support biofuels, especially in farm states. "There is zero daylight" between Democrats and Republicans in the region, says Ken Cook, president of Environmental Working Group, a nonprofit research policy group in Washington. "All incumbents and challengers in Midwestern farm country are by definition ethanolics."^[5] In the United States, ethanol is also an important issue for presidential candidates. The first state in both the Republican and Democrat presidential primary elections is Iowa, which grows corn for the ethanol industry. "You can't trash ethanol and expect to win in Iowa," says Iowa State University political science professor Steffen Schmidt.^[6] Strong political support has maintained key subsidies and polices for ethanol for 30 years, and those forces will remain.

A great source of political strength is that biofuels can be justified in so many ways, which has been tremendously useful in building support for biofuels. Many groups have become interested in biofuels because production and use of these fuels impacts three major policy areas-energy policy, environmental policy, and agricultural policy.

Since the development of the automobile, biofuel supporters have emphasized a variety of benefits of producing and using the fuel. Reviewing the history of biofuels, we can observe the changing rationales for biofuel use over time. Back in 1907, Congress passed legislation meant to spur the development of a domestic transportation biofuels industry in hopes of creating competition for Standard Oil. In the 1930s, biofuel was touted as a strategy for dealing with agricultural surpluses and low commodity prices. When oil prices were high in the late 1970s, ethanol was seen as a gasoline extender. During the 1990s, ethanol was seen as an aide to combating urban smog in large U.S. cities. As concerns about greenhouse gases intensified in the 2000's, Europe adopted biofuels as a way to reduce emissions. While the United States was concerned about emissions as well, a biofuels mandate was also adopted for national security reasons, namely, concerns about oil imports, and to support Midwestern corn farmers.

The variety of rationales for promoting biofuels has been useful in gaining support. A lack of precision or clarity about policy goals, sometimes known as constructive or strategic ambiguity, can be very useful when advancing a political purpose. The ambiguity surrounding the question of why government should support transportation biofuels-or what a mandate would specifically accomplish-helped create the necessary support to facilitate the passage of the 2005 Renewable Fuels Standards and the 2007 revised standard (RFS2). An RFS could be all things to all people. Farm groups, industry groups, unions, some environmental groups, certain political groups (such as national security groups who wanted to reduce dependence on Middle East oil), consumer groups, evangelicals, and a number of car-makers backed a government biofuel mandate-most for different reasons. But ambiguity can generate subsequent controversy. For example, while some groups initially supported a Renewable Fuels Standard for environmental reasons, concerns grew about how to ensure that the RFS would indeed reduce carbon emissions as hoped.

Biofuels supporters also gained a political advantage by pursuing the idea of a mandate. One advantage of a mandate is that it hides the true costs of a given policy. The cost of mandate is less clear than a more targeted instrument, such as a tax. The problem with taxes (from a political viewpoint) is that their cost is transparent. It is clear who will pay the cost of the tax, and how much will be paid.^[7] A great political benefit of a mandate is that no one knows exactly what it will cost or who will pay. Therefore, while it may be clear who "wins" as a result of the mandate, it is less clear who "loses."

Furthermore, in the 2005 and 2007 campaigns for a Renewable Fuels Standard, an RFS was sometimes perceived as a more acceptable or easy way to meet environmental or energy-related goals than more controversial policies such as implementing a carbon tax. In this way, the US Renewable Fuels Standard represents a "second-best option," an option that supporters may not see as the optimal policy, but is said to represent some progress on issues of concern. For example, some environmental groups saw a biofuels mandate as a realistic option when compared to increasing fuel economy standards-a policy that had been strongly opposed by car makers and the United Auto Workers union for many years.

It is also important to consider that the 2005 Renewable Fuels Standard and the 2007 revised standard were not passed alone, but as part of larger energy bill packages.  Combining different legislative issues into packages creates the potential for trade-offs. These trade-offs can neutralize opposition to any given policy and create a broader coalition. For example, in initial negotiations, a biofuels mandate was combined with legislation that was favorable to the oil industry, a move that helped gain some support for a biofuels mandate (or at least reduced resistance).

While the resulting breadth of support for biofuels has been tremendously useful for building political support for biofuel use, it is detrimental to good policy. Biofuel mandates are good politics, but not good policy-an example where good policy and politics work against each other. As long as groups do not need to agree on why we need to mandate biofuels, then there is support for their use. If we required policymakers to justify how biofuels represent the most efficient solution to any one particular policy goal, it would become apparent that biofuels are not the most efficient solution to any particular market failure.

Clearly, there is a dilemma. The principles of good policymaking require precision and clarity of purpose, but the political realities of forming coalitions often benefit from ambiguity, hiding costs, accepting second-best justifications, and packaging policies together to further broaden support. These dynamics can create policies which are unlikely to achieve their stated goals, as has been the case of biofuels.

This paper is a plea for avoiding such obfuscation. A technology (such as biofuels) is not a policy or an end in itself, but an instrument. First we should be agreeing on goals. Only then can we decide if a particularly technology is the most efficient way to meet the policy goal. Focusing on the desired goal or target will increase the chances that policies will be rational and efficient.

While this paper argues against mandates, it should not be understood as an attack on all biofuels policies. Three are especially worthy of consideration. First, there are good reasons for the government to subsidize research on different alternative sources of energy such as biofuels.  Indeed, precisely because biofuels could help in increasing energy independence, or in providing transportation fuels that reduce CO2 emissions, breakthroughs in knowledge about such technologies are likely to provide social benefits far in excess of the private rewards to innovators. But this calls for precisely targeted alternative energy R&D programs and subsidies with explicit objectives rather than policies that encourage the widespread use of particular technologies with ill-defined purposes.

Second, there may be a role for government coordination and investment in biofuels infrastructure which are essentially public goods that private actors cannot undertake on their own. And third, there are also good reasons for removing the tariffs that are imposed by both the European Union and the United States on imported ethanol and biodiesel. These trade barriers not only reduce any potential environmental benefits that could be achieved from using these products, but also limit the development benefits than poor countries might enjoy from producing them.

[1] Biofuels provide 1.8 percent of the world's transport fuel. All statistics in this paragraph from United Nations Environment Programme, International Panel for Sustainable Resource Management, Towards Sustainable Production and Use of Resources: Assessing Biofuels, October 2009, p. 15

[2] Renewable Fuel Association (RFA), http://www.ethanolrfa.org/industry/statistics/

[3] George W. Bush, 2006. http://georgewbush-whitehouse.archives.gov/news/releases/2006/04/20060425.html

[4] Amy Myers Jaffe, Baker Institute, Rice University quoted in Heat, a Frontline documentary film, PBS, October, 2008. http://www.pbs.org/wgbh/pages/frontline/heat/etc/script.html

[5] Alexei Barrionuevo, "The Energy Challenge: A Modern Gold Rush; For Good or Ill, Boom in Ethanol Reshapes Economy of Heartland," The New York Times, June 25, 2006.

[6] Shailagh Murray, "Ethanol Undergoes Evolution as Political Issue," The Washington Post, March 13, 2007, Pg. A06.

[7] In fact of course, microeconomic theory suggests that the actual incidence of taxes do not fall fully on those who write the checks. For example, a sales tax may not only raise the cost to buyers but also reduce the price received by sellers.