More Fallout from Biofuel Subsidies

For a variety of reasons that have a lot more to do with subsidizing preferred business interests than energy or environmental policy, Congress has fallen in love with biofuel subsidies and mandates.  We've talked quite a bit on this site about ethanol.  Here is another example, via Mark Perry:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The article poses this as a dueling jobs situation, but the result not only leaves us worse off economically, it leaves us worse off environmentally.   And the explanation is all Hayek and the limits on information possessed by a few individuals in Congress vs. 300 million market actors.  It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were "waste."  What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power.

But in fact, businesses (no matter how much environmentalists believe otherwise) abhor waste.    When a tenth of a percent on margins is important, a lot of people have financial incentives to either reduce the waste or do something productive with it.  Which is why there is a whole industry using sawdust and chips already to make various building products.  And I won't go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

  • DrTorch

    "It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were “waste.” What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power."

    I think you nailed it. 100% correct.

    And your follow-up comment about business hating waste, I'm reminded of Harvey Mackay's anecdote when he first started in envelope manufacturing. He's at a conference and asks a peer "How do you make money in this business." The guy says in a New Orleans drawl, "You got a good contract for your scrap, you do alright, you don't, well..."

    Mackay's mouth drops open...he'd been paying to have his scrap hauled away!

    Anyway Coyote, your blog is a valuable service to remind people just how business really works.

  • Rick C

    I move we make a slight name change to the Biomass CRop Assistance Program, for no particular reason.

  • Greg

    Unfortunately I don't think any Democrat Politician (and few Republicans) would ever read this blog or any like it. Good economic sense, and the guts to stick with that sense, seems to be a rare thing in government.

  • O Bloody Hell

    > And I won’t go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

    I think it's getting closer and closer to the time we need to burn some politicians for fuel.

    Just a few, I think, and the rest should be able to vastly improve the effectiveness of their work output.

    .

  • stan

    Harvey Mackey has an anecdote about his ignorance of the business after he took control of a business that made envelopes. After struggling for a while without making a profit, he was at a trade meeting talking to an old veteran and bemoaning how it seemed impossible to make a profit. The old man asked him, "how much you getting for your scrap? That's the key."

    Mackey had been paying someone to take it away instead of getting paid for it.

  • Subsidy Eye

    Guys, before you go blaming Democrats and environmentalists for these policy failures, please recall who pushed for the program in the first place: farm-state senators and representatives, of BOTH parties. Greenness was an excuse: farm support, and the pursuit of distorted notions of energy security, were the real motivations.

  • tomw

    Just another demonstration of the truth that Congress proves almost daily:
    Stupidity is still not illegal...

    tom

  • rs