A Response to Mairon G. Bastos Lima by C. Ford Runge

[C. Ford Runge is the Distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota.]

Mairon G. Bastos Lima is to be congratulated for his coherent and ambitious proposal to rationalize the governance of biofuels through multilateral applications of the Rio and Good Governance principles. As he correctly observes, biofuels policies are highly nationalistic and lack even a rudimentary multilateral structure. Although he is right in his criticism, and constructive in his proposed alternatives, the analysis should be placed in a larger perspective.

Biofuels are but one of many areas in which excessive subsidies have created now falsely-named “infant industries” that demand protection from competition — both domestic and foreign. By any estimate, biofuels subsidies have grown in OECD countries to hundreds of billion dollars. Apart from the huge diversion of productive resources, and increasing evidence of environmental damages, national governments continue to encourage a patchwork of methods to boost biofuels production, including tax allowances, mandates and tariffs. These may not only be inconsistent within a nation’s borders, but also operate to the detriment of other nations across borders (de Gorter and Just, 2009).

Unfortunately, biofuels policies, especially in the United States and European Union, have been largely spawned from pre-existing agricultural and agribusiness interests. The basic mode in the agricultural sector is to devise methods to transfer income from taxpayers and consumers to producers and processors of agricultural products. In the case of biofuels, these transfers are often misunderstood or unknown to the public at large. In the United States, for example, the “blenders tax credit” to ethanol essentially subsidizes the price of corn. Two other policies: the federal biofuels mandates (now at about 12.9 billion gallons, scheduled to rise to 36 billion gallons by 2022) and a 54 cent-per-gallon tariff on imported ethanol have myriad effects. The mandates created a seemingly safe market for investors in ethanol and biodiesel plants, but have encouraged overinvestment at levels that have bankrupted many. Ironically, the precarious state of the industry has now become a rationale to continue the mandates, which forces consumers to purchase blends of biofuels and petroleum that are more costly and less efficient. The 54 cent-per-gallon tariff protects domestic producers of maize-based ethanol from foreign (mainly Brazilian) producers of much lower cost sugar-based ethanol. If sugar-based ethanol could enter U.S. markets duty free, it would lower costs to consumers, but would threaten the stranded investments in the maize-based facilities. From the point of view of trade policy, the U.S. has taken a product in which it has a clear comparative advantage (maize as feed for poultry, pork and beef) and converted it to a product (ethanol) in which it has an obvious comparative disadvantage of roughly 54 cents-per-gallon vis-à-vis Brazil.

Placed in a larger perspective, biofuels policies reflect many of the distortions and inefficiencies endemic to agricultural policy writ large. And just as agriculture has resisted efforts at multilateral negotiations and rationalization, so biofuels interests and national governments are likely to resist calls for new governance frameworks built on the Rio and good governance principles. One conclusion that I have reached (Runge, 2009) is that attempting to negotiate separate agreements or protocols is problematic without an overarching framework, especially relating to issues of agriculture, environment and trade. This could take the form of a World Environment Organization (WEO) to operate alongside of the World Trade Organization (WTO). Applying the Rio and good governance principles to biofuels would be more likely in the context of such an overarching framework.

References:

de Gorter, H. and D.R. Just. 2009. “The Welfare Effects of a Biofuel Tax Credit and the Interaction
Effects with Price Contingent Farm Subsidies.” American Journal of Agricultural Economics 91(2)(May): 477-488.

Runge, C.F. 2009. “The Climate Commons and a Global Environmental Organization.” In Climate Change, Trade, and Competitiveness: Is a Collision Inevitable? L. Brainard and I. Sorkin (eds.). Washington, D.C., Brookings Institution.