Friday, February 01, 2008

Competition Beats Subsidies

The normally-sensible Cliff May proposes a tax break for companies that make, and consumers who buy, ethanol-powered vehicles. Marlo Lewis, senior fellow in environmental policy at the Competitive Enterprise Institute, "fisks" May on National Review's Planet Gore blog:
Cliff argues that the problem with gasoline is there is no competition in the motor fuel market. When you go to the pump, you can choose between gasoline and gasoline, and when you buy a car, you can choose between one that runs on gasoline and another that runs on gasoline.

Cute, but what Cliff is describing is not the absence of competition but the results of competition. Ethanol as a motor fuel has been around as long as petroleum-based gasoline. In fact, back in the 1920s, Henry Ford supposedly predicted that ethanol would be the "fuel of the future." The marketplace proved him wrong, and for what turns out, in hindsight, to be fairly obvious reasons. None of the alternatives to gasoline perform as well in terms of cost, portability, and energy density.

Biofuels already get billions in subsidies, tax breaks, and mandates—-an estimated $92 billion during 2006-2012. Were it not for the 51-cent per gallon tax break refiners get to blend ethanol in the nation's motor fuel mix, a national market for ethanol would not even exist. Gasoline continues to dominate the motor fuel market because it still blows away the competition. I'm afraid that what Cliff laments as lack of competition is simply a competitive outcome he wishes were otherwise.

There is no chicken-and-egg problem preventing the motor fuel market from evolving into something better. Installing E-85 pumps costs $11,000 to $55,000, by one estimate. That's not cheap if you are a small independent, service station, but it's also not prohibitive if consumers really want ethanol. So far, however, demand for ethanol is underwhelming. And that is because ethanol isn't really a great buy. For example, last July, during summer driving season, the AAA estimated that E-85 (motor fuel blended with 85 percent ethanol) cost more than gasoline once you take into account the fact that ethanol contains about 25 percent less energy by volume than gasoline. . .

Cliff, automakers already have the biggest possible incentive to start a revolution. Nobody likes pain at the pump. With oil selling near $100 a barrel, any automaker that figures out how to produce an affordable, roomy, safe, high-performance vehicle that gets 100 mpg—or better still, runs entirely on rechargeable batteries or fuel cells—will RULE THE WORLD!

Keep gomn't out of the picture; it will only make things worse!
Agreed. As I've shown, ethanol subsidies are a bad deal and unnecessary: "Adam Smith solved the energy crisis in 1776--the free market responds automatically and without . . . subsidy or bureaucracy." See Ken Green and Jerry Taylor for more data.

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