The Wall Street Journal: ‘Perverse Effects’

August 21, 2013

August 20 – Anticarbon central planning was bound to distort markets, but it turns out that the planners often increase emissions as they try to engineer President Obama's “new energy economy.” So concludes the National Academies, whose major report on energy subsidies deserves more attention than it has received since its June release.

By some miracle, Congress in 2008 created a National Research Council special committee to comb the tax code to figure out how specific provisions increase or decrease greenhouse gases. As chairman William Nordhaus of Yale and his colleagues note, there is very little empirical literature on these programs. What they did learn is that “several existing provisions have perverse effects, while others yield little reduction in greenhouse gas emissions per dollar of revenue loss.”

Take ethanol and other biofuel subsidies, which the committee calls a “most striking” example. The 45-cents-a-gallon ethanol tax credit expired in 2012, but before it died it was increasing carbon emissions by five million tons every year, at a cost of $5.26 billion. As they say, it's not easy being green.

The ethanol credit grew over decades into the single largest U.S. energy tax expenditure, yet five million tons is nothing on a world scale, roughly 0.1% of U.S. emissions. The committee shows that the subsidy was economically equivalent to a taxpayer-funded coupon at the pump, slightly lowering the price of blended fuels. As gas became artificially cheaper, consumers naturally used more of it. While the ethanol credit expired, the ethanol purchase mandate still survives.