Stop subsidizing biofuels
Carbon pricing is becoming a mainstream part of Canadian policy. Four provinces have or will soon have carbon prices, one more has made a commitment to do so, and the federal government is now promising to fill in the gaps.
The emergence of a nation-wide carbon price signals that the time has arrived to reconsider policies implemented years ago, before carbon prices were a reality. One example is the federal and provincial policies encouraging the production and use of biofuels. These modestly reduce greenhouse gas (GHG) emissions, but do so at a much higher cost than alternative policy approaches. It is time for them to end.
Let’s start with the basics. Biofuels are made from renewable biomass, and they are blended with gasoline and diesel to reduce the overall carbon content of transportation fuels. First-generation biofuels are made mostly from crops: ethanol from wheat and corn, and biodiesel from soybeans and canola oil. More advanced biofuels, which are expensive and little used in Canada, are made from a range of non-food feedstocks.
For the past decade or so, governments across Canada have been encouraging the production and use of biofuels. The main motivation has been to reduce GHG emissions, although secondary objectives have also played a role. Two types of policies have been central: governments have provided direct cash subsidies to producers of biofuels, financed by taxpayers; and they have mandated that fuel distributors blend biofuels with their gasoline and diesel, Since biofuels are more costly than fossil fuels, these mandates have increased prices for consumers.
Biofuels modestly effective at reducing GHGs
A new report from Canada’s Ecofiscal Commission argues that while these policies have been modestly effective at reducing GHG emissions, they have only done so at a high cost. In particular, these emissions reductions have been much more expensive than what is achievable with alternative policies, notably a carbon price.
The Ecofiscal report estimates that these biofuel policies have led to a reduction of GHG emissions of about three megatonnes a year. The reason is straightforward: for every litre of biofuels used, a similar amount of gasoline or diesel is displaced, and the latter creates more carbon emissions than the former. Canada produces about 690 megatonnes of emissions, so a reduction of three is not huge. But every bit counts; the important thing is to determine the cost of these reductions.
On this point, the report estimates the fiscal cost to taxpayers of the production subsidies and also the cost to consumers of being required to use more expensive biofuels. Over the 2012-15 period, the average fiscal plus consumer cost was $640 million a ear. This is obviously a lot of money for any normal person even though it is a drop in the bucket for the Canadian economy. But a better way to think about the cost of biofuel policies is in terms of the benefits generated, which in this case are the reduced emissions.
For the production and use of ethanol, the emissions reductions come at an average cost of about $180 a tonne; for biodiesel, it is about $145 a tonne. And even these costs appear to be on the low end of the spectrum. There is considerable uncertainty regarding the true carbon content of various biofuels, and when less optimistic values are assumed, the estimated costs a tonne rise considerably.
What are the alternatives?
The Ecofiscal report talks a lot about “cost effectiveness,” which involves comparing the costs of emissions reductions achieved with biofuel policies with those that would be incurred by using alternative policies. But which alternative policies should be considered?
The obvious choice is to consider the costs associated with the emerging nation-wide carbon price. Estimates from other researchers show that British Columbia’s carbon tax, currently $30 a tonne, can reduce a tonne of GHG emissions at an average cost of just over $28; the estimates from Quebec, with a lower carbon price, would likely be a little bit less.
So, here’s the bottom line: Canada’s current set of biofuel policies are reducing GHG emissions slightly, but are doing it at a cost several times larger than what is now possible with a carbon price.
For good economic and environmental policy, it shouldn’t be enough to be green. We should insist that environmental gains be achieved at the lowest possible economic cost. If we all agreed on that fundamental principle, Canada’s biofuel policies would soon be a thing of the past.