Imagine if the government passed a law requiring you to purchase either a specified number of pink elephants or government-issued “pink elephant credits.”  This is, in essence, what the government is doing to oil companies: requiring them to purchase a nonexistent product or purchase credits for a nonexistent product.

The seeds of this nonsensical policy were sown in 2007, when President George W. Bush signed the Energy Independence and Security Act into law, which required oil companies, starting in 2010, to purchase a specified volume of cellulosic biofuels, or fuel made from non-food crops and plant matter.  The fuels were intended to be mixed with conventional gasoline, thereby ostensibly reducing environmental pollution.

The only problem is, not a single gallon of cellulosic biofuel has been brought to market.  According an October 14, 2010 report by the Congressional Research Service, “Significant hurdles must be overcome before commercial-scale production can occur.”  It’s a shame the Environmental Protection Agency (EPA) didn’t take that piece of wisdom into account when it began putting the mandate into effect.

In 2011, the EPA did respond to this lack of production by reducing its mandate from 500 million gallons to 6.6 million gallons.  However, even this relatively meager demand could not be met by the fledgling cellulosic biofuel industry, and oil companies have been forced to purchase EPA-issued “waiver credits” in lieu of the actual fuels.

The industry has so far received well over $1 billion taxpayer dollars in the form of grants, subsidized loans, and tax credits.  You would think that with all of these subsidies, the cellulosic biofuel industry would have brought at least a few gallons to market.

In 2007, President Bush established a tax credit of $1.01 per gallon of cellulosic biofuel produced.  President Obama has taken additional measures to subsidize the industry.  In August 2011 the Obama Administration funded a $510 million program to produce biofuels for the military.  In September 2011, the administration issued a $134 million loan to fund the construction of a cellulosic biofuel production plant.  That same month, the Department of Energy gave an ethanol-producing company a $105 million loan guarantee to invest in cellulosic biofuels.

Despite these copious taxpayer-funded investments, industry developments thus far have not been promising.  Cello Energy, the company that was supposed to produce 70 percent of the 2010 cellulosic biofuel supply, was found guilty of defrauding investors in a 2009 civil case and ultimately declared bankruptcy in 2010.

Though it has resoundingly failed in its attempt to ramp up cellulosic biofuel production, according to the office of Rep. Jeff Flake (R-Ariz.), the federal government will have extracted over $24 million in “waiver credit” payments from oil companies by the end of this year.  This cost is ultimately borne by consumers, not oil companies.

Thanks to the cellulosic biofuel mandate, every time you fill up your tank with gas you are paying an invisible sales tax.  To exacerbate matters, this implicit sales tax is flat and therefore inherently regressive.  Put simply, the tax hurts low-income earners a lot more than it does Warren Buffett.

This increase in gas prices is just one of the cellulosic biofuel mandate’s insidious effects.  Any policy that increases the cost of producing gasoline is effectively raising the price of any good or service for which gasoline is an input.  This means that whether you are filling up your tank, riding public transit, or ordering a pizza, you are likely paying more than you would be in the absence of the mandate.

Nonetheless, there are many who would argue that investment in green energy is needed in order to reduce future levels of environmental pollution.  While anyone who can recall the Solyndra debacle might find this claim dubious, Rep. Flake has offered a solution that will lift the mandate’s implicit tax burden while still providing incentives for private companies to invest in cellulosic biofuel production technologies.

Rep. Flake’s proposed legislation, known as the Phantom Fuel Reform Act, would keep the mandate intact while simultaneously ensuring that it never outstrips actual production. The bill would essentially work by requiring the EPA to set its mandate equal to current cellulosic biofuel production levels.

The government’s subsidization of the cellulosic biofuel industry has come at a very high price. Taxpayers and consumers are losing money through tax credits, federal loans, loan guarantees, higher prices on gasoline, and artificially expensive goods and services. Rep. Flake’s bill would mitigate some of these effects while keeping the mandate’s main aims intact.  Americans ought to support this bill and urge our government to stop enacting “green energy” policies that leech money from taxpayers and do nothing to help the environment.

 

 

 

Filed under: Energy, Environment, Solyndra