Filling the Swamp Isn’t Draining it!

President Trump may be a teetotaler but when it comes to corn alcohol he is all in and in a big way.  Instead of draining the swamp, he is filling it with ethanol by pandering to corn state senators by backing off from abolishing the renewable fuel standard.

The ethanol mandate originated in the 1990 Clean Air Amendments and was added as a way of buying agriculture’s support.  It was not needed for clean air purposes then and it is not needed for greenhouse emission reductions now.  It’s only benefit is to enrich corn farmers and ethanol manufacturers. At the time of the Clean Air debate, the oil and auto industries urged Congress to set tailpipe emission standards and let the two industries work together to meet them.  Instead, Congress wrote a formula for gasoline into legislation.  When the ethanol mandate switched from being about clean air to climate change, advocates claimed that it would result in lower greenhouse gas emissions.  The evidence demonstrates the opposite.

In 2005 when gasoline demand was rising, Congress tried to deal with complaints about the ethanol tax credit by mandating annual volumetric requirements.  Of course, shortly thereafter gasoline demand peaked.  EPA attempted to raise the current 10% per gallon limit which would have voided many new car warranties and later attempted to reduce the annual volume requirement but was rebuffed by a court.  Congress could have simply ended the volumetric requirement but the ethanol lobby has proven too powerful. No matter which party controls Congress, it needs support from agricultural representatives and the environmental lobby to pass legislation, so nothing happens.

With 40% of the domestic corn crop being dedicated to ethanol production, the effect has been to drive up the prices of food products that are based on corn.  The ripple effect of higher prices has an especially harmful impact on people in countries where corn based food is a basic commodity.  In addition, the ethanol mandate also means higher gasoline prices, especially in the summer when congressionally mandate reformulated gasoline is required.

To ensure compliance with the renewable fuel standard, EPA created a tracking system of renewable identification numbers—RINs—that are assigned to each gallon of biofuel.  Blenders of gasoline are required to have enough RIN credits for each gallon of gasoline they sell.  If they don’t have enough credits, they have to buy them.  And, since in recent years the volumetric mandate has exceeded the demand for gasoline, refiners have had to buy additional credits for fuels that did not exist, driving up the price of credits and gasoline.  Hence, regulatory compliance created a market in credits that would increase in value.

Anytime there is a trading market, Wall Street speculators will find a way to become involved and make money in the process.  Credits created for compliance purposes quickly became a commodity that could be bought and sold like any other commodity.

This is a classic example of the Bootlegger and Baptist theory of public choice.  Farmers, ethanol manufacturers, and now traders align themselves with environmentalists who are wedded to biofuels to  enriched themselves by selling a product that is not needed.

 

The End of the Internal Combustion Engine, But Just Not Yet

A wave of prospective bans on gasoline and diesel engines seems to be sweeping through Europe and is on the drawing board in China.  The bans announced by France and Britain are decades off but not in Norway or India.  China will probably pick a target far enough off that it will have no near term effects.

Environmentalists are obviously cheering but you have to ask how serious are these prospective bans?  If they are mainly aspirational, they will undoubtedly slip as they confront reality.  If they are serious deadlines, you have to wonder if there has been any serious analysis of the economic impact that a mandated shift to electric vehicles would have?

While some of these bans may reflect deeply held beliefs by ruling elites, it is hard not to conclude that they are driven by politics in the hope that the fervor driving the climate lobby will have dissipated by 2040.  Making commitments for a relatively far off period makes it easier to avoid tough actions now.

Advocates for electric vehicles make claims about falling costs and their being almost competitive with internal combustion vehicles but if that is true why would bans be needed?  If the stated optimism was genuine then advocates should believe that market forces would bring about the transition from gasoline and diesel more efficiently and faster.

In 2016, global auto sales were close to 90 million with EVs and PHEVs were about 1.5million.  Until recently, most forecasts for EVs showed steady but very optimistic growth over the next couple of decades with estimates ranging from one-third to over fifty percent of vehicles sold in 2040. But, the IMF has raised the outlook to an incredible 90%. IMF clearly shows life in an ivory tower and the  wonders of assumptions, equations, and extrapolation!

Auto manufacturers have been playing the EV game because of the effect of subsidies and for branding purposes.  All plan to roll out an increasing number of EV/PHEVs in the coming years with GM stating that it will have 20 all-electric vehicles by 2023 while Volvo plans of manufacture only EV/PHEVs beginning in 2019.  As long as subsidies are in place manufacturers will continue to produce these vehicles and continue to monitor and participate in advancing technology in case there is a breakthrough.  But, there is no evidence that any manufacturer except Volvo is shifting its emphasis from the internal combustion engine and advancing its technology.

After all of the hype and optimism, reality and economics will rule the day.  Electric vehicles cost more to manufacture than internal combustion engine cars, as documented by a comparative analysis by ADL.  While lithium battery costs have been dropping they have not dropped enough to offset higher manufacturing costs of EVs and PHEVsA.  Without a major breakthrough in battery technology, EV/PHEV potential will continue to be limited.  A 2015 article in MIT’s technology Review made this point very clear, “… while countless breakthroughs have been announced over the last decade, time and again these advances have failed to translate into commercial batteries with anything like the promised improvements in cost and energy storage … One difficult thing about developing better batteries is that the technology is still poorly understood. Changing one part of a battery … can produce unforeseen problems, some of which can’t be detected without years of testing”.

And, until that breakthrough takes place, range will be a serious limitation.  There is also the issue of charging.  How much additional power plant capacity will be needed, what will it costs, and how much will it add to the GHGs that EVs avoid?

Hype and hope are not substitutes for needed large scale capital investments and actual advances in technology which cannot be mandated to meet a political time frame.  In the meantime, the world does not face any near term shortage in oil and actual advances in internal combustion engine technology are providing increased efficiency and lower emissions.

 

 

Three Cheers for Ending Sue and Settle and Goodbye Bre’r Rabbit

EPA Administrator Pruitt’s decision to end “sue and settle” is a step in restoring the rule of law at EPA. And as expected, environmental groups howled in protest, and with good reason.

For too many years, democrat administrators have taken settlement agreements, which can be a good resolution, a step too far by agreeing to terms that imposed regulatory burdens outside of the rule making process.

Several years ago, the Washington Examiner ran an article describing how sue and settle had become a “cottage industry”. It described it this way “First, the private environmental group sues the EPA in federal court seeking to force it to issue new regulations by a date certain. Then agency and group officials meet behind closed doors to hammer out a deal. Typically in the deal, the government agrees to do whatever the activists want. The last step occurs when the judge issues a consent decree that makes the deal the law of the land. No messy congressional hearings. No public comment period. No opportunity for anybody outside the privileged few to know how government regulatory policy is being shaped until it’s too late.” And, too add insult to injury, the government would have to pay the plaintiffs legal fees which in turn are used to sue the government to achieve more settlements. According to a GAO study, between 1998 and 2010, the government shelled out $16million in tax payer dollars.

Sue and settle provides a way for environmental groups to short circuit the Administrative Practices Act which lays out a required process that allows all interested and affected parties to participate in the rule making process. Regulations that flow from this process are supposed to be based on existing law and an objective review of all comments on a proposed regulation. As the Examiner piece and others have documented, the process doesn’t work this way with sue and settle.

To make matters worse, many regulatory analysts have pointed to instances where there was apparent collusion between EPA and environmental organizations on potential litigation by agreeing on the terms of a settlement agreement. This became a classic example of using a piece of fiction, Uncle Remus, to do what Bre’r Rabbit did—get authority figures to act against what should be their own best interests, which is the public interest.
Now Bre’r Rabbit will be retired if the Administrator’s action is followed up by passage of the Sunshine for Regulatory Decrees and Settlements Act of 2017.

 

 

Rebuilding Puerto Rico—The Marshall Plan Model

The devastation to Puerto Rico from Hurricane Maria has left this bankrupt island with no functioning infrastructure or means of economic recovery.  Although steps are being taken to get food and water to Puerto Rico citizens as well as to restore its electrical grid, it will take months to restore basic services and capabilities and much longer to rebuild its economy and infrastructure.

Puerto Rico’s economic conditions severely limit its ability to raise the funds for rebuilding, which was true of western European countries after World War II.  The Marshall Plan provided the needed resources under clear but strict requirements, including repayment.  The same approach could be used with Puerto Rico.

Restoring electricity is the highest priority after saving lives.  Without electricity, Puerto Rico’s economy cannot recover and its citizens’ quality of life will be among the worst in the developed world.  There should be a two-step process to restoring the electrical grid, even if that is more expensive.  The first step is to restore basic electric service throughout the commonwealth as quickly as possible.  Presently, only about 6% of electrical service has been restored.  The second step and the far more ambitious, expensive and time-consuming one  involves building a grid for the future that is hardened and has the resilience to quickly recover from hurricanes or any other event that can disrupt power.

The destroyed grid was comprised of 15 power plants of various sizes.  In 2016, 47% of Puerto Rico’s electricity came from petroleum, 34% from natural gas, 17% from coal, and 2% from renewable energy. Two wind farms provided half of the renewable energy and four solar facilities provided the other 1%.  According to the L.A. Times, Puerto Rico Electric Power Authority (PREPA) “appears to be running on fumes, and … desperately requires an infusion of capital — monetary, human and intellectual — to restore a functional utility.”  However, the utility has a history of poor maintenance, poor staffing, and allegations of corruption on top of a mountain of debt.  Given that history, PREPA is not the vehicle for rebuilding Puerto Rico’s electrical system and simply restoring the existing system would be foolhardy, as the residents of the U.S. Virgin Islands can attest.  Four times over the past 30 years, hurricanes have destroyed their electrical systems.

A grid for the future should minimize above-ground poles and transmission lines to the extent feasible and, where not feasible, the poles and lines to be hardened to the extent possible.  Generating facilities that were not made uneconomic will also need to be reinforced and perhaps converted from oil and coal to natural gas.  Because of the population distribution outside of major cities, dispersed areas could plan on microgrids when they become economical and reliable. These are localized electric grids that allow communities to keep power if centralized power plants stop functioning. They incorporate small-scale power plants as well as energy storage like batteries to maintain electrical power.  When central power is lost, microgrids would provide resiliency by becoming the primary source of power.  Microgrid development is being supported by DOE and also by DOD for use by the military in remote locations.

While solar and wind power can play a role in a rebuilt electric power system, it would be a serious mistake to count on them (as some environmental advocates do) for more than minor and back-up roles.  Category 4 and 5 hurricanes are too strong for wind turbines and can uproot solar panels which also can be damaged to excessive rain and debris.

Rebuilding a robust electrical power system can provide Puerto Rico a solid foundation for rebuilding its economy and becoming a model for the Caribbean region.