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Can biofuel mandates achieve their objectives?

 

Biofuel mandates have become rather popular in contemporary times. Indeed, we now have such mandates on both sides of the Atlantic Ocean. In the United States, we have witnessed the successful passage of the Renewable Fuels Standard in 2005 and the revision of 2007. As a result, the United States now requires the use of 36 billion gallons of biofuel in the nation’s transportation fuel supply by 2020. Similarly, in Europe, the Renewable Energy Directive has mandated that biofuels make up 10 percent of all transport fuel by 2020.

What is the purpose of a biofuel mandate, and why are such mandates popular? Focusing on the United States, there are three objectives for having a biofuel mandate. The first is energy security, and this involves reducing our dependence on foreign-particularly Middle Eastern-oil. The second objective is to reduce carbon and other greenhouse gas emissions and thereby address the real problem of global warming. The third is to strengthen rural economies by raising the incomes of farmers.

Biofuel mandates are popular primarily because the production and use of such fuels affects individuals interested in agricultural, energy and environmental policies. As such, these mandates can be justified in many different ways. In addition, a biofuel mandate is politically expedient because it hides the true cost of this policy. Finally, a biofuel mandate can often be marketed as a "second-best policy" when the best-and frequently more controversial-policy, such as a carbon tax, is politically unpalatable.

Comprehending the reasons for the popularity of biofuel mandates is all well and good, but given that we live in a world of scarce resources, do we need such mandates? Put differently, will they accomplish their objectives? Let us investigate. The discussion in the previous paragraph tells us that, at least in the United States, biofuel mandates have three objectives. In contrast, a mandate is a single instrument. Therefore, the question we have just posed is tantamount to asking whether it is possible in general to simultaneously accomplish three objectives with a single policy.

The work of the Nobel laureate economist Jan Tinbergen has showed convincingly that unless the three goals are perfectly aligned with each other, it is not possible to attain three goals with one policy concurrently. What is needed is for the number of policy instruments to be equal to the number of goals. To see this clearly, consider the inherent difficulty faced by an archer who is asked to hit three targets with a single arrow! In addition to this very basic difficulty, biofuel mandates also are unlikely to efficiently attain any one of the three goals under discussion.

Therefore, if we truly want to address energy security, reduce greenhouse gas emissions and support farmers, we need to use three policy instruments. For instance, an oil import tariff would address the problem of our dependence on foreign oil; a carbon tax or a well-designed cap-and-trade policy would reduce greenhouse gases; and subsidies to farmers would strengthen rural economies.

In conclusion, a caveat is in order: This essay should not be construed as a blanket criticism of all government biofuel policies. Government policies that, for instance, promote research on alternative forms of energy such as biofuels are desirable, but we should not pretend that it is possible to kill three birds with one stone!

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.

1/14/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail rbj@rbj.net.

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