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How Misguided Energy Policy Eats Up the Economic Stimulus – Pacific Research Institute

How Misguided Energy Policy Eats Up the Economic Stimulus

This month, checks are going out to federal taxpayers in the form of an “economic stimulus” package. Economists are divided over how those dollars will be spent—new spending, paying off bills, savings? Unfortunately, other federal and state policies, including energy policy, will eliminate any stimulation.
The economic stimulus checks are for $600 to individuals and $1200 for families. How far will this go, given the price increase at the pump? Gasoline currently sells for more than $4 per gallon in parts of the state, diesel at $4.25 and both are more than 25 percent higher than last year at this time.

The average driver goes about 12,000 miles per year and may get 20 miles per gallon. With the price increase for gasoline, compared to a year ago, of roughly $1 per gallon—guess what? That equals exactly $600—the amount of the economic stimulus for an individual. The dramatic rise in food prices eats up more than the stimulus package can provide. Part of the price increase is due to ill-advised energy policy, specifically mandates and heavy subsidies for ethanol.

In response to rising prices and other reasons, some in Congress, including presidential candidates John McCain and Hillary Clinton, have called on the EPA to suspend the ethanol mandate. This is a much better idea than their so-called gas-tax “holiday.” An even better idea would be to remove the subsidies, eliminate the mandates and discard the prohibitions regarding domestic oil and gas exploration and development.

Ending the tax subsidy for ethanol should be easy, were it not for the corn-growing lobby. Ending the mandate will be tougher, though some members of Congress are showing buyer’s remorse about last year’s “New Direction for Energy Independence, National Security and Consumer Protection,” the 2007 energy law. One reason is the worldwide spike in food prices.

That has been driven largely by a huge increase in demand and rising energy costs. The diversion of American corn from food to fuel – about one-fourth of the total crop – has not helped food prices. While some advocates, such as the Renewable Fuels Association, argue that food price increases are only “20 percent due to the ethanol mandate” it begs the question of whether consumers might enjoy 20 percent less price inflation.

The other reason for the price hike is a spate of studies suggesting that some bio-fuels – corn ethanol in particular – actually accelerate global warming, as I wrote about most recently in February. Environmentalists had long regarded corn ethanol as at least carbon-neutral, emitting greenhouse gases when burned but absorbing those gases while growing. But rising demand for corn, for fuel and food, wields a profoundly negative effect if it causes farmers to clear previously untouched land, in turn releasing more carbon into the atmosphere. It doesn’t help the water situation, either, especially in a drought year, as growing corn and other cereals consume vast amounts.

California leaders enjoy an opportunity to influence federal policy and should take every opportunity to convince Congress that mandates are harmful, subsidies do little good and continued restrictions on domestic production – oil, natural gas, nuclear and coal – continue to harm consumers. Now that approach would be stimulating.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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