Archives for Energy

The State-by-State Economic Impact of Proposed EPA Regulations

As a nation, we’ve made great strides in combining growing the economy and cleaning up air pollution. But as the Environmental Protection Agency (EPA) is setting up to roll out nine new new rules or regulations, most of which are related to coal-powered electricity, it’s worth asking, “Is the gain worth the pain?”

The report, Economy Derailed: State-by-State Impacts of the EPA Regulatory Trainwreck, comes in four sections: what new regulations are under review; how those regulations would affect the economy, on a state by state basis; who is opposing the regulations; and what officials in the states can do to respond.

Economy Derailed is from the American Legislative Exchange Council (ALEC), the demon of the day. But take note: Much of the data in the report comes from various units of the federal government, including the EPA itself.

With that aside, let’s get to a quick overview.

SECTION ONE, “the causes of economic derailment,” explain nine broad categories of proposed regulations, which for the most part deal with coal-based electricity. You’ve probably heard of some (greenhouse gas emissions), but not others (“Utility MACT Rule”). This section describes each regulation as well as recent developments. Most importantly, it outlines some of the potential costs of each new regulation.

Here are some of the potential costs:

Job loss. As a result of new rules on the use of coal, 27,000 jobs in coal mining could disappear. But the effects go far wider than that. The “Boiler MACT rule,” for example, could result in 800,000 jobs gone, nationwide. Rules based on the quantity of ozone (a natural substance) in the air could could threaten 7.3 million jobs by 2020.

Opportunity costs.  The Utility MACT rule could cost $11 billion a year (EPA estimate); a rule on coal combustion could cost anywhere from $1.5 billion a year (EPA) to $20 billion per year (other estimates). You could tell a similar story for other regulations. These sums represent spending that could be spent on paying employs, investing in equipment, and so forth.

Your electronics, lighting, heating, and air conditioning at risk. I’m stretching a bit here, but bear with me. What do the following have in common: your smart phone, computer, TV, refrigerator, air conditioner, and furnace? Most likely, they all depend on electricity. If you’re going to use them, you need to have access to reliable (always there, almost always on) electricity that you can afford.

Enacting just one of the proposed rules–the MACT rule–could result in a moratorium on new electricity plants. The rule is so divorced from the state of the art that even recently completed plants would not meet it.  Restricting the supply of something and what happens to its price? Up, up, and away. Imagine what happens next. Brownouts, anyone?

SECTION TWO gives you estimates of the effects of the proposed regulations, broken out by each state. Here’s a snapshop of the impact on Minnesota:

  • Jobs lost: Roughly 12,000
  • Increase in electric rates: 7.8 percent
  • Electric generating capacity: Enough to power 700,000 homes.

How hard a state is hit will be determined by several factors, including (a) how much of the state’s electricity comes from coal; (b) how many people work in coal mining in the state; and (c) how important larger energy users are to the state’s economy.

SECTION THREE of the report describes the “broad and diverse coalition opposing the EPA.” Depending on your view, this is a list of heroes or a rogue’s gallery. The opponents include the coal industry (of course), including its unionized workforce. But they also include governors, legislators, trade groups, and state regulatory officials.

SECTION FOUR offers up tools that state legislators can use to respond to EPA rules. These include:

  • Hold oversight hearings
  • Write to members of the state’s congressional delegation
  • Pass resolutions of opposition
  • Weigh in with comments on proposed rules

* * *

The report, regardless of how you evaluate it, is a good reminder that we shouldn’t make policy in a vacuum. The EPA is concerned with regulating, not creating jobs. It is concerned with minimizing risks to the natural environment, but it isn’t so concerned with minimizing risks to the economic environment, which bears a great deal upon the quality of the human environment.

Consider what you do when you buy an expensive product such as a house or a car–or even a relatively inexpensive item such as a smart phone or a computer. Take the purchase of a new car. You’ve settled on the make and model, but what happens if the car has three trim lines. The cheapest line has a manual transmission, uses basic materials, and has a cheap stereo. The most expensive line has leather seats, a deluxe stereo, and a larger, more powerful engine. Which one do you pick? Your income and wealth are not unlimited, so you need to balance your desire for a nicer car with your desire to spend money on everything else. Given what you know, does this or that option actually contribute anything to your well being? Only you can make that decision.

But in environmental policy, who makes the call? Can an environment be too clean? Not for the EPA. Quite reasonably, it operates as with a one-track mind, meaning it can seek reductions in particulates or other substances to the Nth degree. So the political class must step in; regulatory items sold as environmental protection measures are but one thing that a member of Congress or (to use the state equivalent) a legislator must consider when surveying the economy. And in this case, as with many others, we have the problem of … politics. There are roughly 300 million Americans, who have a nearly infinite range of preferences and ability to pay for this or that measure sold as the latest in environmental protection. The EPA, whose employees number in the thousands, make decisions for those 300 million. What’s the chance they will get them right?

Policy making might be improved by the increase in technical knowledge, which the EPA accumulates. But it’s also too important to be left to a few narrowly focused experts. Give ALEC credit for bringing the EPA rules to our attention, and giving us all more information to chew on. Read the report and then ask: Should we “buy” these policies? If so, which ones?

You can find the report, as well as related materials, at RegulatoryTrainwreck.com.

Good News for 2012: Ethanol Tax Credits, Tariffs, End

The federal 46-cents-a-gallon tax credit for corn-based ethanol, and a tariff on imported ethanol, has expired. Mark that as one good start to 2012. A bad policy that is over 3o-years old has (partly) come to an end.

The credit and tariff have cost motorists billions of dollars, contributed to the cluttering of the tax code, served as another example of top-down policy arrogance, harmed the environment, caused food prices to increase, contributed to hunger in the third world.

So the end of the credit and tariff is good news.

Why did the subsidy end? The Economist says the tea party can take credit. So can some players in the the environmental lobby, such as Friends of the Earth, which have (rightly) argued that ethanol drives up the price of food.

Unfortunately, public policy is still tilted towards ethanol: There’s still a separate tax credit for “cellulosic” ethanol made from switchgrass and other products, which stands at $1.01 a gallon.

In addition,  the demand-side requirement of the federal government has increased. As the Argus Leader points out, “The federal government has set its target for biofuels production in 2012, increasing by 1.25 billion gallons the amount of ethanol and biofuels that must be blended into the fuel supply.” This has contributed to some assaults on the English language, such as when advocates warn of the importance of using government mandates to promote an orderly “market.” (“It’s important to let the market develop at a reasonable pace.”) Oh, I get the fact that markets and mandates coexist all the time. But the greater the  mandate, the activity in question (say, making ethanol) becomes less of a market-based one and more of a politically driven one. One pro-mandate group  has an effort to develop cellulosic ethanol, called “Project Liberty.” That’s an ironic name, given that it is being driven, in part, by federal laws requiring fuel sellers to sell ethanol.

The ethanol industry says that rising gasoline prices have helped make its product competitive with regular gasoline. Score one for standard economic theory, which said long ago that ethanol could become more attractive, without government-imposed distortions, if the price of petroleum rose high enough.



Energy Policies and World Hunger: Remarks by Whitney MacMillan, Chairman Emeritus at Cargill

A key part of most Thanksgiving Day celebrations is an abundance of food. This is a good time to reflect on some policy decisions about food, including this stunning fact: We feed 40 percent of the corn crop in the United States to machines, not people. How has ethanol policy affected  world hunger? Whitney MacMillan, former chairman and CEO of Minnesota-based Cargill, talked about this and other food-related issues in an address this fall to the Blake School.

Good morning. I’m happy to be here.

I have some very fond memories of my days at Blake.

I did not have good marks, in fact made the top three-fourths of the class possible but more importantly Blake taught me to understand better what it takes to make good choices … to make the right decisions.

I’d like to spend my time with you this morning talking about just that subject – making the right decisions.

As many of you probably know, I spent my entire career in the business of agriculture. I’ve seen how important it is to make smart decisions – or maybe more important, I’ve seen what happens when you make bad ones.

This morning, we’ve all had the chance to enjoy a fine breakfast. We’ve had our choice of food and beverage, and we never thought one minute about where it came from, or how much it cost. We never questioned where our next meal would come from. We never considered whether our families could count on a continuing supply of safe, nutritious and affordable food. We never had to consider how the abundance we enjoy here this morning may influence the availability and cost of food elsewhere.

This morning, I’d like to make you think about all those questions … and probably a few more. After more than a half-century in agriculture, I believe we have some very tough decisions ahead of us about food. Make the right decisions, and we can continue to feed a growing world. Make the wrong choices, and a great many people around the world will feel the effects – and they won’t be good.

The fundamental cause for my concern isn’t something new. We all are aware of it. We have more and more mouths to feed every day.

Our global population today stands at about 7 billion. In the lifetime of people in this room, it will be closer to 10 billion, and some so-called experts say even more. Regardless of the expert you choose to believe, the simple fact is that every day, we have another 200 thousand more people to feed – most of them in what we used to call the developing world.

Somebody has to produce the food a growing, hungry world needs. And just as important, someone has to generate the wealth needed to enable those hungry people to afford the food they need.

In the past thirty years, we’ve seen a 70 percent increase in our global population. While we have made great strides forward in productivity, our capacity to step up food production hasn’t kept pace. The balance between the food we produce and the food we consume remains razor thin.

Back in 2009, when we last saw a notable spike in global food prices, the Food and Agricultural Organization estimated that just over one billion people worldwide could be classified as either “hungry” or “malnourished.” Yes, one billion – or one of every seven people on this planet.

What is worse, malnutrition and disease go hand in hand in a slow, sad dance. We see nearly 11 million children under the age of five die worldwide each year – an estimated 5 million of them due to poor nutrition. In the time we spend together this morning, that works out to about 570 children whose lives ended because they didn’t have enough to eat.

Our long-term efforts to reduce global hunger continue to be compromised by the lingering global economic downturn. History teaches a clear lesson. When people prosper, hunger declines. And vice versa.

If a tree falls in the forest and there is no one there to hear it, does it make a sound? If we produce food and some can’t afford to buy it, do we have real food security?

Generating better incomes worldwide are just a piece of the food puzzle. By 2050, we could see global income levels increase nearly three-fold, as economic growth continues in Asia, and other key economies around the world. Food consumption will double as a result of this population and income growth.

As incomes rise, demand changes. As people have more disposable income, they want different foods – less starch and more protein, for example. People will expect more chicken, pork, beef and milk with all the environmental and resource-use issues that come with expanded animal production.

To make things more complicated, much of that growth will occur in urban settings. But as they say, we aren’t making any more land. Perhaps more noteworthy is the fact that half the world’s farmers today can’t feed their own families. So just saying “let more people farm” isn’t an option. We must make the best possible use of the resources we have to contend with this daunting challenge. And by resources, I mean not just our natural resources, but our human resources. We can’t just work harder to feed the world. We must work smarter.

Earlier this year, the United Nations generated a lot of publicity when it reported that food prices had climbed 39 percent in the past year, and had contributed to political unrest in several hot spots around the world like Egypt.

The link between food security and political stability should be obvious. But here in the richer countries of the world, we can lose sight of that simple fact. We may not have to worry much about food riots on Hennepin Avenue. We take pride in the productivity of the American farmer, and we should. We take comfort when experts tell us we still have the capacity worldwide to generate enough calories to feed the global population.

But we need to understand that political instability in places like the Middle East and Africa can have important consequences for us. Just as important, with the wrong policy decisions, we will not keep our productive capacity ahead of rising global food demand.

As a businessman, I look at what we are doing here in the United States and elsewhere around the world and I see a formula for the price volatility that has rocked the commodity world in recent years. Also, I see a substantial risk of rapid and significant increases in food costs. Supply and demand are in precarious balance. From a longer-term perspective, our productive capacity isn’t keeping pace with population growth and food demand. And we‟re not helping the situation with public policies that inhibit the smart use of our global natural resources.

Let me give you just a few examples of things that play a role in driving higher food prices.

First, let’s think about our belief that “organic” immediately means “better.” It may make us feel better on the assumption anything ‘organic’ is somehow more pure and natural. But it also offers considerably lower yields, and frankly, poses its own food safety problems. USDA just expanded the range of e coli strains to be tested in beef. We should extend that concern to at least some organics.

Similarly, we see a lot of people arguing against the use of improved genetics, most notably in seed genetics. Some say it somehow tampers with nature and leads to that most evil of all things – “Franken-foods.” Anything that smacks of “intensive” farming is automatically bad, according to others. But how can anyone object to a seed that increases yields and income, requires no tillage, uses less water, does not require pesticides nor insecticides and uses less fertilizer?

I can’t help but see this blind opposition to scientific progress as something regrettable. I see a world with serious challenges to food security but hear a debate that sounds remarkably like what Copernicus and Galileo must have faced hundreds of years ago.

I don’t mean to disparage the views of genuinely concerned people. Debate is healthy. But let’s have debate, not shrill nay-saying and denial of an unpleasant reality.

Keep in mind the numbers I gave you earlier about population and hunger. The truth is, our ability to meet the challenge of feeding 10 billion people – while preserving our natural resources – is linked directly to the smart use of exactly this kind of technology – and its use in helping reverse the poor management practices that compromise ag productivity around the world.

If we don’t focus on using the best resources in the best way for food production, we run several risks. We will see more people trying to bring land into production.

We’ll see overuse and misuse of crop inputs, with the associated waste and – perversely enough – even greater threat to our environment and natural habitat. Thanks to the incredible skills of the American farmer we just don’t see how big a problem that is on a global scale. But it exists.

And let me start to wrap up these remarks with one of my favorite examples of the consequences of bad decision-making. Let’s talk about ethanol for a minute.

We all know how the current ethanol policy came into being, and all the reasons its proponents cited for such a massive effort by government to create and manage an artificial market.

Ethanol would do wonderful things for us.

It would reduce our dependence on foreign oil. It would create jobs and economic activity, especially in rural areas that desperately needed such help.

Ethanol would clean up our environment and promote better health, due to reductions in carcinogens.

All that was required to bring ethanol to life was an estimated 53 billion dollars in federal subsides by 2015. The federal government offered a substantial tax credit for each gallon produced, and mandated a steadily increasing use of ethanol in our gas supply. Today, about 90 percent of gas sold in the United States is blended with ethanol – and we have mandated increases in its use still to come.

Creation of policy like this places ag companies in a no-win position, which is why so many in the industry have been reluctant to speak up. Years ago, many of us warned against this policy, but we lost the debate. And once such a far-reaching program came into being, there was no choice but to compete as best we could. Some people can’t grasp – or accept – that it is essential to remain competitive in order to survive in agribusiness. But ask anyone in the business – or better yet, anyone no longer in the business, of whom there are many. Competitiveness is essential.

But in the past year or so, there’s increasing evidence that more and more people realize the true and far-reaching consequences of what we have done. More and more people inside the agricultural community have realized that bad ag policy is no cure for bad energy policy.

Ethanol has gone center-stage in the larger middle-class tax revolt against questionable federal spending. More and more people question whether it’s smart to use so much of one of our cornerstone commodities – corn – for fuel.

Let’s be clear. Ethanol from corn is not the sole cause of food insecurity and price volatility. Many, many factors contribute to that problem – weather problems, for example. More bothersome to me are things we generate on our own, despite the lessons of history … export bans, and other government-imposed trade restrictions and interventions in the markets.

To me, ethanol does indeed have a place in a comprehensive U.S. energy policy. It’s the reliance on corn as the predominant source of raw material that troubles me and so many others. I hope to see us move toward reliance on other stocks, just as Brazil has done. More important, we hope to see an ethanol program based on true market economics – not a market defined and managed by government.

But it is disingenuous to allege that current ethanol policy doesn’t play some role in our global food challenge. Today, four of every ten bushels of corn produced in this nation are going into ethanol production. Yes, you heard me right – 40 percent of our corn crop in the United States – goes to feeding machines, not people or animals.

No wonder editorial pages around the country are clamoring for an end to the ethanol program. No wonder more people are asking if having more ethanol for that drive to the mall – or to lock up those couple of additional percentage points in the Iowa caucuses – is really the right decision.

No wonder that World Bank President Bob Zoellick (“ZELL-ick”) would say this:

“While many worry about filling their gas tanks, many others around the world are struggling to fill their stomachs. And it’s getting more difficult every day.”

But here’s the rub, as Billy Shakespeare would say. As a society, we realize the policy we’ve created is seriously flawed. We know what should be done. But again, we have used a federally driven program to make substantial investments in plant and equipment … rural areas have become dependent upon the new economics created by an ethanol industry … politicians have built careers on their support for it … and exceptionally strong and well-funded lobbies have emerged to defend it.

My point is simple. Even in the most obvious situations, changing direction is tough. The challenge ahead of us is difficult. The consequences of not facing up to them could be catastrophic for all.

Our ethanol predicament reminds me of the old saying: The road to hell is paved with good intentions. I believe we need to keep that thought front and center as we make policy choices. If we make bad choices – even with the best and most noble of intentions – the result will indeed be hell for a great many people worldwide.

If you believe I’m exaggerating, just remember the television images we all saw recently about the famine in the Horn of Africa – where the UN says as many as 750 thousand people still are at risk of death due to famine in Somalia alone.

If I have sounded a bit like Cassandra this morning, it has been purely to gain your attention. And make no mistake about it, we need to pay very close attention to this issue – and start doing so now, not later.

You see, after a career devoted to this issue, I remain at heart what I call a rational optimist. I look at the empirical evidence and I see the capacity to feed a bigger, hungrier world. I believe we can meet the demand for more food – and just as important, do so in an environmentally responsible manner … one that preserves our capacity to feed our children and our children’s children, and beyond.

And at the risk of being provocative, I will repeat what nearly five decades in this field tells me will be the critical elements of the solution. We must find a way to embrace improved genetics … better farm technologies and management practices … and smarter, more thoughtful use of our natural resources both now and long-term … in solving the food security challenge ahead of us.

But it demands smart choices. There’s not enough time here today to spell out all the choices or to offer specific details on all these incredibly complex and difficult issues. But I can lay out what I believe are a few key tests we ought to apply to our ag-related public policy questions moving forward.

Let’s ask questions like these as we debate the right choices in our public policies for food and fuel.

Does it allow markets to function to the maximum extent possible? Markets allocate resources best – not subsidies and artificial price manipulations, and certainly not politicians and bureaucrats.

Does it advance our ability to trade freely and openly? Does it let people everywhere take full advantage of their comparative advantage?

Is it environmentally responsible? Is it the best use of our natural resources? Does it preserve our ability to meet future food needs?

Is it the right thing to do? This may be the trickiest question of all to deal with in a political context. But at some point, we need to realize that we’re all in this together, no matter where we live on this planet. We can’t just think about my needs. It has to be about our needs. You can take this as something “soft and fuzzy” if you like. I prefer to look at it as an application of the words used by Blake to characterize our school: Challenging the Mind, Engaging the Heart.

I’m happy to answer questions, and equally eager to hear your thoughts and ideas.

Thanks once again for allowing me the honor of being with you.

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