Writing in the National Post, the authors of a recently-released MLI report on government-funded biofuel support programs say there’s no evidence that they have been successful in achieving social and environmental benefits.

Douglas Auld and Ross McKitrick, the authors of "Money to Burn: Assessing the costs and benefits of Canada’s strategy for vehicle biofuels", say the evidence shows that federal and provincial governments should phase out the major components of biofuel programs.

Douglas Auld and Ross McKitrick, June 25, 2014

Since the turn of the century, biofuels production in the U.S. and Canada has soared more than eight-fold, driven by extremely favourable government support programs. In 2006, the new Conservative government announced its intention to accelerate and broaden the existing ethanol support system, beginning a major intrusion into the transportation fuel market. Through a combination of direct subsidies and blending mandates, the business of turning corn and other plants into a gasoline substitute called ethanol took off in North America.

The government’s stated goal was to reduce the emissions of greenhouse gases (GHG). In a new report for the Macdonald-Laurier Institute, we have examined the costs and benefits of Canadian biofuels policy, as well as the technical debates over whether their production and use even reduces GHG.

Ethanol displaces some fossil fuel use when it is blended in with regular gasoline. However, a litre of ethanol has less energy in it than a litre of gasoline, so you have to burn a larger volume of the blend to go as far as the equivalent amount of pure gasoline would have taken you. Determining whether use of biofuels reduces overall GHG emissions is difficult because of this factor, and also because the ethanol production process is very energy-intensive. Once researchers count up all the GHG emissions associated with the production and use of a litre of ethanol, they often find that there were more GHG’s emitted than during the production and use of a litre of gasoline.

For the purpose of cost-benefit analysis, even if the policy is cheap, if there are no GHG reductions, the cost per tonne of reductions is effectively infinite. So throughout our analysis we make assumptions that are maximally favourable to the possibility that biofuels do yield net GHG reduction in order that we can estimate the most optimistic possible benefit-cost ratio.

In economic terms, for a policy to be socially beneficial, the cost per tonne of greenhouse gas reduction policies should be at or below the conventional estimates of the “social cost of carbon.” By that measure, Canada’s biofuel support programs have been a clear failure.

Notwithstanding the fact that since 2008, there have been significant improvements in the technology to manufacture ethanol, therefore improving its GHG effectiveness, any reduction in GHG achieved by blending ethanol and gasoline continues to yield negative net social benefits. On a per-tonne basis, we estimate that the cost per tonne of CO2 equivalent reduction from production and use of corn ethanol ranges from $400 to $3,300 per tonne, and that from cellulosic ethanol is about $142 per tonne. This far exceeds the conventionally-estimated benefits of CO2 reduction of between $0 and $50 per tonne.

Put another way, over the 2008-2012 interval, allowing for very optimistic assumptions about the efficacy of reducing GHG from ethanol blending, we estimate that federal government biofuel initiatives cost Canadians between $3.00 and $3.50 for every dollar of social and environmental benefits achieved. Consequently the policy has failed to deliver value to Canadian taxpayers.

The most obvious recommendation to emerge from this analysis is the need to phase out the major components of current transportation biofuel policy on the grounds that the costs far exceed the social benefits and there are no realistic prospects for this situation to change.

If the government’s goal is to support the development of renewable fuels that have at least a theoretical potential to replace gasoline on a cost-competitive basis, a case can be made for limiting public research and development funds to cellulosic ethanol, namely the biofuel made from stem material of plants. But otherwise, our current biofuels policy yields only dubious environmental benefits and clear economic harm.

Douglas Auld and Ross McKitrick are economics professors at the University of Guelph and co-authors of the Macdonald-Laurier Institute report “Money to Burn: Assessing the costs and benefits of Canada’s strategy for vehicle biofuels.”

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