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By Robert Rapier on Jan 10, 2010 with no responses

Wood Versus Fuel

I know it has been a week since I put up something new. Some readers have also noticed that I haven’t been commenting much lately, and my e-mails are piling up. Things have just been really busy. I have a few guest posts that should be ready to go within a week or so, but I saw a topical story this morning that was worth commenting on:

The unintended ripples from the biomass subsidy program

The issue of incentives for biofuels increasing the demand for grains and thus helping drive up food prices is often called “Food versus Fuel.” There is also an incentive program (Biomass Crop Assistance Program) designed to encourage the use of biomass for heat, power, or biofuels. As is almost always the case, there were unintended consequences:

While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value.

“It’s not right. It’s not serving any purpose,” said Bob Jordan, president of Jordan Lumber & Supply in North Carolina, even while noting that he might be able to get twice as much money for his mill’s sawdust and shavings under the program.

“The best thing they could do is forget about it. All it’s doing is driving the price of wood up.”

Sounds like “Food versus Fuel” except in this case it is the cost of wood – not food – that is being driven higher. The thing is that there are always trade-offs and always unintended consequences. We have to be wise enough to change policies in cases where the unintended consequences outweigh the benefits. But you have to look at the big picture as well. Were there also unintended benefits? Things like that must be considered.

In this case, I don’t know whether the unintended consequences outweigh the benefits. I think it is too early to know for sure. But in any case, higher cost biomass is something I expect in the future. I made this point in my presentation at the Pacific Rim Summit. If your business model is based on either tipping fees, or just free or very cheap biomass – then I doubt that model is sustainable. I think as more companies attempt to turn biomass into fuel, competition will heat up and free or negative-valued biomass will be a thing of the past.

Therefore, I think the safe bet is to plan for 1). Escalating biomass prices; 2). No government assistance. I have no objections to getting started with government assistance, but if you don’t have a clear plan for operating in a subsidy-free environment, then you may just be wasting taxpayer money up until the point that your business fails because conditions changed (in a way that you should have anticipated).