There were countless lessons shared during the podcast series and every listener will have a different set of takeaways. This week’s post is our reflection on policy lessons learned from ethanol that will help guide our thinking on the future of carbon markets.
Three Levers
At the outset, we knew the story of ethanol’s rise would require a review of the policy. Broadly speaking, there are three ways – or levers – a government can support or protect an industry:
- mandates,
- subsidies, and
- providing protection from competitors.
Of course, you’ll probably never hear policymakers stand up and say, “We are using option #2,” but these are the general flavors of policies used.
Ethanol’s rise was perhaps unique in that policymakers pulled all three levers of support. The most recognized policy was the Renewable Fuel Standard (RFS), which established the types and quantities of renewable fuels that would be utilized in the future. The mechanics of the RFS mandate gave rise to Renewable Identification Numbers (RINs) and the traded markets, the details of which were covered in Episode six.
Early on, a tax credit was provided to blenders of ethanol fuel as an incentive or subsidies for utilizing the fuel. There was debate as to who benefited from these subsidies – corn growers, ethanol plants, oil refiners, or gasoline consumers – but the goal was to encourage the production and usage of ethanol.
Finally, and perhaps least known, is a tariff the U.S. put on renewable fuel imports. Cheaper imports – ethanol from Brazil and biodiesel from Argentina or Indonesia- would face a tax. Ethanol from Brazil faced a small tariff (2.5%) but sent an economic signal to blunt the appeal of imports.
This is in no way a complete list of all the specific programs and policies deployed, but a high-level look at how serious and aggressive policymakers in 2005 and 2007 were about expanding ethanol’s production and usage.
Implications for Carbon Markets
What started as a goal of providing a base-level of knowledge ethanol policy – a short course of sorts – left us scratching our heads, wondering about the hurdles carbon markets need to overcome. What policy actions could be in store?
The most widespread support for carbon markets has been subsidies to standardize, develop, and scale carbon verification processes. It will be curious to see how efforts to incentivize producers to plant more cover crops intersect with markets that pay farmers for sequestered carbon.
On the other hand, mandates appear to have negative momentum. While voluntary programs are appealing, we wonder how they will play out in the long run, especially if the cost of compliance gets expensive. Ethanol mandates provide the market and investors with some confidence about the future of ethanol usage. How confident will carbon market participants be about the future, especially if large and long-term investments are required?
Finally, the global trade of carbon credits is an underappreciated factor at present. Some regions of the world will be able to produce and sell carbon credits at a much lower price than others. In the U.S., sellers of carbon credits will be excited about export opportunities, while carbon credit purchasers will be searching for low-priced imports. Will a robust export market make domestic carbon prices too high for buyers, or will cheap imports flood the domestic markets and push prices too low for producers?
Wrapping It Up
In thinking about the future of carbon and carbon markets, we’ll be watching how policymakers move forward with these three levers in mind. The current debate has emphasized voluntary carbon markets and support for establishing these markets. Our goal here isn’t to argue one way or the other but to lay out a framework and background. Policy always requires trade-offs as there aren’t many – if any – silver bullets.
In addition to the three policy levers, we also reflected on the scaling formula, pursuit of best, benchmarking versus practices, and technology in a recent AEI Premium article.
We encourage you to also reflect back on this season of AEI Presents and capture your own key insights and lessons learned. Invest a few minutes in collecting and writing down your thoughts. Very few of you will be compelled to type or write out your own summary, but doing so will clarify your thinking and makes it easy to share your thoughts and start a meaningful conversation with friends and colleagues.
