Monday, February 07, 2011

The Case for Flex-Fuel

Since I ripped Newt in the previous post while supporting the flex-fuel mandate, it might be a good idea to talk about flex-fuel and the difference between government creating demand and government creating a market.

I'm not against ethanol per se.  I'm against government forcing us to buy subsidized ethanol, especially corn ethanol.

I know I'm straying off the libertarian reservation here, but a mandate that new autos have flex-fuel capability is not the worst idea in the world.  Current ethanol policy is essentially social engineering in the form of farm price support.  Under current policy we must use ethanol -- food prices, efficiency, and environmental impact be damned.  Government has created an artificial level of demand, and is not allowing the market to balance the inherent trade-offs in using ethanol as a fuel..

With a flex-fuel mandate, government would of course be forcing you to buy $100 worth of engineering and gadgetry in your car, but would not actually force you to buy E85.  The "flex" part of flex-fuel means you can burn anything from straight gasoline up to E85 and everything in between.  The consumer would have a choice of fuels. 

A flex-fuel mandate solves a collective action problem in the distribution of E85 by creating a market rather than creating demand. Currently, so few individuals have flex-fuel vehicles that E85 pumps are scarce.  With a mandate, fuel suppliers would know that their customers are capable of using E85, and could choose to supply it at a level demanded by the market.  With free pricing of ethanol, consumers and suppliers will find an equilibrium price where E85 and gasoline are in rough price parity after adjusting for their relative efficiencies.

By having a diverse fuel source, we would be more insulated against price shocks from either the petroleum or the agricultural markets.  If there's a drought, we would naturally shift toward petroleum to pick up the slack.  If there's a geopolitical shock, we would shift to biofuels.  With flex-fuel vehicles, these adjustments would happen quickly and seamlessly.

In exchange for a flex-fuel mandate, I want a few concessions from King Corn:
  • Mandates and subsidies for corn ethanol are to be phased out within five years.
  • The tariff on imported sugar and ethanol is to be lifted immediately.
  • Nothing above E10 is to be sold as "gasoline".  (E15 is a non-starter... sometimes literally for small engines like chainsaws and snow-blowers.)

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