Monday, July 24, 2006

Global Warming Solutions: Khosla on ethanol

Khosla's kause:  ethanol

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Vinod Khosla is a highly successful venture capitalist who is betting on next-generation ethanol.  Khosla supports

tax and regulatory policies to persuade people to adopt ethanol.  He advocates (1) requiring car manufacturers to provide more flex-fuel vehicles, (2) requiring large gasoline distributors to make ethanol available, and (3) a variable ethanol subsidy that falls as oil prices increase.  Khosla's policy fixes are cheap: flex-fuel cars do not cost appreciably more than gas cars, ethanol could be available at every tenth gas station for $ 1 billion, and a variable subsidy could cost no more than the current subsidy. 

Interestingly enough, Khosla's ethanol advocacy comes at a time when the market seems likely to achieve his goals even without policy reforms.  Car makers are flocking to flex-fuel vehicles and gas distributors seem likely to meet the demand for ethanol -- it's just a matter of time.  And if oil prices stay high, the current ethanol subsidy seems likely to fuel conversion to ethanol.

How does Khosla's ethanol proposal rate on the criteria for a serious global warming solution?

(1) dramatic and attention-compelling

For a US program to have the desired global leadership effect, it must convince the rest of the world of the magnitude of the crisis and the US commitment to an effective response.  Imposition of ethanol related requirements on car manufacturers and gasoline distributors and reform of the ethanol subsidy are hardly dramatic and attention compelling.  They are little more than priming the already functioning ethanol pump.  In addition, the proposals address only the vehicle problem.

(2) contains incentives for global responses that mirror the level of US commitment

Khosla's solutions do not include such incentives

(3) market based

Khosla's solutions are command and control requirements and subsidies.  They do not meet the market-based criterion -- and they privilege one technological solution over others -- which does not encourage innovation or provide a relatively economically efficient regulatory system.

(3) grandfathers portions of existing emissions through allotments or entitlements

This criterion need not be met because the proposal is not based on marketable rights or taxes. 

(4)  transparent

The proposal is easy to understand, so it meets the transparency criterion.

(5)  effectively monitored and enforced

The proposal would be extremely easy to monitor and enforce.  We can readily count flex-fuel cars and ethanol pumps.

(6) politically sustainable

The proposal is politically attractive because it doesn't do much and doesn't cost much.  But is it sufficiently effective in addressing the problem that it can withstand political pressures down the road?  I think not.  It is not sufficiently broad to effectively deal with the problem.  Its just another subsidy program, privileging ethanol and flex-fuel vehicles.  When entrepreneurs seeking support for another emerging fuel mobilize, ethanol may well lose its privileged status under the proposal.


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