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Monday, March 6, 2017

Government policies and the bioeconomy

Policy stability is a critical component of building any kind of industrialised society. When evaluating a proposed investment into a new plant, bankers and other investors all want to see a detailed business plan, with a decent proforma over 20 or 30 years, showing capital repayment and eventual profits. This is especially true in capital-intensive industries. A key part of policy stability is stable taxation rules.

When governments change, even in swings from one extreme of the political spectrum to the other, the incoming finance minister or treasurer will usually be very careful about making sudden, sweeping changes to taxation policy, even if the party campaigned on the flaws of current policies. Any changes made will be gradual, and will be telegraphed well in advance through conversations with business leaders and the press. Stability here is absolutely critical to preventing capital from moving elsewhere. 

The current uncertainty around Renewable Fuel Standards (RFS) in the US, and around carbon pricing in general world-wide, is a major obstacle to the development of a bio-fuels industry. New governments will tread carefully around taxation, but see no problem making radical changes to carbon pricing policies early in a new mandate. 

Why is this? One reason is that carbon pricing is driven by environmental considerations, not the views of Treasury or Finance people. The folks at Environment have their hearts in the right place, but one's position on the environment is more of a visceral reaction ('right', 'wrong'), while Finance is run by accountants and economists with a basic set of rules to go by - 'right' and 'wrong' don't come into it, it is all supposed to be a science. (I am aware of the science which shows that climate change is real and man-made; I am also aware that many do not consider economics a 'science'. I am making the point that one's response to environmental issues is more likely to be emotional, and tied to one's political affiliation, than one's view of the tax act.)

In public, large players in the petroleum and petro-chemicals industries will applaud carbon pricing schemes, and will imply that the adoption of these schemes will accelerate the implementation of novel bio-products. The reality is that the only business plans that depend on carbon pricing come from start-ups. Large industrial players want a business plan that works under current taxation rules (which they assume will remain stable even with a radically new administration) but with no benefits assumed from carbon pricing (which they assume will NOT remain stable from one administration to the next).

To be fair, a more subtle and perhaps more realistic view is that business wants stability. Whether that involves carbon pricing or not is immaterial; what matters is that once it is decided and implemented, it can be incorporated in a proforma that you can take to the bank, with a reasonable expectation that it will remain stable over 20 years. 

What needs to be done? Make carbon pricing part of the tax act, and give it to the bean counters at Finance to manage. Make it simple but effective; base it on solid accounting procedures; make sure it is revenue neutral by clearly identifying other changes to the tax act that will compensate; most importantly, build on the idea of new jobs, generating new tax revenues, from this new industry rather than focusing on the costs and on the potential for environmental disaster. Oil and gas exploration credits are based on the idea that a large oil and gas industry will generate lots of taxable economic activity; carbon pricing should be based on the idea that a large bio-industry will do the same, with potential environmental benefits thrown in as a bonus. And like Brazilian support for ethanol from sugar cane, you can make it clear from the outset that support will decline as the industry reaches a point of standing on its own.

Meanwhile the bio-chemicals industry, which may be less reliant on carbon pricing than bio-fuels, is a better bet moving forward. Bio-fuels, especially second generation bio-fuels, are really only cost-competitive with petroleum-based fuels at oil prices well above $100 per barrel, while some bio-chemicals stand a chance at oil prices closer to $50 per barrel. I am not alone in this opinion; the French giant Total agrees. To read more, click here.

Comments? For public discussion, please use the comments box below, or write to me privately at tom (at) Thanks for reading!

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