The Regional Impact of Biofuel Economics

Abstract

The European Commission has developed a series of regulatory measures to introduce alternative energy technologies, including a binding target for a specified share of biofuel in petrol and diesel, in European Union (EU) member states. The instruments to achieve this goal include taxation, subsidies and legal restraints. Biofuel suffers from the problem of being uncompetitive, and the intervention addresses the price gap between conventional fuel and biofuel.

The enthusiasm for biofuel is particularly high in peripheral regions such as the northern provinces of Sweden and Finland. Expectations include renewed economic growth and employment opportunities. However, when studying the economic impact of the biofuel regulatory framework with the help of the concept of property economics, it becomes clear that the framework generates investment in biofuel production due to distorted price signals and expected profits. From the perspective of property economics, the biofuel framework challenges property rights as it requires people’s appropriated means to be put into the effort of biofuel production. The artificial change of investment conditions may lead to the formation of an investment bubble. This distorts the interweaving structure of capital goods, which contributes to the manufacturing of biofuel, including machinery and wood products. As bubbles are bound to burst, people in the affected territories may be left with a lower living standard and greater exposure to the consequences. Therefore, the biofuel regulatory framework leads to unsustainable conditions.

JEL Classification: O10, O20

Keywords

Property economics Energy economics Government intervention Welfare biofuel Sustainable development

1. Introduction

The European Commission has developed regulatory measures that focus on the rapid diffusion of alternatives to conventional energy technologies. Measures include a binding target of a 10 per cent share of biofuel in petrol and diesel in the member states of the European Union (EU) by the year 2020 (European Union, 2009, 2016; Wiesenthal et al., 2011). The promotion of biofuel is highly relevant in the Northern European countries, as Sweden and Finland in particular are promoting the use and production of biofuel. Reflecting this, the Finnish government has increased the target to a 20 per cent share of biofuel in conventional fuel by 2020 (Lovio et al., 2011; Ministry of Employment and the Economy, 2010). The Swedish government has decided that the country’s car fleet will be independent of conventional oil imports by 2030 (Regeringskansliet, Sweden, 2010; USDA Foreign Agricultural Service, 2009).

Being especially forest-rich with great potential for bioenergy, the northern provinces of both countries are enthusiastic about biofuel production. This response has to be seen in the light of the apparent opportunities promised by alternative technologies like biofuel. Thus, the regulatory framework appears as an answer to the economic development problems faced particularly by the northern provinces. Both the Swedish and Finnish forest clusters have undergone major changes, which have resulted in a decrease in production capacities in more traditional fields, such as pulp and paper manufacturing. Therefore, new focus areas had to be developed, including biofuel production (Hetemäki & Hänninen, 2009; Kangas, Lintunen, Pohjola, Hetemäki, & Uusivuori, 2011). The organisation of the forestry industry as a cluster has created a regime where larger changes have far-reaching impacts on other companies, including on capital goods manufacturers and forest owners. This makes the general commitment to sustainable development by national and regional governments and companies understandable. The focus is on the creation of sustainable employment opportunities to counteract the population outflow from the northern provinces. Hence, the commitment is followed by support for the construction of a biodiesel refinery in Kemi, Finnish Lapland, and continued support for the expansion of biofuel facilities in Norrbotten, Sweden (Demirbas, 2009; Kusar, 2012; Norrbotten County Council, 2005; Regional Council of Lapland, 2009).

However, a regulatory framework like the one on biofuel is a typical example of top-down governance, as it is mostly concerned with what is technologically possible and politically desirable. While it is broadly based on considerations of economics and development, it ignores the actual functioning of the economy. A new technology is only successful if it is economically useful, that is, productive, so that investment in it makes sense (Collantes, 2010; de Carvalho Lopes, Neto, & Martins, 2011; Mickwitz, Hyvättinen, & Kivimaa, 2008). Such a policy has a profound impact on the economy when being implemented through national legislation, so we need to understand how legislation relates to the economy and whether the framework’s top-down development approach is working in the long term and leading to continuous and sustainable development with all its known benefits. To do so, we refer to the concept of property economics, which studies the economic implications of acquisitions. After all, any management problem or conflict deals at its core with the question of ownership, and legislation will modify property rights (Hülsmann, 2004).

Given the significant political momentum, we recognise that the government commitments have resulted in remarkable interventions in the market. Interventions, however, may produce severe distortions of prices and production structures. The economic analysis which follows the review of the property economics concept suggests how these distortions affect people’s actions and decision-making, subsequently impacting on their welfare. First, however, we briefly introduce the main aspects of the biofuel regulatory framework.

2. The Biofuel Regulatory Framework

Biofuel refer to broad group of different energy sources, including solid and liquid biofuel. It includes wood, as it may be used to produce heat in houses and power plants, by-products of the wood industry, but also peat and other energy products stemming from agricultural production (Heinimö & Alakangas, 2006). This article, however, deals solely with the economic context of the production of biofuel in the form of ethanol and biodiesel, which are used to replace their conventional counterparts.

Policies, which list justifications as well as means for government intervention, follow the logic of environmental economics, which is essentially concerned with increasing social welfare. The policies are, thus, based on the assumption that the consumption of a certain commodity, which is made more expensive through a tax, is going to decline. In contrast, a commodity which is not provided by the market in sufficient quantity is subsidised in order to increase its production (On government intervention for welfare economics, see: Blomqvist & Lundahl, 2003).

2.1 Enforcing Action

As mentioned, the European Commission has developed a series of measures to increase energy efficiency and reduce energy consumption. These have been bundled in the EU’s climate and energy package of 2009 (European Union, 2009, 2016). It prescribes an increase in energy efficiency to achieve the following targets: a reduction in EU’s greenhouse gas emissions of at least 20 per cent below 1990 levels, a requirement that 20 per cent of EU’s energy consumption comes from renewable resources and a 20 per cent reduction in primary energy use (compared with forecasted levels under a do-nothing scenario, which implies no government intervention). The package is legally binding and thus enforces action on this matter.

The energy and climate package includes a mandatory 10 per cent share of biofuel in conventional fuel by 2020 in the EU member states. Within this, Finland has made biofuel its focus and doubled its commitment compared to the EU demands, to increase the share of biofuel to 20 per cent in conventional fuel by 2020, including a 6 per cent share in the period 2011–2014. All fuel distributors who are active in Finland have to deliver the appropriate share of biofuel to the market (Heinimö & Alakangas, 2006; Ministry of Employment and the Economy, 2010; Palmberg & Viljamaa, 2011). The Swedish government has raised the bar higher and prescribed a goal of having all cars in the country independent from conventional fossil fuels by 2030. Its long-term plan to achieve sustainable development focuses on the use of biofuel and, as in the Finnish case, all fuel distributors active in Sweden must provide access to biofuel across the country (Regeringskansliet, Sweden, 2010; USDA Foreign Agricultural Service, 2009).

2.2 Taxing the Competition

The EU’s energy and climate package includes the implementation of a number of instruments, including financial instruments, which are thought to be market based. Their aim is to alter the market price of certain commodities in order to support the production and consumption of biofuel (Timilsina, Csordás, & Mevel, 2011). The EU’s only reference to taxes is the emission trading scheme (which acts like a tax), which aims at reducing emissions and which supports the development of alternative technologies (European Union, 2009). Additionally, the EU Community framework for the taxation of energy products and electricity contains minimum tax rates for conventional fuel and states that EU member states may exert partial or complete tax exemptions in the case of biofuel (European Union, 2003). The EU member states have focused on taxes levied on car-use. For example, both Sweden and Finland have reformed their car taxes in general to motivate car owners to buy smaller and more fuel-efficient cars. Taxes include registration tax, annual vehicle tax and energy tax. The Swedish government in particular is keen to promote the purchase of cars with so-called flexifuel technology, which can use both conventional and bio fuel (Palmberg & Viljamaa, 2011; USDA Foreign Agricultural Service, 2009). The governments of both countries have raised the energy taxes levied on petrol and diesel; Sweden has exempt biofuel from taxes, and Finland has levied lower taxes on biofuel than on conventional fuel (National Board of Customs, 2012; USDA Foreign Agricultural Service, 2009).

2.3 Subsidising Biofuel

A regime of subsidies has been put in place by EU member states to reduce the costs of producing biofuel—implying that the costs have been socialised. Subsidies are of various types, including investment facilities for renewable energy installations, which also serve to accelerate the deployment of new technologies. In addition to funding start-ups, public investment is also focusing on research in biofuel. Different levels of government are also funding various research programmes, such as the transport research-related EU Green Cars initiative and BioRefine of the Finnish technology funding agency Tekes, which promotes new solutions in biofuel in close cooperation with businesses and academia (Palmberg & Viljamaa, 2011; USDA Foreign Agricultural Service, 2009). Further, the use of cars which use biofuel may be subsidised: Sweden in particular has favourable taxation for this. Funding has also been extended to support the installation of biofuel production structures in rural areas, which mainly provide energy wood in forestry and which has an important role to play in the northern provinces. Support of this kind is given in Sweden by the country’s rural development programme and in Finland by the Ministry of Employment and Economy (Palmberg & Viljamaa, 2011; USDA Foreign Agricultural Service, 2009).

3. The Economics of Property

Property is an important concept in economics. To social theorist Niklas Luhmann, property is an integral part of the modern economic system, which is differentiated based on monetary exchanges, and which only take place when property is transferred with each money transaction. In Luhmann’s theory, the economic component of a concrete payment is complemented by a legal component, which refers to ownership. Property is, thus, always to be understood as private property. Payment is tightly linked to ownership, and anyone who is not an owner is excluded (Luhmann, 1988, p. 149).¹ But how are resources or artefacts made available for transactions in the first place? In Hans-Hermann Hoppe’s view, private property extends to scarce physical resources, appropriated by means of one’s labour, which are used by individuals in order to act and advance. If, on the other hand, nobody owns anything other than their own body, then humans would cease to exist and society would be unsustainable (Hoppe, 2006 [1993]).

This somewhat broader perspective on appropriating property is useful in the context of less developed or emerging economies, which may often not be fully differentiated based on monetary exchanges but may be based to a significant extent on a subsistence economy. For the appropriation of assets there are only three possibilities. First, assets can come into one’s possession through the direct appropriation of unowned resources, which were perceived as scarce, before anyone else does so. Second, assets can come into one’s possession when they are produced by the means of one’s labour based on previously appropriated resources, that is, property is created through physical transformation. Third, assets can come into one’s possession through voluntary acquisition, that is, through exchange from a previous appropriator or producer (Hoppe, 2006 [1993]).

Hülsmann suggests looking at the laws of appropriation from the perspective of counterfactual laws. This gives us a model for the impact of legislation on the economy, within which appropriation can fall into two categories, namely, justifiable and unjustifiable. The justifiable means to acquire property apply to the ways of appropriation as described earlier by Hoppe. The unjustifiable means, on the other hand, apply to all other cases where an invasion of property occurs (Hülsmann, 2004).

Hülsmann points out that there is a dichotomy between the two categories, and a choice in favour of one option precludes the other. For example, buying a good precludes stealing it at the same time, and vice versa. Therefore, a comparison between the two possibilities of acquiring assets is counterfactual, as it is an analysis of what could have been instead of a chosen course of action. Exchanging one good for another, for instance, benefits both parties, while stealing a good benefits only one party. An understanding of what could be instead of a course of action enables us to derive laws of appropriation. Hülsmann calls these a priori laws, since they exist irrespective of any particular state of society or legal framework (Hülsmann, 2004).

Property economics does not study who owns what. Rather, property economics studies the implications of just or peaceful versus unjust or violent acquisitions. Economics presupposes that property exists. Any legal framework that modifies property rights will, therefore, have profound impacts on decision-making (Hülsmann, 2004). The view is held that positive law cannot overrule the constraints set by a priori laws. The following subsections highlight the nature of the biofuel regulatory framework from the perspective of a priori laws and how the framework affects concrete biofuel economics and sustainable development overall.

3.1 Counterfactual Analysis in Practice

It is important to understand that property rights can only be attached to physical objects. People own things with objective, physical boundaries. In turn, they do not own the value of those things. Action requires, as mentioned earlier, property rights, including the rights to one’s body to act, and includes assets directly appropriated through one’s actions. It is not possible to act or to make any proposition without having the means at hand to do so (Hoppe & Block, 2002).

Moreover, a person could not act if he or she had to take into account the possibility that the action may alter the value of someone else’s property. After all, whether or not somebody’s actions affect the value of others depends on others’ evaluations. Such a situation is very common: for example, entering a market in a particular industry will generate unwanted competition, thus reducing the relative value of the offered good or service. Entering a market does not, however, impair somebody’s physical integrity. Thus, if there were property rights in values, a person could not act, as prior to an action a person would have to inquire whether the action might affect someone else’s property value. An inquiry, however, requires action (Hoppe & Block, 2002).

Despite these findings, property-rights-in-values forms a common basis of present day political decision-making and finds its way into legislation. Hoppe and Block consider this notion of property-rights-in-values non-operational in a practical sense if the resulting legislation is fair. The only way legislation on this basis can exist is when person A tells person B what he or she may or may not do in order to not impair A’s property. This, however, would imply that nobody else has actual command over his property, that is, that B possesses neither the value nor the physical integrity of his or her possessions. It is operational only if it forms the basis of an exploiting regime, as it will privilege one person or group over another. Legislation of this sort does not qualify as just since it is not universally the same for everyone (Hoppe & Block, 2002).

We suggest that the biofuel regulatory framework as described previously, which uses taxation, subsidies and restraints, is based on the property-in-values notion. The framework favours one group in society, in particular biofuel producers and corresponding investors, over others, that is, those who prefer conventional fuel. It increases control over the means of one group and diminishes or restricts the means of the other. Our suggestion is based on the belief that nobody can impair anyone else’s physical property, thus, no restrictions or retaliations can be justified.

4. The Economics of Biofuel

The biofuel regulatory framework contains a range of financial instruments to support the production of biofuel. These instruments exist because biofuel suffers from the significant disadvantage of being more expensive than its competition product, which is conventional fuel based on crude oil. This is reflected in the recognition that for the Finnish semi-state-owned energy company Vapo, the development and commercialisation of an innovative biofuel production technology requires a sound business foundation (VTT Technical Research Centre of Finland and Vapo Energy, 2006). Vapo was the major developer of the planned biodiesel plant in Kemi, Finnish Lapland until 2014. Unable to detect a sound business foundation to the venture, Vapo decided to quit the development project. Since 2016, the Chinese company Kaidi Group has established a subsidiary in Finland and taken over the project of establishing the biodiesel plant. The plant is scheduled to open in 2019 (Hannukainen, 2014; Nilsen, 2016).

If biofuel production were profitable, no subsidies or other measures would be required. Companies employ capital based on the production of a particular commodity that ought to provide a reasonable return on investment. Capital goods manufacturers who produce a particular commodity would attempt to make a sufficient return on their investments that will enable them to continue to produce. In the absence of a market, the biofuel regulatory framework makes it appear attractive to engage in biofuel production, with significant consequences.

First, no calculation of profits and losses is possible without a market. Government intervention produces distortions, so that the price cannot serve as the core factor to determine inputs in the production process based on consumer demand. In a market, the factors of production are aligned in such a way to satisfy the most urgent consumer needs (Mises, 1998 [1949]). An intervention has the goal of promoting a particular production programme; thus companies enter an economic activity, which does not aim to serve consumers but is undertaken solely to meet the goals of the plan. The biofuel regulatory framework, thus, privileges a certain type of production and range of companies, with the same goals by replacing entrepreneurship with bureaucracy. This stance reflects the property-rights-in-value position, where one group, which supports the prescribed values, is subsequently favoured.

Second, there is a growing dependence on subsidies coupled with a socialisation of costs. The forest cluster as an inclusive regime affects many more companies and social strata than just the enterprises engaged in biofuel production. For example, as soon as forest owners benefit from rising raw material prices, they will be among those most keen to defend the government intervention. Recently, there has been a declining trend in the Nordic forestry industry, mainly due to a weakening of export markets and a decline in the competitiveness of Nordic production relative to competitors (Hetemäki & Hänninen, 2009). The biofuel regulatory framework, however, helps companies aligned with it, to increase their cash balances and subsequent profits. The costs, on the other hand, are socialised and borne by the taxpayer.

Third, because of the plan and the market distortions, the supply of capital inputs, such as wood, is reduced to other industry sectors, where they would be used productively and in the interests of the consumer. Consequently, there is a relative short supply of raw materials, which leads to a rising price for wood (Heinimö & Alakangas, 2006). Therefore, the biofuel regulatory framework has unforeseen impacts, which were not envisaged when the framework was developed. The change in the structure of production and consumption due to significant interference impacts a variety of markets.

Fourth, taxation as part of the package of measurements constitutes a challenge to private property. The voluntarism associated with cooperation and exchange in the market increases the net wealth of each participant. Taxation, on the other hand, is an involuntary act and benefits only one party, namely the government, while simultaneously decreasing overall welfare over time. Through taxation, a transfer of real wealth to the government takes place, which is meant for public expenditure, such as biofuel production. Since it constitutes a burden, it reduces the net wealth available to the individual (Hoppe, 2006 [1993]). In turn, if consumers could use their available means in any way they see fit, an almost infinite number of investment or saving possibilities would exist. Not only does the biofuel regulatory framework change the structure of production and consumption, the large number of choices and combinations of whether to spend or not are also impacted.

4.1 Economic Growth

An important argument commonly advanced through supporting policy programmes, like the biofuel regulatory framework, focuses on the necessity of economic growth for social well-being. This growth is particularly important in areas such as the northern provinces of Sweden and Finland, which have a lower potential for economic growth, as they lack strong elements of the national production structure. In accordance with the idea of sustainable development, biofuel production ought to stimulate so-called ‘green growth’, suggesting that economic development must be balanced in particular with environmental friendliness. Simultaneously, the global financial crisis, which has led to a general downturn and significant debt generation in many households, provides a well-received opportunity for government intervention (Organisation for Economic Cooperation and Development, 2010).

The biofuel regulatory framework is, thus, a means for government to stimulate economic growth in accordance with the concepts of green growth and sustainability. Alongside this policy, many government agencies and research institutes have developed programmes to identify potential growth areas, which fall in the broad category of sustainable economic business, predominantly concerned with lowering energy consumption and the sustainable use of resources. Accordingly, biofuel offers a new business opportunity and contributes to green growth (Lovio et al., 2011).

The regulatory framework aims to leverage the market by claiming that the market does not produce biofuel in sufficient quantity which is necessary to support the green growth argument. Hence, subsidies are required to increase demand for them, a strategy which is colloquially termed demand-side stimulation. This way a market for biofuel is artificially created. Demand-side stimulation is a growth in investment in a sector, which would not occur under market conditions. A growth in the supply of money is often believed to be indicative of economic growth in general: a common strategy among central banks is to inflate the supply of money in the economy, to help economic growth. However, an artificial market created through taxation and subsequent subsidisation constitutes merely a distribution of wealth, taking away means from productive use and channelling it towards activities which are arguably not productive. Real economic growth, which is characterised by a growth in the output of goods and services, is determined by the rate of savings used for investment in production. The impacts of a fiscal policy where taxes are distributed to generate a desired type of production may not be visible, as long sufficient productive activity is already taking place. If government intervention continues, taxation will diminish productive activities, and the rate of real growth will be significantly hampered due to the misallocation of funds. After all, an inflationary alteration of someone’s purchasing power lowers the relative share that can be allocated to investment (i.e., saving) purposes, in order to contribute to the improvement of an economy’s capital structure (Machlup, 1940).

Economic growth must not be confused with the growth of indices like gross domestic product (GDP). While it is possible that GDP grows, like a stock exchange index it would hardly grow were it not for a significant rise in the amount of money in circulation. This is due to the impossibility that the profits of all or at least most of the companies in an economic area would grow at the same time without the additional supply of money (Machlup, 1940). GDP increases with the money supply, as GDP growth is only possible if the price of each product, expressed in monetary units, rises to a certain extent. On the other hand, if the money supply remains constant, the total amount of money that companies can earn through their activities, and thus the GDP itself, would inevitably remain constant. Thus, the biofuel regulatory framework, by appropriating other people’s property, namely those engaged in productive activities, merely redistributes a part of that wealth, in accordance with the plan laid out in the policy.

4.2 Sustainable Job Creation

The creation of jobs is the second-most important argument after support for economic growth. As mentioned, job creation is especially important in the northern provinces of both countries, Sweden and Finland. With fewer employment opportunities but significant voting power, government intervention is believed to create the missing opportunities, which the market does not. Accordingly, biofuel production was intended to increase financial rewards particularly for small-scale producers, including wood producers, and therefore strengthen social security in the northern countryside (Norrbotten County Council, 2005; Regional Council of Lapland, 2009).

However, the transfer of funds to create employment in one sector comes along with a reduction in employment somewhere else. As mentioned earlier, Machlup’s argument, that not all or even the majority of companies in an economic area can grow at the same time, applies here, too (Machlup, 1940). Hoppe adds that changes in the money supply and therefore capital inputs available to industry alters relative prices through the distortion of production and consumption structures and the consequential modification of the demand for capital. This, however, does not imply a change in employment (Hoppe, 2006 [1993], p. 145). Jobs are not created through increased demand, that is, demand-side stimulation. New jobs in a company are the result of entrepreneurial efforts to create higher revenue per sold unit with any increment in employment (Hoppe, 2006 [1993], p. 141). Thus, jobs emerge based on productive economic activity.

Naturally, employment creation requires that a market exists for a particular commodity. The legislation surrounding biofuel ultimately redistributes means. When employment is artificially created, (productive) workplaces are not only at stake but are in fact destroyed somewhere else. Therefore, the biofuel regulatory framework does not contain any prospect for the creation of sustainable biofuel jobs in the northern provinces.

5. Economic Impact: The Biofuel Bubble

Biofuel production makes sense when the price for conventional fuel increases and the production costs for biofuel are reduced. Taxes and subsidies, the classical means of environmental policy, come into play in order to reduce the price gap. The law is used to ensure that there is a guaranteed outlet for the production. We understood that economic growth is generated through the improvement of the capital goods infrastructure, leading to a higher output of both capital and consumer goods in the future. Productive investment is based on real savings and not on the government-induced growth of money stock for the economy as a whole or in a particular industrial sector. The capital goods infrastructure is sensitively aligned. It is a perfect structure to serve consumer interests (Mises, 1998 [1949]). Government intervention changes this structure and mal-investment occurs. The artificial lowering of the social interest rate leads to an increase in non-productive activities, which, as an aggregate, reflects the balance of savings and investments at any point in time. This rise of non-productive activities, which as described is only possible with the help of government intervention, is a boom-and-burst phase, which we like to call the biofuel bubble.

A closer look at the interest rate is required to understand the consequence of its manipulation. The interest rate reflects individual time preferences; it is the outcome of the relation between savings and consumption and designates the premium for present goods over future goods. Accordingly, a high interest reflects a high time preference, implying that people save less and consume more means. In contrast, a low interest reflects a low time preference, implying that people save more and consume less, making means available for investment in order to increase future output (Hoppe, 2006 [1993]; Mises, 1940).

To repeat, the social interest rate is the aggregate value of all individual’s time preferences. In a coordinate system, the point where the savings curve meets the investment curve determines this rate. Government intervention reduces the interest rate, providing a false image of an increased willingness to save. Intervention tells companies that more money is available, which can be invested in capital goods in order to raise future output and lead to economic growth. With respect to companies engaged or potentially engaged in biofuel production, subsidies act in the same way as inflation of the money stock. More money in the economy, which is not backed by real savings, induces additional capital goods consumption, which had not taken place in market conditions.

However, the social interest rate, which reflects the sum of an individual’s willingness to save and consume, has not actually changed. Thus, companies in the market make the wrong assumptions and invest capital goods even though real savings do not actually cover this demand. Consequentially, the price for capital used in production will increase. Once the market realises that the actual social interest rate has not changed, the boom phase will ‘revert to normal’. Thus, there will be a downward phase, a recession. At this point, the biofuel bubble will burst and the mal-investment is liquidated (Hoppe, 1997, p. 69).

Government intervention not only affects the receiving biofuel manufacturers and taxpayers; it creates a regime that impacts on the entire biofuel production process, particularly the several capital goods manufacturers who provide the goods and services needed for production. Thus, the intervention in the form of the biofuel regulatory framework produces wide-ranging distortions in capital goods infrastructure, as all the companies involved respond to changes in the price signals by developing business plans and investments, which would not be considered under market conditions. The biofuel bubble is thus created by diverting means from productive, wealth-generating activities to unproductive activities. While it is inevitable that the bubble will burst, it may take years until the government changes the regulatory framework to slow down or stop the diversion of means through taxes and subsidies. The government may also simply raise taxes to continue supporting biofuel production, but this can only continue as long as there is sufficient productive economic activity.

Since biofuel production is financed through intervention, it does not raise economic growth. Instead of producing benefits, the regulatory framework distributes wealth, and the companies involved in biofuel production benefit most from this because they are at the higher end of the distribution scheme. The boom at the beginning of the bubble creates illusory profits. However, the inevitable burst likely lowers the standard of living (Rothbard, 2001 [1962]).

6. Other Welfare Impacts

As shown, taxes are used to generate mal-investment. We understood the economic impact of the biofuel regulatory framework as it manifests itself in the form of the biofuel bubble. But what happens to the people who are taxed? This is a particularly relevant question in the context of property economics. When taxes change the time preference of actors, production and consumption structures are modified. This leads to lower production and, hence, to lower future consumption. Lower production will increase commodity prices, which mainly affects the less well-off. Consequently, the northern and other rural communities will not only be hit by an economic downturn and rising unemployment but also by rising prices and fewer means for future investment.

We can make such a statement because biofuel production is especially embedded in the forestry industry. Forestry is still the backbone of the Finnish economy and is among the largest industries in Sweden. It is also a largely family-based activity, despite its domination by large, international corporations. For example, 80 per cent of the Finnish wood production comes from small family-based wood producers. In Sweden, the forest sector has the largest net exporting value of all the industrial sectors in the country and is especially important in the economy of the more sparsely populated areas of the north (Jylhä, 2007; Noltfox, 2012).

Thus, a development such as the biofuel regulatory framework that affects a significant part of the population, as many capital goods manufacturers, their employees and families will be exposed to radical changes, will place many people at risk. When the biofuel bubble cannot be upheld anymore, the burst may leave the territories in question with reduced industrial activity and high unemployment. In the process, the bubble, which has been maintained by the biofuel regulatory framework founded on taxation, subsidies and tight legislation, will consume a significant share of people’s own wealth, which is the foundation for future well-being and welfare (Boeters & Koornneef, 2011; Böhringer, Rutherford, & Tol, 2009; Jaeger & Egelkraut, 2011; Kretschmer, Narita, & Peterson, 2009).

We may, moreover, consider the environmental dimension of biofuel production in this section. Two issues are particularly noteworthy. First, in the context of environmental change, wealth has been considered especially significant in determining the capacity to adapt to change (Smit et al., 2001). This is especially true where such a change cannot be mitigated. If, however, government intervention socialises the risk associated with entrepreneurship and pushes through a production programme, it places many more at the risk of failure to successfully adapt to change. This is due to our understanding that wealth is diminished when the biofuel bubble bursts.

Second, biofuel production is economically inefficient. The biofuel regime requires a lot more energy for the simple reason that the large-scale biofuel production envisaged in the biofuel regulatory framework requires government support to function. However, the huge state apparatus to make laws, collect taxes and redistribute them, and so on, is very costly. Consequently, there is a higher degree of physical change involved in biofuel production than in the production of an equivalent commodity in the market.

Finally, government intervention takes place at the very least to achieve the conditions of a pre-defined state in society, which is expected to provide the optimal level of social welfare. However, the presumption of what is an optimal state—in other words, a common value judgement across society—is a normative idea. Costs and values are subjective, after all (Brownstein, 1980; Herbener, 1997). Hence, from the perspective of property economics, welfare from the government’s point of view reflects a property-rights-in-values notion in the legislation. Government intervention distributes means, and a distribution of means to achieve some state considered more optimal fails to improve welfare for everyone involved (Herbener, 2009). In property economics, however, welfare is founded on the rules of just appropriation. Accordingly, any voluntary action increases our welfare, since it is our wish to act. The biofuel regulatory framework is not a voluntary framework. Means are appropriated in an involuntary way. These are means, which could have been used differently and productively and, hence, the framework fails to improve welfare for everyone involved.

7. Conclusion

The biofuel regulatory framework focuses on enhancing biofuel production in the northern parts of Sweden and Finland. Two factors play a large role: extensive forest lands, where wood is used as a raw material in biofuel production and weak economic capabilities in the northern areas. The state rationale suggests support in the form of subsidisation.

The economic analysis undertaken in this article proposes a different outcome than the one perhaps anticipated in the European energy and climate package and its national implementations. For a start, price competitiveness is not a given in the case of biofuel. On the contrary, the biofuel regulatory framework may lead to an increase in commodity prices due to the potential formation of an economic bubble. Compared to alternative production based on markets, biofuel production is actually unproductive and economically inefficient. This also implies that, while the potential in terms of raw material availability seems great in the territories concerned, political impulses cannot override the economics of biofuel production.

We have explained that property economics studies the economic implications of acquisitions, that is, the economic impact of legislation. The analysis undertaken in this article has shown that property rights are significantly modified when government intervenes with its biofuel regulatory framework. Taxation is complemented by the legal requirement to use a biofuel mix, which in turn generates mal-investment and changes in the consumption and production structures. The developers of the biofuel regulatory framework consider the market a hindrance to their perceived value of producing and consuming biofuel instead of conventional fuel, which can only be achieved with the help of government intervention. Hence, the biofuel regulatory framework is not based on a recognition of property rights in physical means, but is based on a one-sided construction of rights in values. A counterfactual analysis tells us what would occur under government intervention compared to what would be without intervention. Thus, in prevailing market conditions, the means are used in the most optimum manner, and real savings can lead to economic growth and to job creation. In contrast, the misappropriation of means for a large-scale project like biofuel production could lead to the formation of an economic bubble. The bursting of the bubble is likely to leave the territories in question with reduced economic activity and employment, for which the taxpayer will continue to be held responsible. The diminished wealth—keeping in mind the liquidated private investment and invested tax money—will likely reduce the funds available for future investment. This could reduce future welfare and lead to a lower living standards due to higher prices instead of lower prices. Such a situation would not be deemed sustainable.

Footnotes

Notes

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