Faulty accounting has been the bane of many an infamous fraudster – Bernie Madoff, Nortel’s Frank Dunn, WorldCom’s Bernie Ebbers – and it’s distortions are also buried deep in ethanol economics. Faulty accounting leads to bad decisions by investors, regulators and lots of individuals, which is why we should strive for clear and fair accounting. Attach costs to the sources of revenues, avoid subsidies and you can avoid unintended consequences, which is something that I wish Congress paid closer attention to.

The Wall Street Journal today wrote about the magazine Science reporting that the whole bio-mass lobby has managed to manipulate the Kyoto Treaty (subscription may be required) rules (which are supposedly in process of being updated) so that biofuels are supposedly ‘carbon-neutral’ which gives unfair, preferential and eventually harmful treatment to biofuels. The authors estimated that by 2050, 59% of the planet’s forests will be converted to biofuel production.

The writers make the case that German consumers of ethanol pay no carbon tax on the ethanol-to-carbon dioxide production in their cars. The giant farms in Malaysia earn a carbon credit to convert native forests to corn production, removing the greatest sink for carbon dioxide being the massive forests covering most of the land. Taken to its logical extreme, people will strip the planet of carbon sink engines in the developing world, replacing it with money-making initiatives where the carbon credits are in fact easily converted to cash. This false economy will only accelerate the demise of our atmosphere since it favors one form of carbon dioxide over another. Fair accounting practices applied to biofuel would account for the opportunity cost of the loss of the forest cover and make the ethanol user pay for that cost. Of course, I have argued that the whole carbon tax regime is unwieldy, overly complex and costly in terms of jobs, standard of living and actual impact on the carbon dioxide dilemma (which I am thinking is probably more associated with the sun than us humble humans).

You don’t have to be a Nobel-winning vice president to see that even this nonsense is madness.┬áThis is another economic disaster in the making, except perpetrated on a global scale.