Let Ethanol Subsidies Die

A policy that free marketeers and militant greens can agree on


It's a very rare occasion when a free marketeer like me agrees with the green fanatics over at Friends of the Earth, but they are right about one thing: It's time to let ethanol subsidies die. In 2004, the government started offering a tax credit worth 51 cents for each gallon of gasoline containing 10 percent ethanol. The 2008 farm bill lowered that credit slightly to 45 cents per gallon, but kept it going for another two years. Meanwhile, diverting grain to ethanol production caused corn prices to soar, lining the pockets of corn growers and refiners while increasing food costs for humans and feed costs for animals. The good news is that unless Congress acts, the $5 billion in annual subsidies to corn ethanol will expire at the end of the year.

The bad news is that the Environmental Protection Agency (EPA) exacerbated the situation last month when it decided to raise the amount of ethanol that can be blended with gasoline from 10 percent to 15 percent for fueling late model cars. The EPA boosted the amount of ethanol that can be blended with gasoline because the industry is currently producing 13 billion gallons. Since the U.S. consumed only 138 billion gallons of gasoline last year, that brings ethanol producers dangerously close to maxing out their market—hitting the so-called blending wall. In the meantime, higher feed costs have driven farmers to cut their herds. In July the number of beef cattle in the U.S. dropped to the fewest since 1973 and the number of breeding hogs fell to near the lowest level ever. The decision to increase the blending limit will send corn prices still higher, prompting a coalition of food producers, grocers, and oil companies to sue the EPA in federal district court in Washington, D.C., seeking to overturn the ruling.

But why would an environmental group oppose a subsidy designed to decrease greenhouse gas emissions, even if it is expensive? It turns out ethanol isn't so green after all. Even an analysis by the EPA found that current ethanol production techniques actually result in higher emissions of greenhouse gases than refining and burning ordinary gasoline. The agency did gamely outline scenarios in which future improvements in ethanol production could eventually get ethanol's greenhouse gas emissions 20 percent below that of gasoline by 2022. This past summer, the Congressional Budget Office (CBO) issued a report that was a bit more forgiving. The CBO report [PDF] found that ethanol subsidies did cut greenhouse gas emissions—at a cost of $750 per ton. By contrast, the current average price per ton of carbon dioxide emissions on the European Climate Exchange is just under $20 per ton. However, both the EPA and CBO reports present an overly rosy picture; neither accounts for the effects of devoting more land to biofuel production, which many analysts argue will substantially increase overall greenhouse gas emissions over those emitted by burning gasoline.

Failing to make a compelling case for the environmental benefits of ethanol, advocates often fall back on claims about energy independence. Surely, they argue, producing fuel on the fertile fields of the Midwest must decrease our reliance on foreign oil. But a recent analysis by Robert Bryce, a senior fellow at the free-market Manhattan Institute and author of Gusher of Lies: The Dangerous Delusions of Energy Independence, finds that ethanol has not reduced U.S. oil imports. Part of the reason is that ethanol substitutes for only gasoline while refining a barrel of crude oil produces many other useful products, e.g., diesel, jet fuel, liquefied petroleum gases, and so forth. This means that oil will be imported to fulfill demand for those products despite the amount of ethanol produced. In fact, the Financial Times reported earlier this week that since the U.S. ethanol market is so saturated that American refiners are now exporting ethanol-laced gasoline to Europe. This exported gasoline still receives the 45 cents per gallon tax credit, so that means that U.S. taxpayers are subsidizing European drivers. In an additional layer of irony, the U.S. also protects domestic corn growers and ethanol producers by imposing a 54 cent per gallon tariff on imported ethanol.

Finally, the 45 cents per gallon tax credit adds insult to the injury of the federal ethanol mandate. The Bush administration's Energy Independence and Security Act of 2007 [PDF] requires that the country produce and consume 15 billion gallons of ethanol by 2015, and 36 billion gallons of conventional and "advanced" biofuels by 2022. But if refiners are required to blend billions of gallons of ethanol into gasoline, why does ethanol need to be subsidized at all? The mandate means farmers will still reap benefits because more corn will have to be grown than what would otherwise have been demanded for food. Thus the current subsidy becomes a bonus gift from taxpayers to farmers and refiners.

It gets worse. Cornell University economist Harry de Gorter argues that the renewable fuels mandate combined with the ethanol subsidy actually lowers the price of fuel at the pump, encouraging drivers to consume more. This increases demand for oil imports to produce gasoline and raises oil prices, but the oil price increase is more than offset by the ethanol subsidy. Thus de Gorter and his colleague David Just show that when combined with the mandate the ethanol tax credit is "a pure waste as it involves huge taxpayer costs while increasing greenhouse gas emissions, local pollution, and traffic congestion."

American taxpayers have showered billions in subsidies onto corn farmers and ethanol distillers, all in the failed pursuit of energy independence and cutting greenhouse gas emissions. While free marketeers and green militants rarely agree, in this case we can join together in urging the lame duck Congress to end this fiscal madness by simply letting these wasteful subsidies run out on December 31st. 

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.