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Ethanol’s Policy Privileges: Heading for History’s Dustbin?

Congress has a golden opportunity to put the general welfare of consumers and taxpayers ahead of the corporate welfare of the ethanol lobby.

by
Marlo Lewis

Bio

December 3, 2010 - 12:00 am

The lame-duck Congress has a rare opportunity to avoid $25-30 billion in new deficit spending over the next five years, ease consumers’ pain at the pump, and scale back political manipulation of energy markets by literally doing nothing.

At the stroke of midnight on December 31 of this year, the 45¢ per gallon Volumetric Ethanol Excise Tax Credit (VEETC), commonly known as the blender’s credit, and the 54¢ per gallon tariff on imported ethanol, will expire.

A bipartisan group of 17 senators, led by Sens. Dianne Feinstein (D-Calif.) and Jon Kyl (R-Ariz.), say it’s time for these special-interest giveaways to go gently into the night. A broad coalition of environmental, taxpayer, hunger, free market, and food industry organizations are urging House and Senate leaders to let the VEETC meet its statutorily appointed fate.

An exciting prospect — for the first time ever, Congress may decide to put the general welfare of consumers and taxpayers ahead of the corporate welfare of the ethanol lobby.

The outcome, of course, is far from certain. Growth Energy, a prominent ethanol lobbyist, advocates a five-year extension of the VEETC and tariff, a mandate requiring that all vehicles sold in the United States be capable of running on E-85 (motor fuel blended with 85% ethanol), taxpayer-backed federal loan guarantees to build a national ethanol pipeline network, and tax credits for the installation of 200,000 E-85 pumps at service stations.

America is not addicted to oil (consumers will stop buying gasoline the moment a superior product comes along), but the ethanol lobby is hooked on subsidies. As with any genuine addiction, ethanolism is an appetite that grows with feeding. The lobby may say it wants to make America energy independent, save the planet, and save the family farm, but what it really wants is MORE — more trade protection, more of our tax dollars, and more market-rigging rules.

Growth Energy’s ask-for-the-moon agenda has zero prospect of being enacted in the lame-duck Congress. Many compromises are possible, though, such as a one-year extension or scaling back the VEETC from 45¢ to 36¢ a gallon. We, the People, should just say no. For fiscal, humanitarian, and environmental reasons, Congress should give the VEETC and tariff the quiet burial they deserve.

The 45¢ per gallon VEETC is a “refundable” tax credit, which means it is paid for by taxpayers, with checks drawn from the general fund of the U.S. Treasury, to the tune of $5-6 billion a year. With the national debt expected to equal or exceed GDP in 2012, now is not the time to renew such extravagance.

Back in 2005 and 2007, Congress enacted and expanded a renewable fuel mandate requiring blenders to sell increasing amounts of motor fuel made from plant materials. By 2022, 36 billion gallons of the nation’s motor fuel supply must be “renewable.” The corn ethanol component of the mandate maxes out at 15 billion gallons a year in 2015. The remaining 21 billion gallons are to be “advanced” biofuels — so named not because they improve engine performance or provide additional value to consumers but because they have a smaller carbon footprint.

Congress should never have enacted this Soviet-style production quota system in the first place. But as long as the renewable fuel mandate is in place, consumers should at least be free to buy ethanol at competitive prices. The protective tariff prevents lower-priced Brazilian sugarcane ethanol from competing in U.S. fuel markets. It increases pain at the pump.

In combination with the mandate, the VEETC and tariff also divert massive quantities of grain from food to auto fuel — a factor contributing to food price inflation and the world hunger crisis of 2008. In contrast, Brazilian sugarcane ethanol poses no risk to global food security.

Al Gore’s “planetary emergency” has many able debunkers. But even if you believe global warming is a problem, the VEETC and tariff are duds (or worse) as climate policy. Brazilian sugarcane ethanol has a smaller carbon footprint, which is why EPA classifies it as an “advanced biofuel.” Yet the tariff prevents Americans from buying this “greener” commodity.

Analyses by the University of Missouri Food and Agricultural Policy Research Institute, Iowa State University (in the heart of corn country), and the Congressional Budget Office (CBO) find that the mandate chiefly determines how much ethanol is produced over the next five years. The VEETC and tariff support only a small and declining fraction of total production. Consequently, any incremental greenhouse gas reduction attributable to those policies has an unreasonably high price tag. The CBO, for example, estimates that the VEETC costs taxpayers $750 to $1700 for every ton of greenhouse gases avoided — many times the estimated price of emission permits under the Waxman-Markey cap-and-trade bill, which the Senate did not see fit to pass.

Ironically, the corn rush may actually increase net greenhouse gas emissions, as Tim Searchinger of Princeton University and Joe Fargione of the Nature Conservancy found in separate studies. A gallon of ethanol emits less carbon dioxide (CO2) than a gallon of gasoline when combusted. However, CO2-emitting fossil fuels are used to make fertilizer, operate farm equipment, power ethanol distilleries, and transport the ethanol to market. In addition, when farmers plow grasslands and clear forests to expand corn acreage, or to grow food crops displaced elsewhere by energy crop production, they release carbon previously locked up in soils and trees. For several decades, such land use changes can generate more CO2 than is avoided by substituting ethanol for gasoline.

Searchinger and Fargione kicked up quite a controversy, but this much is beyond dispute — the VEETC imposes costs on taxpayers that nobody would willingly incur in a free marketplace. According to the University of Missouri study, the VEETC will induce an additional 1.4 billion gallons of ethanol to be blended above the 12.6 billion gallons already required by law next year. With the VEETC costing nearly $6 billion, that works out to about $4 for each “extra” gallon of ethanol. When gasoline hit $4.00 a gallon in the summer of 2008, politicians denounced gas prices as “obscene.”

The actual per gallon cost of the VEETC may be even higher. The Iowa State study estimates that extending the VEETC would induce additional blending of 680 million gallons of ethanol, costing taxpayers almost $7.00 per extra gallon in 2011. In 2014, the VEETC would induce additional blending of only 220 million gallons. That works out to a whopping $30.40 per gallon!

But doesn’t ethanol benefit consumers by breaking the “monopoly” enjoyed by petroleum-based fuels? That’s what ethanol lobbyists would like you to believe. However, when they decry the “absence of competition” in the motor fuels market, what they really object to are the results of competition.

Ethanol as a motor fuel has been around almost as long as gasoline. In fact, back in the 1920s, Henry Ford supposedly predicted that ethanol would be the “fuel of the future.” The marketplace proved him wrong, and for what turns out, in hindsight, to be fairly obvious reasons. None of the alternatives to petroleum derivatives perform as well in terms of cost, portability, and energy density. Let’s look at these factors in a bit more detail.

During most of the past 27 years, ethanol was more expensive than regular gasoline. In 2010, the price per-gallon of ethanol dipped below that of gasoline, because the mandate combined with other subsidies increased supply faster than demand. However, driving one mile on E-85 is still more costly than driving one mile on gasoline, because ethanol has about one-third less energy than an equal volume of gasoline. The American Automobile Association’s Daily Fuel Gauge Report makes this crystal clear. For example, on December 2, 2010, the mpg-adjusted price of E-85 was $3.30 per gallon — more expensive than the per-gallon price of regular gasoline ($2.89), premium gasoline ($3.16), and diesel ($3.18).

Federal agencies tout ethanol as a boon to consumers, but they know better. The U.S. Environmental Protection Agency (EPA) and the Department of Transportation (DOT) jointly administer a Web site called www.fueleconomy.gov. If you visit the site, click on “Alternative Vehicles,” then click on “Flexible Fueled Vehicles,” then click on “Fuel Economy Information for Flexible Fueled Vehicles,” and then click on “Go.” You should land on a page listing all Model Year 2011 flexible fueled vehicles and comparing what the typical motorist will spend on fuel in a year depending on whether he buys gasoline or E-85. In every case (more than 110 vehicles), the motorist spends hundreds of dollars more to drive on E-85. For example, the owner of a Mercury Mariner will spend $2,145 in a year if he uses gasoline but $2,613 if he uses E-85.

A question to ask your congressman at the next town meeting: If ethanol is such a great bargain, why do we need a law to make us buy it? You probably won’t get the real answer. “We” don’t need the ethanol mandate at all. Rather, presidential candidates “need” the ethanol lobby’s blessings to win the Iowa Caucuses. As Al Gore acknowledged recently, “One of the reasons I made that mistake [of supporting subsidies for corn ethanol] is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president” in 2000.

Another drawback: Ethanol can’t be shipped through existing fuel pipelines. As the Houston Business Journal explains, “ethanol is highly corrosive when mixed with oxygen and can cause damage to lines and fittings. Ethanol is also hydrophilic, which means it attracts water. When it blends with water, it creates a sub-octane gasoline.” Technological advances may resolve these issues, but up to now ethanol’s inherent characteristics make it less portable than gasoline. To repeat, gasoline’s market dominance is not due to any alleged “market failure” or oil company conspiracy but to the fuel’s comparative energy density, affordability, and portability.

Defenders of the statist quo claim that ending the tax credit and tariff will eliminate more than 100,000 jobs. That is sheer hype. As already noted, ethanol production is chiefly determined by the mandate, which is not scheduled to expire. The Iowa State study indicates that the U.S. corn ethanol industry would lose about 1,000 jobs over the next five years. A $30 billion subsidy to save 1,000 jobs is too high a high price to pay.

The ethanol lobby likes to portray itself as an infant industry in need of special protection — a valiant little David challenging the Goliath of Big Oil. In reality, the U.S. ethanol industry is the world’s biggest and governments at all levels have been subsidizing it for decades. Enough is enough.

The November elections were a sharp rebuke to arrogance and fiscal irresponsibility in the nation’s capital. If the lame-duck Congress got the message, they’ll let the VEETC and tariff tumble into history’s dustbin. They can do good just by doing nothing — surely there’s a lesson in that too.

Marlo Lewis is a senior fellow in environmental policy at the Competitive Enterprise Institute
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