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Public Policy

The Problem with Ethanol

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Thirty-five years ago, when it was discovered that ethyl alcohol derived from field corn could replace the fuel additive MTBE, it was heralded as a great savior. MTBE had been shown to contaminate groundwater, U.S. farmers were already growing lots of corn and soybeans, and there wasn’t enough of our own oil.

The oil price shocks of the mid ’70s had left the nation with a collective bad taste in its mouth. So if homegrown corn could be blended with gasoline to make the United States less dependent on imports subject to the whims of the leaders of the OPEC cartel, who wouldn’t be for it? In addition, anything that helped Midwestern farmers and bolstered struggling rural economies had to be good, right?

Selling ethanol to the American public was harder than policymakers thought, even after the “green wave” hit and anything renewable or sustainable was automatically deemed good. So the nascent ethanol industry and its Congressional backers intervened. If Americans weren’t going to fill their tanks with corn-derived American ethanol because it was more expensive than regular gas, then they’d make it cheaper. Ethanol subsidies were born.

A tariff was slapped on imports of cheap, sugar-based Brazilian ethanol. Tax credits for making and buying ethanol and blending it into gasoline were given to the makers and blenders. And if those giveaways weren’t enough to get the American public in an ethanol-buying mood, then they’d just force people to buy it.

Higher food prices
In 2005 Congress passed the Energy Policy Act, which for the first time mandated a certain amount of biofuels — mainly corn ethanol — to be mixed with gasoline sold in the United States. For 2006, the Renewable Fuel Standard (RFS) required 4 billion gallons of ethanol to be blended into gas. That figure was to rise to 7.5 billion gallons by this year, but Congress revisited energy policy in 2007: It extended RFS through 2022, whereby the ethanol mandate will be for 36 billion gallons. Of that figure, nearly two-thirds (21 billion gallons) were envisioned to be in the form of so-called second-generation biofuels – those not derived from edible feedstocks like corn.

With built-in demand for its product firmly in place by law, the ethanol industry experienced a boom. Ethanol production facilities — more than 200 in all — sprouted up across the agricultural Midwest. And when gas prices rose, suddenly the price of ethanol at the pump looked more attractive by comparison. Rural Midwest economies blossomed. Corn farmers were happy. The ethanol industry was happy.

But livestock farmers weren’t — and neither were food makers, foodservice providers or grocery consumers. Suddenly, the price of corn had gone through the roof, and along with it the prices of most other food commodities. Two-dollar-per-bushel corn was now $7 per bushel. The huge run-up in commodity prices had coincided with the 2004 imposition of the ethanol blender’s tax credit and the 2005 Renewable Fuel Standard mandate. Academics and government economists developed models, crunched numbers and reached the same conclusion: It was obvious to all that the subsidies and supports for ethanol, which have cost U.S. taxpayers some $45 billion since the 1980s, were now costing everyone more in higher prices for food, as well.

Ending the affair
Congress recognized the problem in 2011 when it allowed the long-sacrosanct ethanol blender’s tax credit to expire on schedule, along with the long-lived protectionist ethanol import tariff. It appears that lawmakers’ long-running love affair with ethanol is ending. But the true test of their mettle will come in the next phase of the battle. As NCCR and our allies in the agriculture and food community turn our focus to the market-distorting RFS, which we believe to be the primary driver of high food commodity prices today, we fully expect that the ethanol industry won’t go quietly into the night. Stay tuned.