Published on:

A Rational Analysis of Ethanol-Part Two

This week we continue our examination of ethanol as an alternative energy source. As a Texas oil and gas attorney, I am particularly interested in the impact that a shift from fossil fuels to alternatives would have on our economy and on our society. It is an unavoidable fact that we are a fossil fuel-based society; any shift from fossil fuels to alternative energy sources will have costs associated with them. While we don’t know what all those costs will be, our experience with ethanol shows that the costs-at least in the early stages of development-can at best limit, and at worst outweigh, any benefits gained from the use of alternative fuels.

What are some of the costs of using ethanol as an alternative energy source? After looking at the issue, I believe there are three primary costs:

• The cost to us as taxpayers • The cost to us as consumers • The cost to our environment
These costs are well documented in study after study, but you never hear about them in the media. The media and the public seem to have bought the idea of limitless and cost-free benefits accruing to our society. There are some benefits, as other studies have shown. But if we don’t look at the costs, how can we decide if the benefits are worthwhile?

What are the costs to us as taxpayers? In order to encourage ethanol production, Congress has approved generous subsidies to farmers and refiners. Since 1978, the Volumetric Ethanol Excise Tax Credit (VEETC) has provided refiners with an incentive to blend corn ethanol with gasoline. According to the the Government Accountability Office, in 2008 the government gave a total of $4 billion dollars in subsidies for corn-based ethanol; in 2009 the figure jumped to $6 billion dollars. Ethanol production in that year replaced a mere 2% of the U.S. gasoline supply. The average cost to the taxpayer was the equivalent of $82 a barrel, or $1.95 a gallon on top of the gasoline price. According to the Congressional Budget Office, the cost of replacing one gallon of conventional gasoline was $1.78 per gallon for corn ethanol in 2009. In addition to the tax credit, there is the Renewable Fuels Standard (RFS) which currently requires 36 billion gallons of renewable fuel (primarily ethanol) to be blended with gasoline by 2022 as well as a tariff on the importation of ethanol which functions much the same way a tax would, by increasing the cost of imports to consumers.

The purpose of these programs is to encourage the domestic production and use of ethanol. With this combination of government assistance, the domestic ethanol industry should be thriving; indeed, one would think that after thirty years of government support, it should be profitable and no longer in need of subsidies, tariffs, and legal requirements, right?

Wrong. In 2009, the same year the government provided $6 billion dollars in subsidies to the industry, 25 biofuels facilities closed. A March 2009 survey of ethanol production discovered that 17 percent of ethanol capacity stood idle. Several large producers filed for bankruptcy. Much of this was a result of the overall economic downturn of 2008-2009, but other factors included the rising cost of corn and the high cost of production and transportation. All of this came in the midst of mounting evidence of the economic inefficiency of the ethanol industry.

What was the government response to all this? President Obama’s economic stimulus package included millions in new spending for the biofuels industry! This includes a total of a half a billion dollars for existing plants and new experimental production facilities.

So is all of this tax money being spent worth the cost, considering what ethanol has produced? Increasingly, the answer seems to be no. Calls to end government subsidies for ethanol production are no longer confined to policy papers issued by the Cato Institute and other similar free-market think tanks. In what has to be a bad sign for the future of government-subsidized ethanol, a July 24, 2010 Washington Post editorial called for an end to the subsidies and the tariffs on imported ethanol. After surveying recent studies questioning the benefits of ethanol, the editorial concluded:

At this point, the question should not be whether to allow corn ethanol’s tax incentives and trade protections to expire. The debate should be about why corn ethanol deserves any federal protection at all. There are certainly more effective ways to reduce oil consumption and greenhouse emissions.

What has been the response from our lawmakers? With the ethanol subsidies set to expire soon, lawmakers (in a time when voters are very angry over out-of-control spending) are keeping quiet over the possibility of renewal. Maybe if the subsidies went away, we would see if ethanol really has the economic promise it’s defenders have longed claimed.

In my next posts, I will look at ethanol’s cost to us as consumers and the cost of ethanol production on the environment.

Posted in:
Published on:

Comments are closed.