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Ethanol subsidies have resurfaced in Congress as part of both energy legislation and the pork-laden farm bill. But this favorite of farmers, among the most hallowed of special interests, serves politicians' ambitions much more than it does sound economic or environmental policy.
The energy legislation is under negotiation in a conference committee of the House and Senate, while the farm bill was just signed into law by President Bush. Advocates of the corn-based fuel additive cite environmental and energy-saving benefits in pressing to further expand the already huge subsidies for ethanol production.
The proposed subsidies are a costly response to an artificial problem. In reality, ethanol can consume more energy to produce than it ultimately yields, while the environmental benefits are negligible. What it does provide, however, is political mileage.
Iowa is full of corn farmers and it is also where the presidential campaign season kicks off—the state hosting the first party caucuses nationwide. Other agricultural states like Michigan and Indiana are politically important as well. Boosting demand for corn, then, is little more than a political payoff to the farm lobby.
For more than three decades, ethanol has been added to gasoline to improve engine burn and thus reduce carbon monoxide emissions. The use of "renewables" also is encouraged to lessen U.S. "dependence" on foreign oil. Because ethanol is expensive to produce and there is little market demand, subsidies such as exemptions from fuel excise taxes are used to encourage its production. Meanwhile, higher demand raises the cost of a bushel of corn by 25 cents or more, increasing the price of a market basket of products.
Largely missing from the subsidy equation are the perverse consequences of ethanol production, such as the energy requirements to produce the fuel additive. Professor David Pimentel of Cornell University has calculated that producing a gallon of ethanol requires 131,000 Btu of energy, while it only yields 77,000 Btu of fuel energy. While ethanol boosts the octane content of gasoline, it also increases engine wear and maintenance costs.
Other factors increase the cost of ethanol, including the complex blending procedures necessary to meet federal air quality requirements. Refining costs are higher as well because separate pipelines, trucks and station pumps are necessary to transport and store ethanol blends. The Government Accounting Office reported to Congress in July 2001 that ethanol-blends comprise only 3 percent of the total fuel consumed. According to the GAO, consumers see no benefit to paying more for ethanol.
As if ignorant to the role of federal mandates in rising gasoline prices, Congress holds hearings in which the petroleum industry is accused of gouging. Michigan Sen. Carl Levin, for example, recently accused the oil companies of market manipulation. But investigations by the Federal Trade Commission have failed to find either fraud or collusion. Rather, more mundane factors such as weather, equipment outages and environmental mandates are actually to blame.
If Congress is intent on placing blame, it might try looking in the mirror.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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