Wednesday, October 9, 2013

Simply Amazing How the Ethanol Mandate Fails

Even if oil has not reached its peak, it still is a non-renewable resource, its production and consumption still causes pollution, and both drilling and transporting have created environmental hazards. Oil clearly has its downsides. America should look into alternative energy sources. One of those alternatives is ethanol fuel. Whether one is Democrat or Republican, fighting global warming or Islamic terrorism [with increased energy dependence], ethanol is a politically popular policy. I personally do not care whether ethanol is politically popular. I pondered on the topic of the government getting involved with ethanol a while back, but I would like to take a closer look as to whether the if the validity of the ethanol mandate has a kernel of truth to it, or if it is a poor enough of a policy where it should just be shucked.

If ethanol production had any merit, no government intervention would be required because the private sector would have already invested in it. Up until 2012, the government had been directly subsidizing corn in the amount of $6B per annum. The ethanol proponents allowed the tax credit and the ethanol subsidies to expire back in 2012 without a real fight. The reason? There was still an ethanol mandate in play. According the EPA's Renewable Fuel Standards (RFS), there has to be a certain amount of renewable fuel to be blended into gasoline. Whether it is an ethanol subsidy or a mandate, it is frustrating because both essentially have the same economic effect, which is the artificial increase of demand. An increase of demand means an increase of prices in corn (See the CBO reportWorld Bank report [p. 17]). Since fructose corn syrup is in so many foods, this policy translates into increased food prices. Ditto for any foods that use corn feed during production!

Attempting to increase corn production in the attempts to make ethanol a viable replacement for petroleum is futile. Even if we use every last bushel of corn towards ethanol fuel, it would still only satisfy 12% of America's fuel demand. This certainly refutes the "we would spend less on oil and more on ethanol, which would stick it to Islamic terrorists" argument. This also refutes the "energy independence" argument because the petroleum market is a global market, which means that energy independence has, at best, a negligible effect on petroleum prices.

An increase in corn demand also creates the "food versus fuel" dilemma. The United States produces 40% of the world's corn. 40% of the US' corn production is used for ethanol, which means that 16% of the world's corn supply is used on ethanol production. All of that corn for a little over 1% of energy consumption! The amount of corn used for a gallon of ethanol can feed a person for an entire day. This policy is causing some serious food shortage issues (Santa-Barbara, 2007). Imagine what 16% of the world's corn supply could do to feed those who are starving, whether they live here in the United States or abroad (NIH report). What would be a better usage of about a sixth of the world's corn production: supplying a small amount of fuel inefficiently or feeding millions? You know the problem is getting bad when the United Nations asked the United States to curtail ethanol production last year.

And all of this without even considering that the cost to produce ethanol is greater than the benefit, ethanol only has 73-83% of the efficiency of a gallon of gasoline, the EPA's unrealistic quota for cellulosic ethanol, or the fact that land-use conversion, usage of pesticides, as well as the fossil fuels used for production make ethanol quite the carbon-intensive endeavor. The winners of this policy are corn producers, ethanol producers, and bioengineering companies. The losers? Everyone else. Sometimes, more complex policy is required to resolve a policy problem, but in this case, it's really simple: repeal the mandate.


2-11-2016 Addendum: The National Bureau of Economic Research recently released a paper on who benefits from ethanol subsidies. Two thirds of the benefits went to ethanol producers, and the remaining third went to the blenders. A negligible amount went to the corn farmers.

2 comments:

  1. The author may emphasize "open minded thought' but unfortunately, also demonstrates the inability or unwillingness to research accurate data and facts.

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    1. Larry, per my "Rules About Posting Comments" section on the right hand column of the site, I don't allow ad hominem attacks, and I certainly won't post anything of a similar vein if you decide to respond. However, I had to post it because I found your comments all too amusing. First, did you bother reading my blog, or did you just read the title and base your criticism solely on the title? I cited the Congressional Budget Office, the World Bank, the US Energy Information Administration, amongst other studies. Anyone who knows me well enough, even those with whom I disagree, knows that I thoroughly do research before posting anything.

      Your accusations are as baseless as they are laughable, and I say that after taking a look at your website. You currently are a consultant for the very industry that benefits from the ethanol mandate, and prior to that, you were a lobbyist for the ethanol industry. You are the textbook example of a hypocrite because you chide me about open-mindedness, yet your professional career reeks of the bias that policy analysts such as myself do our utmost to avoid with a ten-foot pole. I would ask you to bring accurate facts yourself in attempts to refute what I researched and so we can actually have a discussion about the merit of ethanol mandates, but if I had to make an educated guess based on your comments and website, you'll just post propaganda from the ethanol industry.

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