Earlier this month, the Senate voted 73-27 on legislation that would terminate some of the federal subsidies granted to the domestic ethanol industry. Ethanol lobbyists and trade associations immediately went into overdrive to protect their taxpayer largesse.
The Renewable Fuels Association (RFA), the trade group representing ethanol interests, has claimed that federal corn-ethanol policy reduced the price of gasoline in the United States in 2010 by an average of 89 cents per gallon. Other pro-corn-ethanol special-interest groups and members of the Obama administration have made similar claims. None of these claims stands up to scrutiny.
A careful review of current federal corn-ethanol policy reveals an array of subsidies, both direct and indirect. These include: 1) corn production subsidies to farmers, 2) a 45-cents-per-gallon ethanol-production tax credit, 3) a mandate requiring gasoline refiners to blend 15 billion gallons of ethanol into gasoline annually by 2015, and 4) a 59.5 cents-per-gallon tariff/tax on imported ethanol. No other energy product enjoys such government favor.
The RFA and others claim these policies are worth their cost because they have helped reduce gasoline prices and petroleum imports and have improved energy security. Those claims are fiction.
The Energy Information Administration (EIA), a branch of the Department of Energy, is required to provide objective, fact-based energy forecasts to the public. The EIA has evaluated existing federal ethanol policy and compared it to alternative scenarios in which ethanol receives no federal support - in other words, a competitive market case. The comparison, from 2008, used the EIA’s long-established energy-modeling system to prepare future forecasts for each policy.
The EIA forecast shows that current federal ethanol policy produces a minuscule additional amount of ethanol over what would be produced using a competitive market policy in the foreseeable future. In 2010, a mere 600 million gallons of additional ethanol were produced, roughly 5 percent of the 13 billion total gallons produced. In 2015, federal policies will increase production by just 1.4 billion gallons. The latter is less than 1 percent of U.S. gasoline consumption, and the cost per barrel of petroleum import reduction is an astounding $2,171.
Federal subsidies only marginally increase production because ethanol is one of the few additives approved by the Environmental Protection Agency for raising the octane level of gasoline. Many refiners use ethanol to comply with the EPA because it is the only alternative available that doesn’t require additional, expensive refining steps to raise octane.
The costs of ethanol policies are enormous, estimated at more than $500 billion to American consumers and taxpayers from 2008 to 2017. The taxpayer costs include subsidies to corn growers and for ethanol production. Consumers, meanwhile, will feel the hit in the form of higher food costs and reduced gas mileage, as ethanol lowers vehicle fuel economy; increased domestic ethanol prices because of the import tariff; and the increased cost of new vehicles caused by requiring that they be capable of burning an 85 percent ethanol/15 percent gasoline mixture - a blend very few consumers choose to buy.
Federal ethanol policy has been hugely successful at one thing: transferring wealth from food consumers and taxpayers to the corn and ethanol industries. More than 80 percent of all U.S. corn and ethanol production comes from just 10 Midwestern states. Corn farmers are reaping enormous windfalls from record-high corn prices, federal subsidies and a huge increase in corn farmland prices. In Iowa, land values have more than doubled since 2005 - the year the Renewable Fuel Standard first went into effect.
Tackling our nation’s growing debt requires making hard choices. Rolling back costly and economically nonsensical agricultural and energy subsidies would be a good start, but few members of Congress have proposed doing so. However, there is some hope on the horizon. The recent Senate vote might signal a new era on Capitol Hill, one in which ethanol subsidies are defeatable.
Why are we dumping billions of dollars into corn farmers’ wallets, given our country’s fiscal situation? Though the claims of ethanol proponents have been thrashed repeatedly by nonpartisan government research, the president and members of Congress support this ethanol scheme in exchange for generous campaign contributions - and votes - from the corn farmers and affiliated trade associations. Consumers and taxpayers are stuck with the very expensive bill.
Ken G. Glozer is author of “Corn Ethanol: Who Pays? Who Benefits?” (Hoover Institution Press, 2011) and a career policy analyst at the White House Office of Management and Budget. He has been president of OMB Professionals since 1999.