Posted by: bmeverett | July 14, 2011

More Mischief on Ethanol

As I’ve discussed before on this Blog, ethanol is the poster child of bad energy policy (See, for example, “Ethanol: A Test for Republicans” from January 16, 2011). Ethanol is a low-quality fuel, containing only two-thirds the energy of gasoline. It’s expensive to produce and actually increases carbon and other emissions. Ethanol, even in relatively small concentrations, can cause problems in engines, particularly marine engines. Most important, it takes a lot of land to produce ethanol, and with about 40% of our corn crop devoted to ethanol production, corn prices have tripled over the last 10 years. Although ethanol does displace imported oil, our massive and costly effort to date has managed to replace only about 3% of our oil imports. Lots of money and lots of problems for not much result.

The Environmental Protection Agency is making this problem worse. Gasoline today may contain up to 10% ethanol (called E10), but the EPA is issuing waivers to allow blends of up to 15% ethanol (E15) onto the market, which may cause significant problems for some automobile engines and may even void the warranties of some new cars. Instead of studying this problem carefully, the EPA is jumping the gun, and consumers will once again pay the price.

If ethanol is such a problem, why does the federal government continue to support it? Simple. Ethanol is a farm subsidy. Farm state senators and congressmen are thrilled that ethanol forces up the price of corn and the value of cropland. That’s an understandable view for them, but why should the rest of us accept this nonsense? More and more people are wising up to this scam, and as a result, there is pressure in Congress to address the problem. Here’s where we can get some real insight into our current political mess.

One would think that conservatives would instinctively oppose ethanol subsidies, which represent a simple transfer of wealth from gasoline consumers (i.e., virtually all of us) to wealthy farmers and, in particular, agribusinesses like Archer Daniels Midland. The federal biofuels program distorts capital markets, raises costs and reduces economic growth. Shouldn’t those who espouse limited government demand an end to this blatant rent-seeking? Unfortunately, our elected officials worry first and foremost about taking care of their powerful constituents. The good of the country and the principles of a free market seem to come in a distant second. Democrats at least are honest and open about their hostility to markets, but Republicans really don’t seem much different.

Have a look at the recent “bipartisan compromise” between Senators John Thune (R-SD) and Amy Klobuchar (D-MN) called “The Ethanol Reform and Deficit Reduction Act (ERDRA).” As usual, the name is great. Why not fix the ethanol problem and the federal deficit at the same time? The problem is of course in the details. The ERDRA would eliminate the 45¢ per gallon ethanol subsidy on July 31, 2011, five months before its scheduled expiration on December 31. Two-thirds of the $2 billion in savings would go to deficit reduction and the remaining $668 million would be dedicated to other renewable fuel incentives. Those other incentives happen to be the “blender pump credit”, which subsidizes ethanol pumps at service stations, and the “small producer ethanol credit” which keeps the subsidy flowing to little guys. If subsidizing ethanol is a bad idea, why not stop it altogether? Why keep a third of it in place? What Thune and Klobuchar are essentially saying is, “We’ve discovered $2 billion waste and propose eliminating two-thirds of it. The rest we’ll continue to throw away. See, we do know how to compromise.”

That small logical problem pales in comparison to the really big lie in this bill. The Energy Policy Act of 2005 includes an ethanol mandate, requiring gasoline supplies to include minimum amounts of ethanol is their gasoline blends. The requirement for 2011 is about 14 billion gallons, equivalent to about 6% of our gasoline supply or 3% of our total oil requirements. In other words, whether or not the federal government subsidizes ethanol, consumers have to buy a specified amount, no matter what it costs. If ethanol costs $6 per gallon and gasoline $4, a free market would reject ethanol until suppliers can get their costs down. Today, we have to pay the $6 per gallon anyway. That’s still a heavy subsidy for corn farmers and ethanol producers. Thune and company are willing to eliminate the small direct subsidy, only because it’s backed up by a massive indirect subsidy. It’s no wonder that American Coalition for Ethanol and the Renewable Fuels Association are ecstatic over the Thune/Klobuchar proposal.

When House Republicans demanded and got a $35 billion reduction in the Fiscal Year 2010 budget last winter, many people were happy that some progress was finally being made. That is until it became clear that the savings were all illusory. The actual savings, once all the accounting tricks were removed was, in fact, nothing. That’s bipartisanship at work. Our elected officials want a continued flow of federal funds to allocate to favored constituents. When the electorate objects, the first instinct of politicians is to see if the financial flows can be hidden and disguised and surrounded by a flurry of rhetoric about financial responsibility.

John Thune, who occasionally talks about running for President, has no right to call himself a conservative. He seems to have a conservative persona, but no principles to speak of. If his constituents believed that the Earth were flat, he would agree. If South Dakota voters were Democrats, Thune would be one too. We really need to get these people out of office, and the quicker the better.


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