Ethanol Subsidy Hurts Farms, Environment

Posted February 20, 2004 at 10:24am

From the days of the Reagan presidency, the conservative approach to energy policy has been straightforward: Create broad incentives for investment in the infrastructure required to generate safe, clean energy; keep a level playing field between the various sources of supply; set sound standards for protecting the environment; and then get the government out of the way. Allowing markets to set fair prices for an important commodity drives capital to the most promising sectors, encourages innovation and fairly rewards productivity gains.

In a series of deregulating steps, state and federal government lifted price controls on oil and gas, allowed new avenues for distribution, and encouraged independent power generation. The results speak for themselves: Since 1980, the real price of gasoline has fallen by 40 percent. Equally important, the amount of energy required to produce a dollar of gross domestic product has fallen by more than 25 percent. The lessons are striking: Price controls hurt consumers, and despite increases in oil imports, the influence of energy cartels is falling, not rising.

Regrettably, with recent efforts to pass an energy bill, the tables have turned 180 degrees. Much of today’s work is directed at crafting tax-and-spending provisions that cater to unique and narrowly defined business activities. This distorts market pricing mechanisms, creates inefficiencies in our economy, and, more often than not, wastes resources on investments with little or no hope of long-term returns.

Nowhere are these forces more evident than in the scramble to double the existing ethanol program. The ethanol subsidy, contained within the energy bill of 2003, will cost a tremendous amount of money, deliver marginal benefits to air quality, provide incentives for deforestation, reduce fuel efficiency, divert revenue from the highway trust fund and distort competitive markets for clean-burning fuels and agriculture.

Even the proponents of ethanol concede that the program carries a significant cost. They justify this with vague claims of returns through cleaner air or reduced dependence on imported oil, but they avoid hard cost-benefit analysis because the costs are so dramatic. Ultimately, under the proposed program, 5 billion gallons of ethanol will be produced each year, with an excise tax exemption of 52 cents per gallon. Over the next seven years, $16.6 billion will be diverted to this narrow segment of industry producing less than 2 percent of America’s automotive fuel. Are we receiving anything even close in comparative value? Let’s take a look:

Clean air. Most arguments for this massive subsidy begin and end with clean air. Who can be opposed to clean air? But the facts are mixed at best. While ethanol does reduce emissions of carbon dioxide and volatile organic compounds, the output of nitrogen oxide (NOX) increases. Moreover, measurements and comparisons of tail-pipe emissions ignore the added pollutants from the high-energy input required to produce a gallon of ethanol.

Proponents also ignore the reality that there are other methods for blending cleaner-burning reformulated gasoline. Unfortunately, heavy-handed mandates and ethanol’s massive subsidy have combined to stifle the very innovations that will lead to the cleanest air in the shortest time at the lowest cost. Imagine the progress that could be made by simply setting clear RFG standards and allowing fuels and technologies to compete on an even playing field. We would then have $16.6 billion over seven years to invest in: (a) power plant refits to reduce NOX, sulfur and mercury; (b) highway funding to reduce congestion, improve air quality and save lives; (c) a return of this subsidy to taxpayers; or (d) all of the above.

Environmental losses. In assessing costs and benefits, we must also consider the environmental impact of land taken out of conservation and, in some cases, deforested. The energy bill proposes to increase ethanol production by 2.5 billion gallons per year. At an average yield of 140 bushels per acre, this represents 7 million acres brought into production and out of conservation to yield 125,000 barrels of fuel per day. By comparison, opening up just 2,000 acres of Alaska’s Northern Slope will yield more than 1 million barrels of fuel per day — for 30 years!

How many legislators support this ethanol plan that opens up 7 million acres to industry in the name of “energy independence,” while opposing 2,000 acres for sustained energy yields many times greater? Ethanol advocates might argue that some of these 7 million acres are already being farmed — albeit with a crop that did not attract such a massive subsidy. They then would be admitting that this policy does exactly what they claim our farm policy should not do: micro-manage planting decisions, thus sapping our farm industry’s vitality, productivity and strength.

Costly infrastructure and lower fuel efficiency. Unfortunately, the $16.6 billion does not even begin to account for the additional infrastructure costs that will be required to meet the mandate. Ethanol must be shipped by truck, rail or barge and blended at the fuel distribution facility. These expenses will be passed on directly to consumers, as will the impact of lower fuel efficiency. Ethanol reduces mileage per gallon by about 3 percent, again before considering the significant energy input required to manufacture each gallon.

No flexibility. As a final measure of policy excess, the supporters of the program get to have their subsidy and mandate it too. The excise tax exemption was originally devised to encourage ethanol use, but the energy bill also mandates the consumption of 5 billion gallons of ethanol per year by 2012. This begs a simple, costly, but unanswered question: If the government is going to mandate the use of something, what is the point of subsidizing its production? With a specific level of consumption mandated, the waiving of excise taxes only serves to yield a higher profit margin for industry at a given consumer price point. Nothing more, nothing less. And while the benefits of this massive subsidy accrue in those states that grow corn and distill ethanol, its proponents are committed to spreading the enormous costs to every consumer. Thus, they have adamantly refused to allow states the chance to opt out of the ethanol mandate even while meeting all of the requirements of the Clean Air Act. Flexibility? States’ rights? If ethanol carries the benefits that its proponents claim, it should be able to succeed on its own.

All Americans should appreciate the challenges and benefits provided by America’s farming community. Our agriculture industry is overregulated, but that is no justification for uneconomic subsidies. In the same vein, I have opposed federal loan guarantees for building nuclear power plants and research subsidies for fossil fuel research. These are great and important industries, but they will become stronger, healthier and more prosperous if our federal government would love them a little less and trust them to innovate a little more.

Sen. John Sununu (R-N.H.) is a member of the Commerce, Science and Transportation Committee.