Consider This A Warning: Government Programs Wasting Your Money, Part II - Ethanol Subsidies

Thomas Warns*


Though the thought of a farmer growing and harvesting corn on a cool autumn day sounds idyllic, the reality is that there is something sinister afoot in the corn industry: wasteful subsidies. Corn is an incredibly flexible crop, which is used for human consumption, as feed for livestock, and to make ethanol, just to name a few uses. The use of corn to make ethanol started in the 1970s during the tumult of the oil price shocks that forced the nation to consider alternatives to fossil fuels; ethanol production has only skyrocketed during the last decade under the Bush and Obama Administrations. 

The subsidies have varied in their content. Traditionally, fuel blenders were given $.40 per gallon of ethanol blended with ordinary gasoline as an incentive. Producers were also protected by tariffs on foreign ethanol. Those subsidies have fortunately expired, but now the Renewable Fuel Standard (RFS) creates the same amount of market distortion with less conspicuousness. The RFS is set by the EPA under Energy Policy Act of 2005, and requires a minimum amount of ethanol be blended into U.S. fuel every year, creating artificial demand for corn and ethanol. Other smaller subsidies still exist in the farm bill as well, such as the Rural Energy for America Program and the Bioenergy Program for Advanced Biofuels.

Why has ethanol production become a big project for the EPA? It is perceived as being more environmentally friendly than regular gasoline because it produces fewer greenhouse gases when burned. The Renewable Fuels Association for instance states that when you take into account the fact that carbon dioxide is emitted from the combustion of ethanol but reabsorbed by corn plants grown to produce ethanol, then using ethanol reduces CO2 emissions by 30-50%. Ethanol spills are also less dangerous than normal gasoline spills because ethanol evaporates quickly and is not hazardous to groundwater.

While these benefits are not trivial, they do not outweigh the costs imposed on the American people. The most predictable repercussion has been the increase in corn prices – creating demand will raise the price (from about $3 a bushel in 2007 to almost $7 a bushel in 2013, though some of the price increase was likely due to a 2012 drought). In a rush to capture the benefits of the subsidies, farmers have eschewed some crops in favor of corn, or earmarked more of their existing corn production towards ethanol. This has been raising prices across the board – meat has become more expensive as feed prices increase, other foods have become more expensive as farmers switch over to corn, and even clothing prices have moved higher due to a lower supply of cotton. At the pump, consumers hoping to use ethanol have to deal with the fact that it is more damaging to their cars and gets about 25% less gas mileage than traditional fuels.

If environmentalists aren’t swayed by those facts, they will surely acknowledge the environmental failures of subsidized ethanol. Farmers trying to meet the demand for ethanol have developed millions of acres of land that had been set aside for conservation; most of the land is earmarked for conservation because the natural grasses growing there reduce carbon dioxide in the atmosphere and protect the fragile topsoil from erosion. The AP estimated that 6.4 million acres of conservation land was planted over in the rush to produce more corn between 2006 and 2012. More farmland also means more water pollution, as pesticides get into the groundwater and rivers, ultimately increasing the size of the dead zone in the Gulf of Mexico. 

The solution by now should be obvious – end the mandate on ethanol in gasoline. The mandate should be phased out, as cutting it all at once could result in a price shock for farmers, but it needs to end. Fortunately, the EPA has announced that it will cut the mandate for this year, though this news was predictably met by howls from the ethanol lobby. An end to ethanol subsidies will allow market prices for many of the foods we eat to return to lower levels, a welcome relief for taxpayers, while also promoting environmentalist goals.

Part of the difficulty with ending the subsidies for the industry is due to fact that the pro-ethanol lobby has become very powerful and concentrated, while its detractors are dispersed and often have ethanol subsidies low on their list of political priorities. It doesn’t help that Presidential hopefuls have to pander to Iowa voters in the primaries – a campaign that mentions cutting ethanol subsidies is virtually certain to flounder in that state, which holds electoral importance because of its early vote date in the primaries. If cuts to the mandate continue, be wary of farmers demanding further subsidies to make up for their falling profits.

An end to the ethanol subsidies is not necessarily a death knell for renewable energy either. Cellulosic ethanol may be an even better alternative to corn-based ethanol. Cellulosic ethanol uses non-food products such as corn stalks, wood chips, and switchgrass in order to make fuel. Since those items are all non-food byproducts of the agricultural process, it is unlikely that farmers would change their planting habits extensively just to harness those products for ethanol (and in the case of switchgrass, it grows naturally and could be harvested with minimal environmental impact). Though the cost of producing cellulosic ethanol has prevented it from becoming a commercial success, the technological barriers around it are getting smaller and smaller each year. While subsidies are to be avoided in most places because of their tendency to create market distortions, small subsidies that spur technological innovation may serve as a more useful policy for domestic renewable energy production at a much lower price to us all.


*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."