Misplaced Priorities; Ethanol Promotion and its Unintended Consequences.

When the state of Iowa becomes a priority in the US presidential election, it is only a matter of time before agriculture dominates the discussion. Indeed, US presidential candidates Hillary Clinton, John McCain, and Barack Obama all brought out their metaphorical overalls to sing praises of corn farmers before the February caucuses. Such kowtowing to Iowa's farmers has become a quadrennial tradition in the United States, where federal corn subsidies totaled US$37.3 billion from 1995 to 2003. The United States' funding of corn farmers stems largely from precedent, a desire to keep the heartland happy, and perhaps even a romanticized conception of small farmers. However, the subsidies also have significant roots in one of the most confounding environmental programs of the past 30 years: ethanol fuel.

According to The Economist, over 200 distinct subsidy programs provide US$7 billion each year to participants in all levels of ethanol production and supply. Since the 1970s, untold billions in handouts have been given to corn farmers, "big ethanol" refining companies such as Archer Daniels Midland, and gas stations in an effort to boost ethanol's profile in the US market. And if federal subsidies to all parties involved in the production of ethanol were not enough, the US government currently places a US$0.54 per gallon tariff on imported ethanol. Several state governments have started subsidy programs as well. This amount of market protection is inordinate for a fuel whose true value--without government support--seems low.

While subsidies are often percieved to be good for US business, the magnitude of government handouts to corn farmers in the United States produces pernicious consequences around the world. Government actions have artificially increased US demand for corn, driving up the prevailing world price of corn by over 50 percent since 2006. While rising world food costs are not the fault of the US ethanol regime alone, support for ethanol does play a significant role in rising prices. This effect is especially dire for poor countries accustomed to years of falling food costs. In addition to its direct implications on the world food market, ethanol--touted by US policymakers as a solid source of renewable energy--may not be a viable alternate fuel. There remain practical concerns to its implementation, and there is no consensus on the fuel's environmental benefit.

After considering corn-derived ethanol's questionable status as an energy-efficient fuel, along with the unintended food price blowback of its subsidization, US government policies in support of ethanol look fundamentally unsound. while political realities may not allow for the removal of distorting subsidies, the US government may enentually realize that money should shift from the production of ethanol itself toward research being conducted to make the existing industry more efficient. If ethanol production technologies are streamlined, less corn would be needed to produce the same amount of product. This would eliminate the need for subsidies, which are in part causing rising food prices and nearly eliminating ethanol's environmental benefits.

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Hungry for Fuel, Hungry for Food

The hype surrounding ethanol raises concern about the dangerous and increasing integration between energy markets and agriculture. Demand for food products now depends not just on the literal hunger and nutritional consumption of humans, but also on a "hunger" for energy. This growing connection has an underlying moral dilemma; is it fair to produce fuel from food that otherwise could have been used for nourishment? The answer to this question is debatable, and largely unclear.

Some other, more pragmatic economic questions have empirical answers. Data shows that mixing energy and agriculture markets has severe policy blowback, affecting consumers at home to the developing world's poor. As prices of corn have risen from subsidies, so have the prices of its grain substitutes--wheat, barley, and others. Processed foods that use the grains as staples have also increased in price, a result which hits foreign and US consumers squarely in the pocketbook. Consumers worldwide are increasingly angry: in early 2007, Mexico City faced riots over the doubling in prices of corn-based tortillas.

C. Ford Runge and Benjamin Senauer, professors of applied economics at the University of Minnesota, noted in their 2007 article in Foreign Affairs that "biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security." The same article also cites figures which indicate that continuing high oil prices (which are likely, considering the ongoing conflicts in the Middle East), would raise corn prices by 41 percent by 2020. Given overall food price increases, the number of "chronically hungry" people in the world could also rise to 1.2 billion by the same year.

Food price increases are most devastating for the world's poorest consumers. Congress' desire to establish a functional ethanol infrastructure through subsidies has increased food prices to the point that farmers in sub-Saharan Africa, Asia, and Latin America are often unable to afford feed for their farm animals. Poor consumers are simply unable to afford food for themselves and their families. Small price increases could starve poor families in the lesser-developed world, and the price increases driven in part by the ethanol craze are much larger than marginal. Over the course of last year, corn prices rose 50 percent from 2006 levels, and wheat prices more than doubled in price per ton. Blind promotion of ethanol is at least partially to blame for these increases.

A Questionable Environmental Solution

Although its distortionary effect on the world food market is immediate and palpable, ethanol also runs counter to environmental sensibilities. There is no consensus on whether it is even an efficient, viable alternative fuel source. US ethanol is derived from domestically grown corn, which requires fossil fuels to harvest and ship to refineries. Similarly, as the final ethanol liquid product cannot be transported through pipelines because it requires absolute purity and low-water levels, additional fossil fuels are required to transport ethanol to gas stations on trucks, barges, and trains.

Some research has found that ethanol is efficient overall in that more energy is created by ethanol fuel than is used to produce it. According to a BusinessWeek report, scientists at a lab funded by the US Department of Energy have found that ethanol delivers about 1 million British Thermal Units (BTU) of energy for every 0.74 million BTUs of fossil fuel consumed. Gasoline, in contrast, consumes 1.23 million BTUs of fossil fuel for every 1 million BTUs delivered. These results are corroborated by a 2006 National Academy of Sciences study, which found an equivalent 25 percent positive net energy balance for corn grain ethanol. As time goes on, ethanol production should slowly become more efficient in terms of net energy balance, as has been the trend over the past few decades. Cellulose-based ethanol, which is derived from a biomaterial found in most plants, is considered to be a more energy efficient version of corn ethanol. It is currently being promoted as a more environmentally friendly, efficient alternative.

While some data indicates that ethanol already is, or is at least becoming, more energy efficient, there is still no scientific consensus on whether it is good for the environment. Some choose to focus less on energy efficiency and more on the carbon emissions that result from ethanol's production and use. Robert Bryce, a fellow at the Institute for Energy Research, claims, "Virtually all studies show that greenhouse gases associated with ethanol and gasoline are about the same once the entire life cycle of the two fuels are compared."

Even if ethanol can be considered more environmentally friendly than gasoline, it still remains to be asked whether it can even be practically introduced as viable replacement for gasoline. The answer to this question is much clearer. If the United States were to depend entirely on domestic crop reserves for ethanol for energy, demand would outstrip supply to such a degree that even if the entire biomass of the United States were used to produce ethanol, there would still be an energy shortage. Tad Patzek, an environmental and civil engineering professor at the University of California, Berkeley, noted in remarks to the National Press Club in 2005 that "compared with current energy use in the United States, the impact of biomass is almost negligible, regardless of its source."

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Patzek asserts that there are several alternatives to funding the ethanol behemoth that would probably help the environment more than the increasingly prevalent use of mixed ethanol and gasoline, or "gasahol." The first is to ensure that car tires are properly inflated, and the second is to increase fuel efficiency of today's vehicles by just three to five miles per gallon. Patzek also suggests investment in solar energy, which "is at least 100 times more efficient in delivering work than corn ethanol." Even if ethanol is energy efficient, it will never be able to replace gasoline as the United States' main source of fuel. As Patzek makes clear, many different types of measures and alternate energy sources could more significantly reduce humans' impact on the environment at a lower cost than the continued rollout of ethanol.

The notable feature of Patzek's alternatives is that each one is much more pragmatic than the construction of the new ethanol-based fuel infrastructure. An outside observer would think that these low-cost, convenient, and environmentally friendlier alternatives would gain predominance. Strangely enough, however, a confluence of political interests has pushed the ethanol project on the United States in place of cheaper, more convenient and less distortionary alternatives.

A Political Phenomenon

Ethanol has achieved success as an alternative fuel largely because it is a convenient policy point for politicians. Corn is a big industry in the Midwest, where presidential nominations are often secured. At the same time, the opposition to ethanol is disorganized, quiet, and politically insignificant. Therefore, politicians have found that supporting ethanol is truly a risk-free political proposition that ensures the support of the thousands invested in the industry without any political downside.

Ethanol is also popular because it tangentially appeals to people of different ideologies and backgrounds. Environmentalists view ethanol as one of the key potential clean fuels of the future. Neoconservatives, who are often at the other end of the political spectrum, see it as a potential way to end the addiction to Middle-Eastern oil and therefore increase the US' relative power standing. Farmers perceive it as a means of earning government money, while suburbanites and urbanites see it as a way to reduce guilt over ruining the environment with gasoline. The issue thus has a broad, if not very deep, appeal to most significant political demographics in the country.

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The fuss over ethanol is also peculiar because it may have never emerged had it not been for the 1973 OPEC oil embargo. OPEC's decision to withhold oil due to US support of Israel during the Yom Kippur War forced then US President Carter to address increasing concerns over energy dependence. In 1977, Carter called for a plan to use US domestic resources to serve the nation's own energy needs and stressed the importance of finding new sources of fuel. Ethanol fit the bill and first gained policy backing in 1980, when Carter approved an election-year subsidy of US$340 million to ethanol production factories in the Midwest. President Ronald Reagan, the famed small government conservative, followed suit--his Department of Agriculture gave US$70 million in government-funded corn to ethanol production companies for free in 1987.

Just as political circumstance aided the initial emergence of ethanol decades ago, such circumstance continues to support ethanol today. President Bush's call in the 2007 State of the Union for Congress to pass laws promoting renewable fuels is almost universally popular and has given a boost to ethanol. In December 2007, Congress passed the Energy Independence and Security Act, which requires that 36 billion gallons of alternative fuel be used by 2022. Current ethanol production is at 7.8 billion gallons a year, and although other renewable fuels are included in the 36 billion gallon figure, the bill still mandates a large increase in ethanol production.

As a result, the industry continues to grow unhindered. The Renewable Fuel Association's 2008 Ethanol Outlook Report notes that 2007 saw the introduction of 29 new operational ethanol refineries and a 2 billion gallon increase in ethanol production. In 2008, 68 refineries will either be expanding capacity or beginning production, which will result in a forecasted 6 billion gallon increase in production. These increases in production will command an increase in government subsidies propping up the entire program.

The ethanol industry is in place today because of a series of political circumstances that spawned government mandates on ethanol content in fuel, as well as subsidies to farmers and producers. In truth, the ethanol "industry" is not so much determined by market forces as it is by political concerns. Before changing his position on ethanol ahead of the Iowa primaries, John McCain correctly wrote in a letter to President Bush concerning ethanol legislation that the fuel "is a product that would not exist if Congress didn't create an artificial market for it."

Therein lies a primary problem with ethanol--it has developed entirely as a political phenomenon and as such is blindly promoted. Because it has not been tested in the open market, ethanol has emerged as the US' favorite alternative fuel without much examination of its viability as a source of clean, efficient, renewable energy.

Ethanol's Future

The one way to immediately end some of the distortive effects that subsidies have had on food prices is to remove the protections themselves. If the United States were to import ethanol from Brazil, where infrastructure for the production and distribution of sugarcane-based ethanol is already established, it would be able to achieve many of the same goals without taking food off the tables of the foreign poor. But considering the disproportionate strength of the US farm lobby, and the predominant political desire for energy independence rather than just energy sustainability. the removal of US subsidies will not happen any time soon.

Still, since the ethanol craze is linked to political convenience, support for the program may fluctuate with ethanol's ability to bring in votes in the Midwest. As the election year passes into memory, the US government may begin to shift its priority away from the physical production of ethanol toward research on the development of new, more efficient methods of production. Currently, subsidies to corn farmers are politically expedient. But once the influence of Iowa fades and the next administration needs a political victory,attention may turn to tangible progress on the energy front. There, the US government may find an opening to shift priorities from physical production toward research. This simple change would promote efficiency, environmental friendliness, and global conscientiousness in the ethanol industry. If ethanol production becomes significantly more efficient as the result of new research on the cellulose model, ethanol may actually become environmentally and commercially viable. Theoretically then, no subsidies of a particular plant would be necessary nor would there be such a considerable rise in world food prices.

But if for political or practical reasons such a shift in priorities does not occur, the US government will focus on simpler, more pragmatic complements to ethanol. Such measures could include significant increases in mileage standards in cars, or greater grant funding for more efficient sources of energy such as solar power. Although these efforts do little to fix ethanol's problems, they could buttress the country's attempts to achieve energy independence and a new, reliable renewable fuel. Such outcomes would indirectly reduce the power that the ethanol industry currently wields.

In the world of renewable energy, there is no panacea. Ethanol, which had originally seemed so promising, has taken its share of criticism over the past few years. But its emergence marks a commitment to renewable fuels, even if the commitment is mostly driven by the desire for energy independence. It is necessary to translate that commitment into a smart, feasible, and fair reality that helps the world more than it harms it. Hopefully when the US presidential election season ends, the winning candidate will have the political will (and capital) to put away those metaphorical farmer overalls, and work toward that goal.

staff writer K1RAN BHAT