My 2 cents on ethanol

Recently Jared asked me about ethanol. I didn't really remember/know much, other than it was a bad idea. Then in my one class we had to write an essay on mutualistic and parasitical relationships in the ecology of enterprises by example. And so, here is what I wrote.



Recently is has become popular to call for “energy independence.” Be it for dislike of pollution, fear of dependency on unstable suppliers, xenophobia/protectionism, or simple rhetoric, the idea of growing our own fuel has some traction recently. Even President Bush has said “Ethanol comes from corn -- and we're pretty good about growing corn here in America; we've got a lot of good corn-growers. Therefore, it makes sense to promote ethanol as an alternative to foreign sources of oil. Ethanol can be mixed with gasoline to produce a clean, efficient fuel.” Subsidies to ethanol producers have increased and mandates for using a gasoline/ethanol blend have been enacted.

Despite the populist appeal, the merits of ethanol and other biofuels tend to be grossly overstated by politicians. The Sierra Club’s head global warming expert, Daniel Becker, said that the process to produce biofuels is so energy intensive that “at the end of the day, you have a product that is no boon for the environment.” Former CIA Director R. James Woolsey stated in a congressional testimony that producing ethanol from corn “takes about seven gallons of oil to produce eight of ethanol.” Furthermore, ethanol based fuel yields lower mileage than regular gasoline. Paul Krugman noted that the Department of Energy said the net savings in replacing a gallon of gas with ethanol is only around a quarter of a gallon. This is “because of the energy used to grow corn, transport it, run ethanol plants, and so on. And these energy inputs come almost entirely from fossil fuels, so it’s not clear ... ethanol does anything to reduce carbon dioxide emissions.” This is because ethanol contains around 40 percent less energy than gasoline. Vehicles using E85 (85% ethanol 15% gas) will get approximately one third less miles per gallon.

Besides the higher fuel prices and lower mpg that consumers are legally mandated to face, the increase in ethanol production raises food prices. Besides direct consumption corn is used to feed animals. Hence the shift of corn usage from food to fuel raises the price of meat as well as corn products. Hungry people in places like Egypt who are dependant on American corn are also worsened by the ethanol mandates. The poor in Mexico are hurt by the raising price of tortillas due to the increased price of corn.

The physical environment is also worsened. More land is cleared to grow crops, which lessens natural habitats. More pesticides and water are used. Sugar cane, which is a much superior source of biofuel, can’t be used extensively due to the climate of America. Places like Brazil have achieved success using sugar cane. Importation could happen, but the sugar lobby blocks it because they don’t want the competition.

New York Time columnist Thomas Friedman summed up the sugar situation best: “Thanks to pressure from Midwest farmers and agribusinesses, who want to protect the U.S. corn ethanol industry from competition from Brazilian sugar ethanol, we have imposed a stiff tariff to keep it out. We do this even though Brazilian sugar ethanol provides eight times the energy of the fossil fuel used to make it, while American corn ethanol provides only 1.3 times the energy of the fossil fuel used to make it. We do this even though sugar ethanol reduces greenhouses gases more than corn ethanol. And we do this even though sugar cane ethanol can easily be grown in poor tropical countries in Africa or the Caribbean, and could actually help alleviate their poverty.” Conservative Harvard economist Greg Mankiw noted that Fridman called the nature of affairs “stupid,” and agreed with him.

Yet despite all this ethanol gets a tax break of 51 to 71 cents at the pump and is mandated to be used in fuel. With organizations as diverse as the Sierra Club and the Cato Institute and economists as far apart on the political spectrum as Krugman and Mankiw opposed to a policy, it would be expected that such a policy would have difficulty passing. Yet it does, and politicians boast.

One reason is votes. The farm lobby is strong, and politicians attempt to placate a concentrated group of voters. Iowa is an important state for politicians with presidential aspirations. Krugman noted that Obama and Biden both were on an introduced bill to increase ethanol production. Hillary Clinton mentioned ethanol in a town meeting in the state. Pushing for more ethanol usage leads to a mutualistic relationship with the farm lobby. Votes are purchased for the politicians, and the centralized voting bloc gets the handout and legislation desired. Although the relationship is parasitic with the rest the nation, the dispersion of interest and lack of a coalition similar to the agricultural bloc renders other’s opinions mostly meaningless, as witnessed by the current policies.

Besides votes politicians receive pecuniary profits from ethanol mandated legislation. From the end of the 2000 election cycle to mid 2006, ethanol giant Archer Daniel Midland has donated $1.2 million to Democrats and $1.85 million to Republicans. Other ethanol producers have also donated to campaigns. In exchange for billions in subsidies, politicians are rewarded with millions of dollars that ultimately originated with taxpayer money.

If one feels that the price of gasoline is too cheap and should be raised to discourage consumption, then the current method is one of the worst methods to achieve this. Giving billions of tax dollar money to the ethanol industry which is parasitic on consumers, the environment, users of corn products both domestic and foreign, and poor sugar farmers abroad is highly inefficient. This could be bypassed simply and a Pigouvian tax levied that would generate government revenue instead of creating more spending programs. This would make the price more stable and be a more efficient and direct method of increasing the price. Yet since politicians profit in both votes and contributions they continue to support and enact legislation to use coercion to ensure its propagation with their mutualistic relationship with the ethanol producers. The effect of the windfall on producers can be seen stock returns on two of the biggest companies, Archer Daniel Midland and Pacific Ethanol as compared to the S&P 500 and the Blue Chips’ returns (from Yahoo! finance).

(the footnotes didn't work out so well in copy and paste, but here they are.)

1. “His Car Smelling Like French Fries, Willie Nelson Sells Biodiesel from the New York Times” http://travel.nytimes.com/2005/12/30/business/30biowillie.html?ex=1171170000&en=79bf54533266f347&ei=5070
2. Quoted in “Energy Piracy” http://www.cato.org/pub_display.php?pub_id=4228
3. “The Sum of All Ears” available at http://economistsview.typepad.com/economistsview/2007/01/paul_krugman_th_1.html
4. “CAFE and ethanol: two Democratic dogs chasing each other's tail; has the President bought in?” available at http://www.sepp.org/Archive/weekwas/2007/February%2010.htm
5. “Against the Grain” http://www.smartmoney.com/barrons/index.cfm?story=20060810 see also “Is Ethanol the Answer?” http://p259.news.mud.yahoo.com/s/usnews/20070205/ts_usnews/isethanoltheanswer
6. “Global Warming’s Friendly Fire” in WSJ Feb. 8, 2007 available at http://www.sepp.org/Archive/weekwas/2007/February%2010.htm
7. “Sugar Ethanol” http://gregmankiw.blogspot.com/2006/09/sugar-ethanol.html
8. “Green Fuel's Dirty Secret” http://www.corpwatch.org/article.php?id=13646 see also “Archer Daniels Midland: A Case Study In Corporate Welfare” http://www.cato.org/pubs/pas/pa-241.html