Time to Repeal the Ethanol Mandate

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Though intended to help consumers and reduce greenhouse gasemissions, the ethanol mandate has done just the opposite,contributing to high food and gas prices with little environmentalbenefit. Representative Jeff Flake (R–AZ) has introduced H.R.5911, the Remove Incentives for Producing Ethanol Act of 2008,which would eliminate the mandate and other benefits for ethanol,and other measures may soon be introduced.
A return to a free market for ethanol would be a welcome step.Congress should eliminate the ethanol mandate, ethanol-related taxbreaks, and protectionist tariffs that keep out potentially cheaperforeign supplies.
A Growing Mandate
Renewable fuels, and particularly corn-ethanol, have long enjoyedpreferential treatment from the federal government. This includes atax credit worth $0.51 per gallon. In addition, tariffs discourageimports of ethanol, including potentially cheaper sugarcane–based ethanol from Brazil.
Yet the ethanol industry still wanted more, and Congress, concernedabout high gas prices, global warming, and domestic energyproduction, enacted a mandate. The 2005 energy bill contained thefirst-ever requirement that renewable fuels be mixed into thegasoline supply. The 2007 energy bill increased the mandatesubstantially. The U.S is now committed to using 9 billion gallonsin 2008, rising to 36 billion by 2022.
Ethanol and Fuel Costs
With pump prices rising to record levels, consumers are not seeingthe promised benefits from ethanol use. Proponents of the mandateinsist that without ethanol, prices would be even higher, but thisis not likely.
The logistical and regulatory costs of mixing ethanol into the fuelsupply raise the cost of driving beyond the level imposed by plaingasoline usage. Unlike gasoline, ethanol cannot be shipped viapipelines and must be transported via rail, barge, or truck.Ethanol use also complicates compliance with some EnvironmentalProtection Agency regulations for gasoline, especially thosedesigned to fight summer smog. Most significantly, as the AmericanAutomobile Association and others have pointed out, ethanol uselowers fuel economy. [1]
Ethanol and Food Costs
Diverting corn from food to fuel use has raised food prices. At alittle over $2 per bushel when the 2005 energy law was signed, theprice of corn has surged above $5 per bushel, primarily because aquarter of the crop is now used to produce energy. A host ofcorn-related foods, such as corn-fed meat and dairy, have seensharp price increases. Farmers, realizing the benefits to bederived from producing corn, are switching from soybeans and wheat,reducing the supply and contributing to the price rise.
For corn farmers, the mandate has exceeded their wildest dreams,but for consumers, it has been an expensive hit—higher coststo drive to the supermarket and higher prices once you're there. Arecent study from Purdue University puts the added food cost fromthe renewable mandate at $15 billion in 2007—about $130 perhousehold. [2] The impact thus far in 2008 is even higher.
The effects of America's ethanol policy, as well as similarfood-for-fuel policies in Europe, are felt globally. Several UnitedNations and anti-hunger organizations have weighed in heavilyagainst current policies. World Bank President Robert Zoellick hasacknowledged that "biofuels is no doubt a significant contributor"to high food costs, adding that "it is clearly the case thatprograms in Europe and the United States that have increasedbiofuel production have contributed to the added demand for food." [3] There has been food-related rioting in several developing nations. [4] Although a number of factors have led to this, biofuels mandatesare undeniably a contributor and exacerbate any other pressures onfood prices.
Repealing the ethanol mandate would have an immediate effect onfood prices. A study conducted by the International Food PolicyResearch Institute found that placing a moratorium on biofuels in2008 would decrease corn prices by 20 percent and wheat prices 10percent by 2009–2010. [5] The faster Congress acts, the quicker consumers will see a drop infood prices.
Ethanol and the Environment
Ethanol was promoted in part for its claimed environmentalbenefits: lower pollution and reduced greenhouse gas emissionsrelative to gasoline. That is why the growing chorus ofenvironmentalist criticism of the mandate is particularlynoteworthy.
Many environmental organizations have raised concerns about theincreased inputs of energy, pesticides, and fertilizer needed togrow more corn. [6] The same is true for the stress on water supplies, especially nowthat corn production is being expanded in locales where rainfall isinsufficient and irrigation is needed. [7] Even land that is now protected under federal conservationprograms may soon be cleared for corn. [8]
In addition, the facilities that turn corn into ethanol createemissions issues of their own. The goal of the ethanol mandate wasto reduce carbon dioxide emissions, but after taking into accountthe carbon dioxide emitted from ethanol production, the reductionin emissions is modest. [9] These effects on the land, air, and water have already raisedserious concerns, and we are only one-quarter of the way toward theeventual 36 billion-gallon target. Clearly, the food and fuelimpacts cannot be justified by environmental benefits.
Even worse is the turnabout on the major environmental issue of theday: climate change. Proponents of ethanol and other biofuelsclaimed that they are responsible for lower carbon dioxide andother greenhouse gas emissions than the gasoline they displace, butseveral recent studies challenge this assertion and argue thatbiofuels increase such emissions. [10] Oxfam, an international aid organization, argues that "large-scalegrowth in biofuels demand has pushed up food prices and so farthere is little evidence that it is reducing overall carbonemissions." [11]
Conclusion
Policymakers are rightly beginning to reconsider whether biofuelsare worth the cost. Ethanol policy has contributed to a rise inenergy and food costs, both domestically and internationally.Moreover, ethanol has damaged—not protected—theenvironment.
The anti-consumer and environmental impact can only get worse. Evenmany long-time critics of ethanol mandates did not expect seriousproblems to arise this soon. We are only one-quarter of the waytoward the 36 billion-gallon mandate. More corn will have to bedevoted to ethanol production—up to 15 billion gallonsannually—and then the rest of the mandate will have to be metthrough fuels like cellulosic ethanol that currently are even moreexpensive.
It should be noted that there is little to no downside risk inrepealing the ethanol mandate, as well as the generous tax creditsand protectionist tariffs that also tilt the playing field in favorof corn ethanol use. To the extent that there is a valid economiccase for fuel ethanol, it will continue to be used even in theabsence of government dictates and incentives.
The lesson seems clear: The consequences of the ethanol mandatehave had detrimental effects on both the economy and theenvironment. Congress should take a hard, honest look at America'sethanol policy, and the mandate should be repealed, along with thetax breaks and protectionist tariffs.
Ben Lieberman is Senior Policy Analyst for Energy and Environment and NicolasLoris is a Research Assistant in the Thomas A. Roe Institute forEconomic Policy Studies at The Heritage Foundation.
[1] See AAA, "Daily Fuel Gauge Report," at http://www.fuelgaugereport.com .