Ethanol Subsidies: Misguided Policy

The lesson of federal ethanol subsidies is one of misguided policy and unintended consequences. One bad idea backed by a strong constituency—the farm lobby, in this case—begets more bad ideas.

Originally intended to reduce our country’s reliance on foreign oil when introduced in 1978<http://usgovinfo.about.com/od/moneymatters/a/The-Federal-Ethanol-Subsidy.htm>, the ethanol subsidy became just another way for lawmakers to funnel money to special interests. In 1990, the Clean Air Act (CAA) amendments gave a further boost by writing into law a requirement for additives that oxygenate fuel—namely, ethanol.

Though failing to meet both their energy (imports) and environmental (emissions) objectives, these subsidies now cost Americans about $6 billion annually<http://money.cnn.com/2011/01/25/news/economy/renewable_energy_obama/index.htm>. Along with their staggering price tag, the policies have driven up the cost of food around the globe<http://reason.com/archives/2010/11/16/congress-let-ethanol-subsidies>.

The Obama Administration is not deterred<http://fuelfix.com/blog/2011/04/11/obama%E2%80%99s-response-to-growing-u-s-deficit-includes-subsidizing-120000-ethanol-fueling-pumps/> by these realities. Instead, EPA ramped up the ethanol limit in gasoline from 10% to 15%<http://www.ft.com/cms/s/0/4f7e3d58-d6fd-11df-aaab-00144feabdc0.html#axzz1JEClRrES> for newer cars last year. And the Secretary of Agriculture just announced<http://online.wsj.com/article/SB10001424052748704503104576251023724394758.html> last month that the federal government will give grants (aka “subsidies”) to fueling station owners to cover the cost of installing gasoline pumps capable of handling higher blends of ethanol in gasoline that cost in excess of $100,000 each.

Though a step in the right direction, it remains to be seen whether last week’s Senate action against ethanol subsidies was a sign of things to come or just political art. Unfortunately, there is no guarantee the bill will be enacted. The House rejected similar legislation, and the White House obviously opposes the repeal because its dependence on farm state votes for the 2012 election.

The political quagmire in which we now find ourselves isn’t limited to ethanol subsidies. The same rule applies to other political attempts to manipulate the U.S. tax system to selectively hurt or help a particular good or service at the expense of consumer choice and market efficiency.

Despite the fact that these maneuvers repeatedly fail and also distort the productive use of our resources, they are nearly impossible to repeal. If there is a political miracle and this subsidy is brought to an end, Congress should also end the mandate to use ethanol. Otherwise, refiners will face higher costs—some of which will be passed onto consumers.

The right thing to do is also to eliminate the CAA requirement for Reformulated Gasoline (RFG) so that refiners and automakers can jointly meet emission limits in the most cost-effective manner. Eliminating the RFG requirement would also permit a rationalization of the nation’s gasoline and distribution system. The at least 11 different blends of gasoline we currently have complicate the distribution system and make fuel more expensive.

According to a 2005 GAO study<http://www.gao.gov/htext/d05421.html> of gasoline markets and special blends:

In the case of oxygenates, there appears to be agreement that the addition of oxygenates reduces emissions from older vehicles. However, improvements in automobile technology in newer vehicles now automatically reduce emissions of carbon monoxide and other pollutants and, for these vehicles, may have negated many of the benefits of adding oxygenates to gasoline. Some studies have also found that use of ethanol can increase emissions of pollutants that can increase ozone levels. Regarding air quality, EPA and other experts have concluded that improvements in air quality seen in some parts of the country are at least partly attributable to the use of special gasoline blends. However, studies on the impact of individual emissions reduction efforts–such as special gasoline blends–are limited and incomplete, in part because of difficulty isolating the effect of gasoline blends from other factors that affect air quality such as weather and emissions from other sources.

The proliferation of special gasoline blends has made it more complicated to supply gasoline and has raised costs, significantly affecting operations at refineries, pipelines, and storage terminals. At refineries, making these blends can require additional investment such as installing new processing equipment and the use of larger amounts of valuable components in the blending process–making it more costly to produce special gasoline blends.

In other words, the environmental benefits of ethanol subsidies are probably negligible but the price effect isn’t.

If Congress is serious about reducing the deficit and improving our energy security, it will eliminate all subsidies intended to produce a politically desired outcome and work with the Administration to create an investment environment that will promote greater use of our own abundant energy sources.

Originally published by the National Journal at http://energy.nationaljournal.com/2011/06/what-are-the-next-steps-in-sub.php#2014080

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