Let's Sunset the Ethanol Subsidy

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WASHINGTON--Gasoline prices are above $4 a gallon, and President Obama on Tuesday renewed his call to Congress to raise taxes on oil companies.

Unfortunately, the lawmakers heard not a word from the president about the $6 billion a year in ethanol subsidies that are paid to corn growers and ethanol producers. For corn farmers, federal support for ethanol is a windfall that lifts corn prices and makes it profitable to plant additional acres.

Ethanol, as most motorists have learned, is a corn-based additive that stretches gasoline, so reduces gasoline needed to operate vehicles. But the gasoline-ethanol blend, currently 10 percent ethanol, lowers vehicles' gas mileage, leaving motorists with higher fuel bills.

In addition, federal ethanol subsidies are responsible for avoidable greenhouse gas emissions and for diverting corn from the food pipeline. The diversion raises corn, meat, and other food prices-in the United States and all over the world.

Congress, in the energy bill signed into law in December 2007 by President George W. Bush, agreed to require the use of 14 billion gallons of ethanol or other renewable fuels this year, with quantities gradually increasing to 36 billion gallons in 2022. Ethanol producers receive a tax break of 45 cents a gallon, and corn growers receive subsidies that Congress may increase in the next farm bill, in 2012.

Even with congressional mandates and federal subsidies, America is having difficulty absorbing the required 14 billion gallons of ethanol.

First, ethanol is costly to ship, because it separates from gasoline in the presence of water. So, unlike gasoline, blends of ethanol and gasoline that motorists put in cars cannot be transported through pipelines. Instead, ethanol is shipped by rail, and mixed with gasoline near the point of distribution.

Second, with high gasoline prices, motorists are driving less and purchasing more fuel-efficient cars, reducing gasoline-and ethanol-consumption.

The Environmental Protection Agency's solution? Force more ethanol consumption, by allowing ethanol levels in gasoline to rise from 10 percent to 15 percent for cars from model years 2001 onward. Since higher ethanol blends are harmful to older car engines-some believe to newer engines also-gas stations would have to operate different pumps for the 10 percent and 15 percent blends. And if a motorist put the 15 percent blend in his older car by mistake-an accident that would likely occur not infrequently-the engine would be damaged.

Oklahoma Representative John Sullivan, a Republican, authored an amendment to block EPA from using funding this fiscal year to raise ethanol levels in gasoline. The Sullivan Amendment passed the House 285 to 136, and is now awaiting action on the Senate floor.

Ethanol wasn't supposed to be harmful. In the 1990s, when Congress passed legislation mandating the use of oxygenated fuels, using ethanol for energy was going to be win-win. The United States can grow so much corn, the argument went, that the country could divert some for gasoline and thus reduce tailpipe carbon emissions and become less dependent on foreign oil producers.

Alas, in the real world, unintended consequences arrive all too often.

Consider the link between ethanol and greenhouse gas emissions. Many scientists now believe that the production of ethanol causes more harmful emissions than it prevents. Other research has shown that substantially increasing our use of ethanol is not cost-effective, because the United States has neither the infrastructure nor the vehicles to use it efficiently.

The problem is that the more ethanol we produce, the more greenhouse gases we generate in that production. This occurs because rising corn prices encourage farmers all over the world to transform their land from forests and fallow fields to corn, thereby losing the capture of airborne carbon dioxide performed by trees and shrubs.

This might suggest, then, that there are ways to produce biofuels that do not generate greenhouse gases. Just produce them from waste material, without cutting down forests or plowing over fields. Yet, the technology for this doesn't yet exist.

In addition, ethanol production is contributing to increases in the price of food, both in the United States and abroad. Not only is corn that was used for food made into ethanol, but other crops are being abandoned for corn. On April 20 the Labor Department reported that over the past six months the cost of food eaten at home has risen 6.5% on a seasonally adjusted annualized basis.

Despite all of this downside, why does President Obama seem still to believe in ethanol? Why does he continues to call for more renewable and biofuels, even if they drive up prices of food and gasoline?

In the past, ethanol has commanded a bipartisan majority in Congress because of the number of Republican members of Congress from agricultural states. Even former House Speaker Newt Gingrich, now considering a run for president, supports ethanol subsidies.

Earlier this month North Dakota Senator Kent Conrad, a Democrat, met with his North Dakota Agriculture Advisory Committee and agreed on a goal of expanding ethanol and renewable energy production.

But House Republicans are beginning to reconsider their support for ethanol. House Republican Study Committee Chairman Jim Jordon, from Ohio, has come out firmly against ethanol subsidies. Only 31 Republicans were in favor of allowing EPA to increase ethanol levels in motor fuel, and 206 were against.

Mr. Obama may figure that he needs ethanol to carry in 2012 the corn-growing states from Ohio westward through Iowa that he won in 2008. Whatever the politics of ethanol, the problem for Mr. Obama is that the new generation of fuels is not yet commercially economically viable on its own.

Ethanol raises the price of motor fuels and food and increases greenhouse gas emissions. It's time for the subsidies to go.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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