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Let’s repeal special tax breaks, tariffs and subsidies for Corn Ethanol Farmers

If I had one question to ask each presidential candidate, it would be this: “do you think the 54 cents per gallon tariff on cheaper imported ethanol should be eliminated? If not, can you explain to American taxpayers why the resulting higher prices for oil would be beneficial for them.

I propose a policy generally of noninterference. Specifically, :

  1. eliminate the 54 cent per gallon tariff on imported ethanol
  2. eliminate the 51 cent per gallon subsidy for blending corn ethanol into gasoline
  3.  eliminate the mandate on production of 7.5 billion gallons of ethanol fuel  2012.

I don’t really have a proactive energy plan, except for raising CAFE standards and keeping fuel emission standards high.  And yes, continuing research on cellulosic ethanol. If we had more hybrid and electric cars on the road, this would really be less of a problem.

Ever since I found out earlier this week that the US Congress mandated 54 cent tariffs on Brazilian ethanol fuel , I have been incensed. I’ve called my congressman complaining about the issue, and plan to call as many politicians about the issues. Congress has mandated through tariffs and quotas that the US produce a certain amount of ethanol in their fuel.

Why is this bad, you ask? In short, it is raising the price of gasoline which all of us will have to pay! It is creating a massive government-supported industry that will inevitably fail. It will fail. Government-protected businesses always fail; the question always ends up being how much damage it will end up doing to the economy in the process.

Here’s a collection of articles and evidence to support this thesis. Let me say right off I am a fiction writer, not an economist or energy expert. I know next to nothing about the science of producing fuel. But my firsthand experience living in Eastern Europe economies has helped me to see the damage down when governments try artificially propping up an industry. It always ends up costing the taxpayer money. I see a case where the American consumer is being screwed bigtime, and instead of blaming Congress for their idiotic politics, they are blaming oil companies.

Current Legislation Being Considered

  • HR 559 Biofuels Security Act
  • Commentary by Colin A. Carter  about the history of legislation (May, 2007):
    • On Capitol Hill, the Senate is debating legislation that would further expand corn ethanol production. A 2005 law already mandates production of 7.5 billion gallons by 2012, about 5% of the projected gasoline use at that time. These biofuel goals are propped up by a generous federal subsidy of 51 cents a gallon for blending ethanol into gasoline, and a tariff of 54 cents a gallon on most imported ethanol to help keep out cheap imports from Brazil. The proposed legislation is a prime example of throwing good money after a bad idea.

      President Bush has set a target of replacing 15% of domestic gasoline use with biofuels (ethanol and biodiesel) over the next 10 years, which would require almost a fivefold increase in mandatory biofuel use, to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no feasible alternative. However, achieving the 15% goal would require the entire current U.S. corn crop, which represents a whopping 40% of the world’s corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.

The Brazil Ethanol Success Story

  • Ariel Cohen, Brazilian sugar cane ethanol costs 25 percent less to make than its U.S. corn counterpart. Despite the tariffs, the U.S. remained the primary destination for Brazilian ethanol in 2006. This was recognized by Senator Richard Lugar (R–IN), who welcomed the new U.S.–Brazilian cooperation as a move to improve the U.S. image in Latin America and increase energy security: “All possibilities for growth in bio-fuels production must be explored to decrease our ‘oil addiction.'”
  • James Surowiecki In the nineteen-seventies, Brazil embarked on a program to substitute sugar ethanol for oil. Today, every gallon of gas in Brazil is blended with at least twenty per cent of ethanol, and many cars run on ethanol alone, at half the price of gasoline.What’s stopping the U.S. from doing the same? In a word, politics. The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago. So the prospects for a domestic-sugar ethanol industry are dim at best.
  • Adam Dean: By limiting market access for Brazilian ethanol producers, who would benefit from increased exports, the U.S. tariff also limits the subsequent benefits that would accrue to Brazilian sugar producers. Furthermore, since ethanol production in the United States is based on corn, the tariff also leads to a higher price of corn in the United States. This artificially inflated price is then passed on to Mexican consumers in the form of higher food prices.In these ways, it is the U.S. tariff on ethanol imports that may have caused higher tortilla prices in Mexico and slowed the growth of Brazilian ethanol production. If the United States were to eliminate its ethanol tariff, we would likely witness market changes that would greatly benefit everyone involved.
  • David Adams: Today, Brazil is the world’s largest producer of sugar and ethanol. Brazilian cars are also equipped with engines that can run on ethanol and gasoline, or any blend of the two. Known as “flex-fuel” cars, they have dazzled the market since their launch by Volkswagen in March 2003. Last month, they captured 66.7% of new car sales. All the major Brazilian car manufacturers now make them, including Ford Motor and General Motors . In Brazil ethanol, or “alcool” as it is called, costs only $2 at the pump, compared to $4 for a gasoline-ethanol blend (Brazil no longer sells regular unblended gasoline). And while ethanol-powered cars consume 25% to 30% more fuel per mile than gasoline cars, the average motorist can save about $820 a year by switching to ethanol.

The Harms of Protecting an Industry

  • James Surowiecki: A recent study by Amani Elobeid and Simla Tokgoz, scientists at Iowa State University, projected that if the tariffs were removed, prices would fall by fourteen per cent and Americans would use almost three hundred million gallons more of ethanol.
  • Doug Koplow: Because the bulk of the subsidies — per-gallon payments, tax exemptions and tax credits — are tied to sales or output and output is increasing at double-digit rates of growth, the rate of subsidy growth is extremely high. Although there are proposals before Congress to create variable-rate subsidies that would decline as oil prices rise, the existing subsidies are still set at fixed rates. Production-linked subsidies distort product markets and trade more than any other form of support.Subsidies to value-adding factors, particularly for capital investments in new plants, are much smaller on a subsidy-equivalent basis than output-related subsidies, and many are provided under general programs. However, these government-intermediated loans and loan guarantees often shift the risk of default to the government body providing the assistance. In effect, a large number of communities have committed a significant amount of public money to the future of biofuels production. The amount of public capital used, the degree of risk being taken, and the implications in terms of future government dependence on the continuation of biofuels subsidies to keep their credit support from defaulting are all important issues to examine in greater depth.The report estimates that by the end of this decade, assuming continuation of current policies, annual support for ethanol will be in the range of $6.3 billion and $8.7 billion a year. Subsidies to biodiesel are also increasing at a rapid rate of growth in output, albeit from a lower base, and could rise to between $1.7 billion and $2.3 billion within two or three years.

Archer Daniel Midland: Polluter

  • Sasha Lilley: Yet the enormous amounts of corn that ADM and other ethanol processors buy from Midwestern farmers wreak damage on the environment in a multiplicity of ways. Modern corn hybrids require more nitrogen fertilizer, herbicides, and insecticides than any other crop, while causing the most extensive erosion of top soil. Pesticide and fertilizer runoff from the vast expanses of corn in the U.S. prairies bleed into groundwater and rivers as far as the Gulf of Mexico. The nitrogen runoff flowing into the Mississippi River has fostered a vast bloom of dead algae in the Gulf that starves fish and other aquatic life of oxygen.To understand the hidden costs of corn-based ethanol requires factoring in “the huge, monstrous costs of cleaning up polluted water in the Mississippi River drainage basin and also trying to remedy the negative effects of poisoning the Gulf of Mexico,” says Tad Patzek of the University of California’s Civil and Environmental Engineering department.

Why Corn Ethanol Generally Sucks

  • John McCain: Ethanol is a product that would not exist if Congress didn’t create an artificial market for it. No one would be willing to buy it. Yet thanks to agricultural subsidies and ethanol producer subsidies, it is now a very big business – tens of billions of dollars that have enriched a handful of corporate interests – primarily one big corporation, ADM. Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality. Let me repeat for emphasis; ethanol does nothing to reduce fuel consumption, nothing to increase energy independence and nothing to improve air quality. (idiotprogrammer comments: although McCain’s sentiment is right, he overlooks the difference between sugar ethanol which Brazil imports).

How much Corn Farmers have been screwing us

  • Ben Liebermann This mandate comes on top of other pro-ethanol provisions, most notably a 51 cent per gallon tax credit. Other incentives include payments to corn farmers and subsidies for small ethanol producers. These add up to $5.1 billion to $6.8 billion per year—roughly $1.00 per gallon of ethanol.
  • Ariel Cohen: Ethanol from corn enjoys a 51 cent per gallon federal tax credit, while imported sugar cane ethanol is punished with an import duty of 54 cents per gallon and an ad valorem tariff of 2.5 percent. But Caribbean Basin Initiative (CBI) member states may export ethanol produced from at least 50 percent agricultural feedstock to the U.S. free of duty. If the local feedstock content is lower, limitations apply on the quantity of duty-free ethanol imports—the greater of 60 million gallons or 7 percent of the U.S. domestic ethanol market.
  •  Colin A. Carter on the economic impact:  Thus, it is no surprise that the price of corn has doubled in the last year — from $2 to $4 a bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn. Until the recent ethanol boom, more than 60% of the annual U.S. corn harvest was fed domestically to cattle, hogs and chickens or used in food or beverages. Thousands of food items contain corn or corn byproducts. In Mexico, where corn is a staple food, the price of tortillas has skyrocketed because U.S. corn has been diverted to ethanol production.

Where Presidential Candidates Stand:

E85 & US Distribution

  • Factcheck Analysis (by Emi Kolawole): It’s true that the U.S. has produced 4.5 billion gallons of ethanol, according to a July 2006 Department of Energy report. But, according to the CRS, total ethanol production accounts for “2.4 percent of gasoline consumption on an energy equivalent basis” even as ethanol production uses 20 percent of the nation’s corn supply. In addition, E85 represents only 1 percent of all ethanol consumption (the other 99 percent, according to a 2006 CRS report (PDF), goes toward fuel blends consisting of up to 10 percent ethanol, also called “gasohol”). With this in mind, a 50 percent increase in biorefinery capacity is merely a drop in the bucket when it comes to replacing the overwhelming amount of gasoline we consume. The CRS report outlines some of the existing barriers to expanded ethanol use:

    CRS: [B]arring a drastic realignment of U.S. field crop production patterns, corn-based ethanol’s potential as a petroleum import substitute appears to be limited by crop area constraints, among other factors.

    Those “other factors” include limits on ethanol distribution. Gasoline is currently distributed via pipeline. But ethanol, which is more corrosive than gasoline, would eat through the existing pipes, so ethanol is transported by truck or rail-car, an expensive alternative. The fuel pipes can be coated with epoxy or other materials to prevent corrosion, but that would merely be one of many fixes needed. Another problem with ethanol distribution is that the fuel would have to travel from the Midwest to the coastlines for refinement and distribution, whereas gasoline tends to go in the opposite direction. It is possible to fix this problem, but the solution would require additional investments in infrastructure. According to the CRS, modifications to remedy these problems “will likely be expensive, and could further increase ethanol transportation costs.”

  • Ethanol and Gas Stations: The Dirty Details: Why Oil Companies Don’t want Gas Stations to Carry E85 (fuel with 85% ethanol content) Ethanol : By Laura Meckler . (highly recommended)

Among those trying to overcome obstacles to E85 are the domestic auto makers. They have built flex-fuel vehicles for years because doing so gives them “credits” in their efforts to meet federal fuel-economy standards. Without the credits, Ford and GM wouldn’t have met mileage goals for light trucks in 2003, 2004 and 2005 and would have owed fines. The mileage goals pose a bigger challenge to Detroit because of its heavy reliance on large, thirsty vehicles. Foreign makers generally haven’t resorted to building flex-fuel cars to meet the mileage goals.

For Detroit, the credits applied even if the flex-fuel cars they built never actually burned ethanol. For a long time, the auto makers said little about ethanol, and many owners of flex-fuel cars didn’t know they had them. But when gasoline prices surged in 2005 and 2006, GM and Ford saw their flex-fuel cars as a way to counter their image as gas-guzzler makers.

Other Resources

{ 3 comments… add one }
  • Nice blog. Yes, everybody should inform themselves about the huge implications — for taxpayers, consumers and the environment — of the government’s biofuel policies. Here is an additional reference: our study, “Biofuels–At What Cost? Government Support for Ethanol and Biodiesel in the United States“, published last October.

  • Arnold Peabody 5/19/2008, 12:24 pm

    Amen, brother.

    I’d like to suggest some ideas to reduce the importation (and cost) of foreign oil, increase alternative, renewable, less polluting energy sources, lower the cost of food that is affected by the domestic production of ethanol, and help promote peace, stability, and our reputation in the world:

    1. Import as much ethanol as possible from Brazil, beginning as soon as possible, with no tariffs to “protect” American farmers or oil companies from this competition. Eliminate the current tariff. Our other industries compete on a supply and demand basis, our mega-farm agri-businesses can do so as well. If they wish to compete in the ethanol business, let them do so by growing crops which are more efficient than the corn that is used now (which has resulted in sharply higher prices for food and animal feed), or by finding a way to produce corn (or other) ethanol that is cost-efficient. Do not compensate farmers because of this change, or pay them not to grow corn for ethanol production, etc. Level the playing field. No doubt the mega-farmers and oil companies will not like it, but it’s time for straight action, not just straight talk. Who else will do it?

    Brazil does not use corn to make ethanol, the sugar-cane they use is much more energy-efficient than corn is at this time, and utilizing Brazilian ethanol would eliminate any justification for higher food prices as a result of using the corn for ethanol. Brazil operates most of its vehicles on straight ethanol, and has for many years. It’s a renewable fuel, and it will greatly reduce pollution, greenhouse gases, and global warming in the world! It also burns cleaner in automotive engines, and is better for automotive engines as a result.

    2. Encourage other countries to grow cost-efficient crops (sugar cane, sugar beets, bio-mass, whatever) and make ethanol, and buy all we can get, again, with no import duties. Countries like Haiti, Honduras, Puerto Rico, etc. Oh, and Cuba as well! Yes, Cuba. If some other American businesses can do business in Cuba, China, Russia, Venezuela, etc., there’s no reason why we can’t import ethanol from Cuba. It would be good for America, good for Cuba’s people, might improve relations with Cuba, and would probably boost America’s image all over the world.

    3. For the oil companies in this country that would be affected – They can invest in the ethanol production of the countries that will grow the crops and make it, transportation and shipping companies, and they will still own the transportation and distribution businesses, currently selling gasoline, that will sell the ethanol here. If they don’t want to do that, let them make doughnuts or something else.

    4. As another direct benefit, we would no longer be dependent for that amount of fuel on countries that hate us, want to destroy us, and are trying to kill us, or support those who do. It would also encourage other countries to grow and purchase ethanol, further weakening the political grip of the oil-producing countries on countries that might otherwise support us.

    5. We would need no oil-tankers or off-shore drilling platforms (with their inevitable catastrophic oil-spills, susceptibility to hurricane or ship-collision damage, causing environmental disasters, massive clean-up costs and work, loss of wildlife, etc.), or drilling in the ANWR area of Alaska for oil!

    We don’t have to locate ethanol underground or undersea, wait for years to drill for it, build refineries for it, it’s available now, we can import lots of it, encourage other countries to make it, it’s comparatively cheap, helps food and feed stocks, doesn’t steal our money and give it to our enemies, lowers prices for food, feed and oil, and the oil companies haven’t been building refineries because they know it’s coming. Demand action to lower fuel costs now. Do your part!

    Here’s one way, email the President or members of the Senate:

    comments@whitehouse.gov

    http://www.senate.gov/general/contact_information/senators_cfm_cfm?

    Cut and paste the senate link into the address line of your browser, (you can look up their email addresses by name, state, or party.)

    Thank you!

    Lightnin’

  • Thomas Gieskes 6/24/2008, 11:21 pm

    The other myth that needs to be dispelled is the cellulosic ethanol route. Iogen in Canada is the self=proclaimed leader in the field, but estimates that it would cost $500 million to build a full scale commercial unit with a capacity of 60 million gallon per year.
    There are better processes out there (BRI, Coskata) but they don’t share the limelight.

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