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Corn Ethanol: The Next New Coke?

May 7, 2012

How do you get Americans to pay for something they don’t really want in the first place? Most of the time – as in the case of New Coke, Harley Davidson Perfume, and the U.S. Football League – the answer is simple: you can’t.

But where the Edsel failed, corn ethanol has somehow succeeded. Despite its drawbacks (which are legion – a point we’ll get to later), more than 13 billion gallons of corn ethanol were sold in the United States last year.

How did it happen? Corn ethanol has outlived Pepsi AM and the Betamax because its backers hit upon a three-part recipe for success: a huge dose of federal subsidies mixed with high gas prices and untethered rhetoric.

For decades, ethanol producers have promised that their product will revitalize America’s farming communities, end our dependence on foreign fuel, save the environment, and lower gas prices. Presumably a product that good would sell itself, but the federal government rigged the market anyway by creating the Renewable Fuel Standard (RFS), the Volumetric Ethanol Excise Tax Credit (VEETC), and a host of other measures worth billions of dollars each year to the biofuels industry. The RFS mandates a nine-fold increase in the amount of biofuels used in the US (from four billion gallons in 2006 to 36 billion gallons by 2022), while the VEETC gave away tax breaks to companies that add ethanol to gasoline (even though Americans were already required by the RFS to consume that ethanol).

Mercifully, the VEETC expired at the end of 2011, but the ethanol lobby quickly fixed its sights on a new target. In order to produce, distribute, and sell the rapidly growing volume of ethanol mandated by the RFS each year, the biofuels industry needs to develop a new, ethanol-specific infrastructure. And, true to form, it would prefer that the government pay for it. In particular, the industry now wants funding to install ethanol-friendly blender pumps at gas stations around the country.

Cue Congress. In late April, the Senate Agriculture Committee passed a Farm Bill that included $800 million for energy-related programs. The largest component of the proposed package is $241 million for the Rural Energy for America Program (REAP), which previously helped farmers improve their energy efficiency, install solar panels, and conduct energy audits. This year, thanks to aggressive lobbying by the ethanol gang, REAP has a new function. In late 2011 – just before VEETC finally expired – the Department of Agriculture began approving the use of REAP funds to defray the cost of blender pumps. USDA’s decision to repurpose REAP was endorsed by key members of Congress during the recent discussions around reauthorization of the Farm Bill.

Why are policymakers so invested in ensuring the success of corn ethanol? According to U.S. EPA’s own 2011 Triennial Report, continued production of corn ethanol will have significant negative consequences for air and water quality, soil conservation, and habitat preservation. EPA data also show that the corn ethanol being sold in 2012 emits more greenhouse gas over its lifecycle than gasoline. In 2009, Clean Air Task Force analyzed EPA’s data and found that the lifecycle greenhouse gas emissions from the additional corn ethanol produced pursuant to the RFS will exceed those from gasoline until 2054.

Meanwhile, for all the flag-draped rhetoric coming from its backers, corn ethanol simply cannot provide energy independence. Already, more than forty percent of corn grown in the United States is turned into ethanol. If all of the corn grown in the United States in 2011 had been used to make ethanol, it would have offset national gasoline consumption by just 18 percent.

Finally, the ethanol lobby’s contention that corn ethanol is dramatically reducing the price of gas is wrong. The study they cite depends on a mix of mistaken and unrealistic assumptions about petroleum refiners’ ability to react to supply disruptions. Moreover, their claim conveniently ignores a fact that’s critically important to consumers: a gallon of ethanol provides only two-thirds as much energy as a gallon of gasoline. Once these factors are taken into account, it becomes clear that the price reductions being trumpeted by industry fall somewhere between negligible to nonexistent.

These flaws and others are catalogued in a letter recently circulated by a bipartisan group of Congressmen. From their perspective, the RFS is a “broken policy” that damages the economy, pushes up food prices, and degrades natural resources. Using REAP funds to underwrite blender pumps will only exacerbate these problems. If Congress and the Administration are going to continue to require Americans to buy corn ethanol, the least they could do is ask the ethanol companies to pay the freight.

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