In its zeal to solve one problem, Congress has created another. Lawmakers thought they were doing the right thing last year when they mapped out a timeline for increasing the supply of biofuels in the U.S. The goal: reduce our dependence on foreign oil. The strategy: expand domestic production of renewable fuels five-fold to 36 billion gallons annually by 2022. Corn farmers will be the big winners in the early going, as annual production of corn-based ethanol will double to 15 billion gallons.
It has been just five months since President Bush signed into law the Energy Independence and Security Act of 2007, supported by all four members of Maine's congressional delegation. Already the ethanol mandate is coming under fire. Last Wednesday the Senate Homeland Security and Governmental Affairs Committee examined whether the rush to corn-based ethanol is contributing to higher food prices. Susan Collins of Maine, the senior Republican on the committee, thinks so. The week before she had joined 23 other Senate Republicans in drafting a letter to the Environmental Protection Agency (EPA) calling for a change in the mandate. In the words of presidential candidate John McCain, "this subsidized program--paid for by taxpayer dollars--has contributed to pain at the cash register, at the dining room table, and a devastating food crisis throughout the world."
Did he say subsidy? That's right, ethanol blenders qualify for a federal tax credit of 51 cents a gallon for helping to meet the Renewable Fuels Standard (RFS) mandate passed in 2005. That comes to $2.5 billion a year. Corn growers get their own subsidy, and they are further protected by a tariff on imported ethanol of 54 cents a gallon. That keeps Brazilian sugar-based ethanol out of our market, to the consumer's detriment. Ethanol from corn costs $1.05/gal. to make with a per-acre yield of 400 gallons. Ethanol from sugar cane costs $0.81/gal. at 590 gallons per acre. Which business would you rather be in?
All told, corn ethanol is subsidized to the tune of $1.45 per gallon. But a gallon of ethanol does not deliver the same energy as a gallon of gasoline. In reality the subsidy comes to well over $2 for every gallon of gasoline replaced. We get way more bang for the buck for subsidies paid directly to the oil industry. Meanwhile, diversion of corn (as much as one-fourth of the crop) from food to fuel has jacked up food prices by 25%--"the best example I've seen of the law of unintended consequences," said Collins at Wednesday's hearing.
When it comes to predicting consequences, politicians struggle. As Henry Hazlitt wrote many years ago in Economics in One Lesson, "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Subsidies and tariffs tend to lead to a sub-optimal allocation of resources, to stubborn inefficiencies. "Free prices and free profits will maximize production and relieve shortages quicker than any other system."
If we must subsidize something, perhaps we should move away from corn ethanol and toward cellulose ethanol derived from crop wastes, wood wastes, and perennial grasses. Corn currently gets ten times the subsidy as the other biofuels combined. A more balanced program would allow different regions of the country to match their R & D to the available feedstocks. As it stands now, corn-belt agribusinesses get fat while the rest of the world starves.
[update, May 15:]
The U.S. Senate today passed the Food, Conservation and Energy Act of 2008 by a lop-sided 81-15 margin. Among many other things, the bill reduces the tax credit for ethanol refiners from 51 cents a gallon to 45 and expands subsidies for cellulose ethanol, steps that Senator Collins would presumably support. However, she voted against the entire package, perhaps because it proposes to spend roughly $300 billion over five years and preserves subsidies to farmers making as much as $750,000 in annual farm income. Currently there is no limit whatsoever; President Bush had proposed a limit of $200,000. The President has threatened a veto, but the Senate has enough votes to override.
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