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The Real Ethanol Subsidy Remains

When Congress ended the tax credit for corn-based ethanol recently, the big ethanol companies all said that they didn’t consider that a big deal despite spending huge amounts of money trying to keep the subsidy. Doug Mataconis explains why they aren’t all that concerned about it: Because there are other subsidies and other federal regulations that assure their continued profits.

He notes, for example, that the subsidy for other cellulosic ethanol — ethanol made from switchgrass, wood chips, corn stalks, etc. — is now up to $1.01 a gallon. Congress has not killed that subsidy but also hasn’t extended it. The industry is still pushing for another five years for that subsidy and may get it after the current recess. More importantly, the federal government still requires that 10% of all fuel refined in the country contain ethanol.

So the reason the industry isn’t complaining too much about the end of the tax credit isn’t because they have suddenly gotten religion and realized that they don’t need government help to push a product that nobody seems to want, it’s because they are now benefiting from the most powerful subsidy of all, mandated demand. It’s as if Congress decided that all fast food hamburgers sold in the United States must include a certain quantity of lettuce and then eliminated a tax credit to lettuce farmers. The industry wouldn’t complain because the new mandated demand subsidy is far more valuable to them, and far harder to repeal once it is enacted, than a tax credit.

The ethanol tax credit is gone, and that’s a good thing, the fact that it took 30 years to kill this monster is just another demonstration of how difficult it is get rid of these vestiges of crony capitalism once they’ve made their way into the law. While the tax credit may be dead, though, ethanol subsidies are still very much with us. Not only does that mean that we’ll continue producing an environmentally dubious product in the name of “energy independence,” it also means that we will continue to suffer the economic distortions that the subsidy creates. It’s already been fairly well established that artificially increasing demand for corn-based ethanol has increased the cost of corn. As James Joyner noted in September, this policy has had the effect of increasing worldwide grain prices, as well as the price of meat given the fact that corn is used as feed for cattle, pigs, and chickens.

I wonder, though, how the lifting of tariffs against Brazilian ethanol might change this. Is it 10% of all fuel used that must contain ethanol? Can refineries import cheaper ethanol from Brazil rather than using American-made ethanol? Brazil makes ethanol with sugar cane, which produces about twice as much ethanol per acre, so it should be a lot cheaper even with transportation costs.

Comments

  1. Michael Heath says

    Doug Mataconis writes:

    . . . the fact that it took 30 years to kill this monster [one ethanol subsidy] is just another demonstration of how difficult it is get rid of these vestiges of crony capitalism . . .

    In the narrowest sense this is ‘crony capitalism’ but it’s not a very good illustration of the practice when considering advocates. That’s because, at least from my vantage point where I’m only casually informed on the subject, the interests originally supporting ethanol subsidies extended beyond a few plutocrats and also included fly-over state populists and environmentalists. In spite of the consolidation of the agriculture industry which increasingly put more money into fewer hands.

  2. thomaspenn says

    I think the cellulosic ethanol subsidies make sense. That is still a developing technology and the U.S. could really benefit from being at the forefront of 2nd and 3rd generation biofuels. It also shouldn’t have the negative effects on the environment and food supply that corn based ethanol does. I think government does have a role in pushing innovation through technological development and the cellulosic ethanol subsidy makes sense in that light.

  3. Reginald Selkirk says

    He notes, for example, that the subsidy for other cellulosic ethanol — ethanol made from switchgrass, wood chips, corn stalks, etc. — is now up to $1.01 a gallon.

    Fine. How many gallons are being produced per year?

    More importantly, the federal government still requires that 10% of all fuel refined in the country contain ethanol.

    There are valid reasons for this. Ethanol is an oxygenated fuel, and cuts down on production of some componenets of smog.

  4. harold says

    He notes, for example, that the subsidy for other cellulosic ethanol — ethanol made from switchgrass, wood chips, corn stalks, etc. — is now up to $1.01 a gallon.

    Except from a perspective of rigid ideological opposition to any government subsidies for any developing industries or technologies, a subsidy for cellulosic ethanol may be a very good idea.

    Note – I strongly oppose perverse subsidies that encourage the use of food corn for ethanol. That is an inefficient practice that generates overpriced fuel ethanol while raising consumer food prices.

    Ethanol fuel per se is a potential complement to solar, wind, nuclear, etc., as part of an overall move toward sustainable, domestically produced, carbon neutral energy sources.

    Ethanol is a liquid fuel which fairly easily substitutes for gasoline as a transportation fuel. It can complement electric vehicles, if a reserve of liquid fuel is desired.

    Unlike fossil fuels, oxydization of ethanol for vehicle propulsion is more or less carbon neutral (because the carbon atoms released into the atmosphere were fixed from the atmosphere by plant crops one or a few harvest cycles ago). Production and transportation of ethanol may or may not be carbon neutral, but burning it is.

    Also, because ethanol can be produced from diverse crops, its price could potentially be less volatile than that of fossil fuels,

    Making ethanol from cane sugar does involve use of a food crop, but due to the very inexpensive nature and limited nutrition of unsubsidized cane sugar, can be efficient.

    Economically efficient cellulose ethanol would not only potentially allow the use of non-food crops or parts of crops for fuel ethanol production, the technology might also allow the use of cellulose to generate material for human food consumption or alcoholic beverage production.

    It is probably a justifiable area of industrial research for a subsidy.

  5. dingojack says

    Hang on a second Doug Mataconis –
    It’s as if Congress decided that all fast food hamburgers sold in the United States must include a certain quantity of lettuce and then eliminated a tax credit to lettuce farmers. The industry wouldn’t complain because the new mandated demand subsidy is far more valuable to them, and far harder to repeal once it is enacted, than a tax credit.”
    It’s more like mandating that a percentage of water must be sourced from processed sewerage rather than rivers, dams, aquifers and lakes. Unless you think diesel is mere empty calories that society doesn’t need to, say, transport food to your local store.
    Not only does that mean that we’ll continue producing an environmentally dubious product in the name of “energy independence,” it also means that we will continue to suffer the economic distortions that the subsidy creates. It’s already been fairly well established that artificially increasing demand for corn-based ethanol has increased the cost of corn. As James Joyner noted in September, this policy has had the effect of increasing worldwide grain prices, as well as the price of meat given the fact that corn is used as feed for cattle, pigs, and chickens“.
    wait now – we’ve began feeding poor cows, pigs and chickens with ‘switchgrass, wood chips, [and] corn stalks’ now? Really?
    And wouldn’t inreasing the use of corn stalks to make fuel imply more cornstalks, therefore more corn. More corn is a bad thing, how exactly?
    Also I’d like a to sight a few studies (I’m sure they exist) that demonstrate scientifically this is ‘an environmentally dubious product’. Peer reviewed please.
    Dingo
    —–
    As I have said before: ‘Nothing sinks a good argument faster than careless hyperbole. Believe me, I know.’

  6. danielrudolph says

    @dingojack: making ethanol from switchgrass and inedible parts of corn would be great. Right now, it’s mostly made from actual corn that someone could eat.

  7. D. C. Sessions says

    I think the cellulosic ethanol subsidies make sense.

    And we’re back to “picking winners and losers.” Which only seems to be a problem when the winners being picked aren’t existing dominant industries.

  8. matty1 says

    Dingo,

    I don’t have the time or inclination to do a proper lit search on this but google scholar throws up this review

    Harro von Blottnitz, Mary Ann Curran (2006) A review of assessments conducted on bio-ethanol as a transportation fuel from a net energy, greenhouse gas, and environmental life, Journal of Cleaner Production, Volume 15, Issue 7, 2007, Pages 607–619

    From the abstract.

    These LCAs [Life Cycle Assessments] typically report that bio-ethanol results in reductions in resource use and global warming; however, impacts on acidification, human toxicity and ecological toxicity, occurring mainly during the growing and processing of biomass, were more often unfavourable than favourable. It is in this area that further work is needed.

    So yes there can be negative environmental effects but there is a lot of uncertainty and of course this was six years ago.

  9. slc1 says

    It should also be noted that producing ethanol from sugar cane in Brazil is leading to rain forests being cut down and bulldozed over to increase production of sugar cane for this purpose. Since the rain forests are the most efficient sequesters of carbon, this seems not to be the best approach to combating climate change.

  10. dingojack says

    matty1 – Thanks for the cites, I’ll look them up.
    danielrudolph – so changing from using a fuel that drives up food prices to one that doesn’t is a bad thing? Yeah really makes sense.
    Dingo

  11. parasiteboy says

    Unfortunately the whole issue of “Does ethanol generate more energy than the amount needed to produce it? (http://alternativeenergy.procon.org/view.answers.php?questionID=001261)” is very muddled and is still open to debate.

    There are a couple of things to note when thinking about this issue.
    1) The corn used to produce ethanol is feed corn, which is used to feed livestock. Feed corn is already the vast majority of corn produced by the US.
    2) The more feed corn produced for ethanol the less corn there is for human consumption and the cost of corn for human consumption and meat products that use corn fed animals both goes up in price.
    3) Fossil fuels are used to produce ethanol and some of the differences between analyses of the cost/benefit of ethanol as a fuel source take fossil fuel use into account differently.
    4) Ethanol is a biofuel, but it is not biodiesel. Ethanol is highly refined, like gasoline and biodiesel is not, like diesel and this refinement can also make a difference between a fuel being on one side or the other of carbon neutral.

  12. matty1 says

    Interestingly – Tasmania has a different source for biodiesel.
    Dingo

    Poppies?

    So that’s what the Afghan war is about.

  13. Azkyroth says

    @dingojack: making ethanol from switchgrass and inedible parts of corn would be great.

    ……that’s what “cellulosic” means……

  14. danielrudolph says

    @dingojack. What I meant is that you were arguing using scrap is good practice and I was telling you it isn’t current practice.

  15. harold says

    Please note that Ed’s original comment is about a subsidy on fuel ethanol made from cellulose, not about fuel ethanol made from corn or fuel ethanol made from cane sugar.

    It should also be noted that producing ethanol from sugar cane in Brazil is leading to rain forests being cut down and bulldozed over to increase production of sugar cane for this purpose. Since the rain forests are the most efficient sequesters of carbon, this seems not to be the best approach to combating climate change.

    This is an excellent argument against bulldozing rain forests, an activity I condemn.

    It is not an argument against using sugar cane ethanol, instead of petroleum products, for liquid transportation vehicle fuel. Sugar cane can be, and often is, grown without bulldozing down rain forests.

    Ed’s post is discussing a subsidy on fuel ethanol made from cellulose, not fuel ethanol made from cane sugar.

    1) The corn used to produce ethanol is feed corn, which is used to feed livestock. Feed corn is already the vast majority of corn produced by the US.
    2) The more feed corn produced for ethanol the less corn there is for human consumption and the cost of corn for human consumption and meat products that use corn fed animals both goes up in price.

    I strongly agree; making fuel ethanol from corn, or any other high value food crop, is a terrible idea, as I noted in my earlier comment.

    Fortunately, the subsidy Ed is discussing is for ethanol made from cellulose.

    3) Fossil fuels are used to produce ethanol and some of the differences between analyses of the cost/benefit of ethanol as a fuel source take fossil fuel use into account differently.

    1) Clearly, this is true. Fossil fuels are also used to produce fossil fuel gasoline. In either case, the total use of fossil fuel should be taken into account.

    2) There are many, many ways to produce ethanol. Humans have been routinely producing ethanol for thousands of years (or more correctly, we have been, unwittingly until a century ago, cultivating microbes that produce ethanol for us); usually we drink it. It is not necessary to use fossil fuels in ethanol production; this is merely a characteristic of some of the more economical methods of contemporary ethanol production.

    (Also, just for information, ethanol can be produced either by allowing certain microbes, most famously but by no means exclusively brewer’s yeast and its cousins, to digest simple carbohydrates in anaerobic conditions, but there are also many other ways of synthesizing it. Fuel ethanol is often made in a very similar way to liquor, by allowing yeast or other microbes to ferment carbohydrates to ethanol, and then distilling the product to a high percentage of ethanol. Details differ, of course.)

    Fuel ethanol is not a perfect solution for anything but it is a potential player in an overall system of more sustainable, more carbon neutral, and less politically and price volatile energy supply, for the following reasons –

    1) Any time you burn ethanol made from recently grown plants instead of an energy equivalent amount of fossil fuel, that is more advantageous in terms of carbon neutrality, and also, although oxydizing ethanol is not a zero pollution activity, in terms of most other pollutants.

    2) Ethanol is a fairly convenient liquid fuel that works right now for standard internal combustion engine vehicles, at a cost that is comparable to that of gasoline (exact cost to consumer depending on local conditions and, of course, primarily on taxes and subsidies).

    3) Electric vehicles running on batteries run cleanly but batteries have to be charged up somehow and a reserve of liquid fuel may still be desirable even in vehicles with electric propulsion potential.

    4) A hypothetical jump from reliance on fossil fuels to a system of total energy supply from wind, solar, and safe nuclear, with vehicles driven by solar charged batteries, or some such system, would preclude any use for ethanol. However, if there are any intermediate steps, fuel ethanol could play a useful role – as long as it is not perversely manufactured from food crops.

  16. parasiteboy says

    Azkyroth@17 says

    Of course, all your arguments are about corn-based ethanol

    Correct, I thought that it was clear from my comments as a whole. Corn based ethanol fuel it what is mainly produced and consumed in the US and we are talking about subsidies for those US based companies.

  17. matty1 says

    Please note that Ed’s original comment is about a subsidy on fuel ethanol made from cellulose, not about fuel ethanol made from corn or fuel ethanol made from cane sugar.

    Eh? I read it as a general discussion about fuel ethanol and subsidies/mandates in which all three of those were mentioned as examples.

    It is not an argument against using sugar cane ethanol, instead of petroleum products, for liquid transportation vehicle fuel. Sugar cane can be, and often is, grown without bulldozing down rain forests.

    The issue is whether the demand for ethanol will lead to increased demand for cane leading to deforestation. When assessing the environmental impacts of something you have to consider the unplanned side effects as well as the stuff you plan. I don’t disagree with your comments about the potential benefits of ethanol, this isn’t something I’ve studied but you sound convincing, but I know a small amount about environmental impact assessment and you should not scope out inconvenient possibilities before you start.

    I’m also slightly confused by your discussion of how ethanol is produced. You say this can be done without fossil fuels, mentioning fermentation which would not produce a strong enough concentration for fuel (try setting fire to a beer, use a bad one please) but then you mention distilation which requires heat and heat requires fuel. Perhaps you mean that this fuel doesn’t have to be fossil based but this is not clear to me.

  18. parasiteboy says

    harold@18 says

    Please note that Ed’s original comment is about a subsidy on fuel ethanol made from cellulose, not about fuel ethanol made from corn or fuel ethanol made from cane sugar.

    harold, I’m not sure we read the same post. The title of the article is

    The Real Ethanol Subsidy Remains

    Ed mentions that

    He notes, for example, that the subsidy for other cellulosic ethanol — ethanol made from switchgrass, wood chips, corn stalks, etc. — is now up to $1.01 a gallon.

    but

    Congress has not killed that subsidy but also hasn’t extended it. The industry is still pushing for another five years for that subsidy and may get it after the current recess.

    In other words there is currently no available subsidy for cellulose based fuel ethanol. Ed goes on to say

    More importantly, the federal government still requires that 10% of all fuel refined in the country contain ethanol.

    Ed then has what Doug Mataconis wrote, part of which is

    The industry wouldn’t complain because the new mandated demand subsidy is far more valuable to them, and far harder to repeal once it is enacted, than a tax credit.

    So the ethanol fuel mandate it “the real ethanol subsidy”.

  19. slc1 says

    Re Harold @ #18

    It is not an argument against using sugar cane ethanol, instead of petroleum products, for liquid transportation vehicle fuel. Sugar cane can be, and often is, grown without bulldozing down rain forests.

    True, but, as I understand it, that is not what is happening in Brazil (which by the way uses an 85/15 ethanol/gasoline blend).

  20. parasiteboy says

    I think D. C. Sessions@8 makes a very good point.

    And we’re back to “picking winners and losers.” Which only seems to be a problem when the winners being picked aren’t existing dominant industries.

    Personally, I believe that we should be investing our money into public/private (government, industry and academic) research and development for an economically viable product that meets a certain standard. This would allow us to pursuit multiple options.

  21. harold says

    The issue is whether the demand for ethanol will lead to increased demand for cane leading to deforestation.

    1) Deforestation is a major issue, whether in the context of fuel ethanol or any other context.

    It is true that oxydizing hydrocarbons of any type for fuel virtually always involves either using fossil fuel, which has a greenhouse impact (because long-sequestered carbon is being added to the atmosphere), or using carbohydrates recently created from atmospheric carbon by plants or other photosynthetic organisms such as algae. Thus, if you replace fossil fuel with ethanol, biodiesel, or any other plant product, you create a demand for more net agricultural output.

    However, ethanol from cellulose would have much less such effect. Certainly it is true that some cellulose is fed to animals or used industrially, in such forms as “hay” and “straw”, but when the entire plant, rather than just seeds, can be used, a great deal of energy per acre can be produced.

    When assessing the environmental impacts of something you have to consider the unplanned side effects as well as the stuff you plan. I don’t disagree with your comments about the potential benefits of ethanol, this isn’t something I’ve studied but you sound convincing, but I know a small amount about environmental impact assessment and you should not scope out inconvenient possibilities before you start.

    I completely agree with this and am mildly puzzled that my previous comments did not already make it clear that I agree with this.

    I’m also slightly confused by your discussion of how ethanol is produced. You say this can be done without fossil fuels, mentioning fermentation which would not produce a strong enough concentration for fuel (try setting fire to a beer, use a bad one please) but then you mention distilation which requires heat and heat requires fuel. Perhaps you mean that this fuel doesn’t have to be fossil based but this is not clear to me.

    You are correct that, if yeast fermentation is used, it must be followed by distillation to increase ethanol concentration. I thought I said that, but evidently, I did not say it clearly enough. And you are correct that the distillation process requires plenty of addition of heat. In fact, efficient fermentation requires temperature control, as well.

    Certainly, if fossil fuels are used during these processes – please note that any controllable source of heat will do; in theory the whole thing could be accomplished using solar power, burning ethanol to distill more ethanol, etc., and the choice will tend to be driven by economics – then the amount of fossil fuel consumption used for ethanol production is part of the impact of using ethanol.

    parasiteboy –

    You are correct and I made a mis-statement. I jumped from discussing the article to discussing my own opinions rather abruptly.

    What actually happened is that all direct subsidies for all ethanol production, regardless of starting material, were not renewed. Since this got rid of subsidizing ethanol from corn, I am happy about that.

    Mandated demand for ethanol remains on the books, and is an obvious indirect subsidy.

    As it happens, I oppose the use of taxpayer dollars to turn food corn into fuel ethanol.

    As you probably gathered, I support the use of fuel ethanol from cellulose, or even cane sugar, in some circumstances, even if the former needs some public support.

    Let me clarify that. I do not support the use of fuel ethanol if there is a better alternative, nor if its use creates different but equally bad environmental problems, relative to the use of fossil fuels.

    However, ethanol is fairly unique in that it is a liquid fuel that can propel standard internal combustion vehicles, with very little modification, and is thus more or less available in the short term. The actual burning of ethanol from plants is more or less carbon neutral (the manufacture of ethanol may or may not be, depending on how you do it). Evidence to date suggests that it creates fewer problems with other pollutants than burning standard gasoline, as well (please note that I am not saying it is perfect in this regard).

    Therefore, if the US transitions to a more sustainable, carbon neutral, less politically volatile energy consumption profile, which would probably involve greater conservation, and appropriate encouragement of a range of alternate energy sources, responsibly manufactured ethanol as a liquid fuel for vehicles might be part of the package.

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