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  • The Ethanol Mandate Needs to Go

    In the name of reducing greenhouse gas emissions and reducing America’s dependence on foreign oil, the 2007 Energy Independence and Security Act (EISA) mandates that we need to consume 36 billion gallons of ethanol by 2022. EISA also contains a mandate within the mandate for advanced biofuels, with the applicable volume of cellulosic ethanol set at 250 million gallons this year, 500 million gallons in 2012, and ultimately hitting 16 billion gallons in 2022.

    The problem is, when you look at the monthly production of cellulosic biofuel on the Environmental Protection Agency’s (EPA) website, you’ll see nothing but goose eggs. Zero production. While the costs of producing cellulosic ethanol have come down, you still have to build the plant, which adds an additional $150 million to the tab.

    The fact that cellulosic ethanol production is nowhere near providing industrial-scale quantities of fuel demonstrates our government’s inability to project what is commercially viable and beneficial for consumers. And it is coming at a cost. Greg Scott, executive vice president and general counsel of the National Petrochemical & Refiners Association, testified last month saying the EPA’s miscalculation would cause his members problems:

    If we miss the mark, EPA will fine us. The same cannot be said either for EPA itself or for the various biofuels promoters presenting testimony today. If EPA is wrong, or if a biodiesel trade group representative or cellulosic ethanol company spokesperson is wrong in his or her rosy predictions for future production, it is our member companies that will experience the economic and regulatory pain.

    Most of the ethanol production in the United States comes from corn-based ethanol, which has plenty of its own problems. A new article by David Biello in Scientific American nicely details the economic, environmental, and logistical obstacles corn-based ethanol has to overcome to replace oil as a transportation fuel. Cost has always been a roadblock, even before the ethanol mandate was enacted in 2005 and expanded in 2007.

    [B]etween 1980 and 2000 the U.S. government has devoted some $19 billion in tax breaks alone to the ethanol-from-corn effort, according to the U.S. Government Accountability Office, and ethanol subsidies per liter of the biofuel have often been larger than the total cost of a liter of gas the biofuel replaced. A significant portion of the profits made by agribusiness giants like Poet or Archer Daniels Midland—which, along with oil company Valero, are responsible for the bulk of ethanol produced in the U.S.—can be attributed to this government largesse with taxpayer dollars. But even setting subsidies aside—after all, every energy source in use in the U.S. today continues to receive federal tax benefits, among other incentives—there’s the simple economic cost of building all those corn mills, stainless steel fermentation tanks and other infrastructure needed to churn out ethanol on the tremendous scale of transportation fuels.

    Then there’s the fact that corn ethanol actually produces a greater harm to the environment just from being created—“CO2-emitting fossil fuels are used to make fertilizer, operate farm equipment, power ethanol distilleries, and transport the ethanol to market.” On top of the emissions from production, there are other environmental concerns. To grow corn, farmers must plow more land, and more land plowed not only means less area for trees but can also “release carbon previously locked up in soils and trees.” And it would take a lot of land for ethanol to replace gasoline, even if we switched to more sugarcane-based ethanol, which the EPA considers an advanced biofuel because it has greater energy efficiency. From Biello:

    Even sugarcane—the most energy-efficient crop for ethanol because of its rapid growth rate and the fact it produces sugar that is ready to be fermented by yeast, unlike starch from corn that requires an additional step—needs some two meters of rainfall a year, which precludes growing it on much of the world’s existing arable land. And to replace all of today’s gasoline demand with ethanol made from sugarcane would require planting more than 320 million hectares across the tropics—more than half all the land devoted to agriculture presently and multiples of the roughly 20 million hectares of sugarcane planted today.

    Let’s not forget we slap a 54 cent-per-gallon tariff on cheaper sugarcane-based ethanol we could be importing from Brazil. While the tax credits for corn-based ethanol and tariff on imported ethanol are egregiously bad policies, the production mandate is the worst of them all. It’s what National Journal’s Amy Harder calls corn’s “sacred cow.” Valero spokesman Bill Day told Harder that “Without the [renewable-fuels standard], ethanol really wouldn’t be a viable business.”

    If that’s the case, then the government should not artificially create a market for it and waste resources by shifting labor and capital to ethanol production. As my colleague David Kreutzer recently wrote, the profit motive of capturing some of the oil market should be incentive enough:

    [A]ccording to the Energy Information Administration, the world market for petroleum will be about $3.5 trillion in 2020. If a lower-cost biofuel garnered just 5 percent of the world market, it would still be worth $175 billion per year. That should be enough motivation for inventors to pursue truly promising—and cost-effective—technologies.

    It’s time for the government to admit its mistake and remove the ethanol mandate.

    Posted in Energy [slideshow_deploy]

    7 Responses to The Ethanol Mandate Needs to Go

    1. Roger says:

      Nicolas- I know it is nice to use the environmentalist's arguments against them with regards to CO2 emissions, but lets not fall into the trap of agreeing with the "greens" that CO2 emissions are harmful to the environment! No data supports such a stance, and using it in arguments will only be a help to "them" in efforts to get cap and trade. And yes please, let's remove ethanol subsidies and mandates!

    2. All sources needed says:

      What do tax breaks given from 1980 to 2000 have to do with anything. This post is full of useless information. It is not false; just useless. The tariff and VEETC are history at the end of 2012. That is not news. Lets see how the ethanol and oil industry adapt to that before rushing to judgement. Lets not talk about our military presence in the Middle East either. That is a difficult concept to put a price tag on regardless of the reason you believe we are there.

    3. Facts says:

      You are assuming that the oil industry would let a competing fuel such as ethanol thrive in the marketplace displacing oil's stranglehold. That tells me alot about the rest of your assumptions and information.

      According to one study of ethanol's effect on the price of gas, ethanol lowers the price of gas from 25-40 cents per gallon. Take that times roughly 140 billion gallons used in the US in a year and ethanol saves consumers 35 to 50 billion dollars per year.

      Brazil has been importing US ethanol because corn based ethanol has been cheaper to produce than their sugarcane based ethanol in recent years.

      Why does the perfect have to be the enemy of the good in this situation? Just because ethanol will not entirely replace fossil fuels does not mean it shouldn't be part of the solution. And to say you are just going to let the "free market" decide if ethanol is part of the solution is just saying you are fine with big oil's hand around this country's neck. There is no free market in this arena.

      • Terrance Little says:

        You did not name the source of the study that convinces you that US can save 35 to 50 billion dallors a year . Show us the numbers on how they of the study arrived at a saving of 25 to 40 cents a gallon better yet tell us how to access the study you refer to so we can check there analesis out for ourselves and send it to Heritage please so we can all access it . thankyou for your reply.

      • Jeff says:

        Corn production (40% use) and prices are largely driven by the EPA requirement for Ethanol in gasoline. Corn prices for all market segments are up over 100% (http://ycharts.com/indicators/corn_price), which impact direct and indirect foods. The price level is largely driven by the Ethanol requirement,. Corn is a $80B crop in the US, without the demand for ethanol, it would 40B at most, providing a $40B tax credit to all citizens applicable to their everyday expenses.

    4. Redfray says:

      The government should not be subsiding anything. It is against the law for the government to give money to profit corps. The government should not give money to the non-profit groups, its not fair to the American people. Here is a thought, using the corn to make ethanol could reduce the use of corn for the diet. So, we make ethanol in the place of food. Now, we buy our food from other countries, is that not trading one commodity for another, making food increase in price?

    5. Larry says:

      Using corn to make ethanol is one of the dumbiest thing the government has ever done. This raises the price of food and lowers the miles per gallon you get from gasoline. Not to say what it does to some engines like chain saws and outboard motors. If they did want to make ethanol they should fix the motors to run it then should use the land that is in conservation reserve program to grow switch grass, it would give you more gallons per acre than corn and not let the ground erode.

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