WASHINGTON -- Have you ever noticed how every plan to increase usage of ethanol depends on government subsidies or government muscle? Apparently, merit and demand are not part of the marketing program.
The ethanol entrepreneurs are continuing to think of new ways to sell more product. Not surprisingly, all roads lead to Washington.
Just imagine this: A big SUV rumbles up to a special pump, gets its 26-gallon tank filled with a blend of 85 percent ethanol and 15 percent gasoline, and rolls off for a day at the beach. Sounds like a simple, private, voluntary transaction, right? But consider:
The SUV was built with flex-fuel systems partly so the manufacturer could claim a credit under the government-mandated Corporate Average Fuel Economy (CAFE) standard.
The service station might get a tax credit for installing the pump to dispense E-85.
The fuel supplier gets a tax credit for every gallon of ethanol added to gasoline.
When Adam Smith wrote about the "invisible hand," he meant that market forces, driven by the search for profits, would direct resources into the most efficient channels. Unfortunately, what we have today is the all-too-visible hand of the government deciding how resources will be allocated and what consumer behaviors will be rewarded or punished.
Unless Congress changes its mind, the fuel industry will be required to blend an increasing amount of ethanol into gasoline in the years ahead. The mandate for ethanol derived from corn tops out at 15 billion gallons in 2015, and ethanol from "cellulosic" sources is supposed to hit 16 billion gallons in 2022. The public is expected to buy ethanol whether it wants to or not.
The energy market is so distorted that it has lost touch with reality. In fact:
Most flex-fuel vehicles are SUV's and pickup trucks in which the higher cost of the necessary fuel systems can be spread over the higher unit cost of the vehicle. But few owners of these vehicles have any interest in filling them up with E-85, which has much lower mileage than gasoline. If you get 400 miles to a fill-up on gasoline, you will get a little over 300 on E-85. Unless the price of E-85 is 75 percent of the price of gasoline or less -- which it isn't -- you don't have much incentive to use it.
Service stations don't get actually federal tax incentives for installing E-85 pumps (and the tanks to supply them) -- yet. But that's one of the ideas that has been put forth to encourage ethanol. Several states actually provide tax incentives for installing E-85 pumps. Most of them are in the Midwestern states that produce the corn used to make ethanol. Ethanol can't move through pipelines, so it's expensive to move it to markets far from the cornfields. The tax breaks are an effort to use it where it is made.
Fuel blenders who supply gasoline to filling stations are allowed to claim a tax credit of 45 cents per gallon of ethanol added. In 2009, that credit will cost the federal treasury about $5 billion.
According to the Environmental Working Group (EWG), ethanol scoops up 76 percent of the federal support for renewable energy. In 2007, ethanol's $3 billion in tax credits was more than four times the $690 million in credits available to companies trying to expand all other forms of renewable energy, including solar, wind and geothermal power, according to federal statistics.
"With America facing an exploding federal deficit and the crisis of climate change," said Craig Cox, Midwest vice president of EWG and author of the report, "it defies common sense to continue to lavish billions of tax dollars on corn-based ethanol, a fuel that has failed to fulfill its promises at every turn."
While ethanol is often promoted as an environmentally friendly source of energy, EWG isn't impressed by ethanol's track record.
"America needs a truly renewable energy portfolio, and the evidence is mounting that corn-based ethanol will not get us where we need to go," Cox said.
The mandate amount is 10.5 billion gallons in 2009. The industry had that much capacity by the end of 2008, with an extra 2 billion gallons per year of capacity under construction or in expansion projects. The industry could probably sell the extra production if gasoline was expensive. But gasoline is now relatively cheap, so ethanol is unattractive and the above-mandate production is going begging for the time being.
Stuck with too much supply, the highly leveraged ethanol industry is financially stressed and some producers are going bankrupt. The industry is trying to persuade the government to increase the demand by jacking up the blend level, from the 10 percent now required to 12 percent or 13 percent or even higher. They even have a name for the 10 percent level: the "blend wall."
Unfortunately for ethanol enthusiasts, the basis for the 10 percent level is that most automobiles can handle only about 10 percent ethanol in their fuel without damage to the fuel systems, as the owner's manuals for vehicles clearly state. The country consumes about 140 billion gallons of gasoline, and at the time the law was written it was assumed that 15 billion gallons of ethanol could be absorbed by the growing demand for gasoline and a growing number of flex-fuel vehicles. Since then, however, the economy slumped, gasoline demand has dropped, and, even worse from the ethanol sector's point of view, oil prices have plummeted. When gasoline is (relatively) cheap, ethanol can't compete and E-85 pumps will get little use.
If the blend level is raised merely to smooth out regional disparities in ethanol supply, the Environmental Protection Agency and the ethanol sector might get away with it. But if it leads, in effect, to an increase in the mandate set by Congress, that may be challenged in court. And the ethanol industry isn't volunteering to pay for repairs to fuel systems damaged by ethanol. Fortunately EPA seems in no hurry to raise the blend level, despite vigorous lobbying by the ethanol entrepreneurs.
The soaring production of ethanol from corn has contributed to extreme volatility in commodity prices and period of food inflation. It's time to quit pitting our quest for energy independence against our need for affordable food. We continue to hope that Congress will figure that out, and federal energy policy will be reformed. That can't happen soon enough.
George Watts is president of the National Chicken Council with headquarters in Washington, D.C.
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