Ethanol Subsidy Expires, Not Ends

Beefs and Beliefs

Direct ethanol payments and tariffs expire but mandate lives on.

Published on: January 5, 2012

This week I'm celebrating the end of the ethanol subsidies and yet mourning that they're still not over.

As you may be aware, Congress allowed the scheduled expiration of the 54-cent blender's credit paid to gasoline sellers to use ethanol in their fuel blends on Dec. 31, 2011. It also let expire the tariff in ethanol imports to this country.

Both these things acted as direct subsidies to the ethanol industry. It's been said the blender's credit cost U.S. taxpayers $6 billion all by itself. I've not seen estimates on how much the ethanol tariff cost taxpayers or consumers.

Regardless, I continue to witness most subsidies more as political payoffs than as well-thought, long-term policy. Usually they are more designed to grease the palms of someone somewhere than to lead our society in a sensible direction.

E.G. Austin, writing for The Economist earlier this week, said this about the end to ethanol subsidies: "In other words, corn-ethanol subsidies were a bad policy and eventually no one could deny it. So Congress let the tax credit in question expire. Perfectly reasonable of them. It is, arguably, surprising that Congress would do something so reasonable, or allow something sensible to happen."

Amen to that.

There are plenty of reasons ethanol wasn't leading us in a positive direction.

  • It has only a marginal gain above the fossil fuel Btus needed to produce it.
  • It distorts the markets for corn and other grains, for farmland, and for other gasoline alternatives such as compressed natural gas, which we have in spades but is lacking in infrastructure.
  • It costs tax dollars and is another form of wealth redistribution.
  • It lowers automobile fuel economy.
  • It has mixed reports for environmental impacts, perhaps more negative ones than straight gasoline

For these reasons, when the Bush administration and Congress chose to modify the tax credit so it paid more to blenders I was angry. Now that it's over, I'm still angry and only somewhat relieved.

On the one hand I recall what Oklahoma ag economist Derrell Peel said many times: "Once it's done you can never go back to the way it was."

The marketplace was altered and even now it won't go back.

But let's not forget the industry is still being subsidized by the federal ethanol mandate, also known as EPA's Renewable Fuel Standard program (RFS1). That requires 15.2 billion gallons of ethanol be blended this year, with increasing levels through 2022, when the total is supposed to hit a whopping 36 million gallons.

This includes pie-in-the-sky predictions for how cellulosic will become a major player and take up most of the slack.

I'd sure like to look into that crystal ball they're using because I've never seen anyone accurately predict how technologies will develop.

As an alternative to paying for ethanol production we could have spent the subsidies on incentives for service stations across the nation to put in natural gas compressors and dispensing stations. I would've opposed it but it would have been smarter for the nation.

Better yet, we could have let the markets develop on their own.

We also could let the wind energy companies pay their own way.

The problem with central planning is it's always as small as the minds of the people doing it. Ultimately, as Adam Smith said back when our nation was founded, the entire population, if free to make choices, will do a better job seeking its needs than can a single mind or a few. Nobody is that smart. They weren't then and they aren't today.

Our next target should be EPA's ethanol use mandates. A big change in Congress and the White House is the only way I see to get that done.