Ethanol, Please, But Not the Cheap Stuff: Why Americans Pay Too Much for Fuel

Ethanol, Please, But Not the Cheap Stuff: Why Americans Pay Too Much for Fuel

By Joseph D’Agostino (Organization Trends, February 2009 PDF here)

Summary: Lobby groups representing corn growers and the U.S. ethanol industry want more subsidies for domestically produced ethanol and stiff tariffs against foreign ethanol, moves that hurt consumers, the environment, and the hungry masses of lessdeveloped countries. U.S. lawmakers give lip service to the ideal of energy independence and urge Americans to become less dependent on foreign oil, but they listen to powerful groups that aim to keep out cheap Brazilian ethanol. Does anyone care?

A new administration, a new Congress, and a new energy policy: What will it bring? Whatever else President Barack Obama and the newly-strengthened Democratic majorities in Congress endorse under the heading of energy policy, it’s unlikely to be the cheapest proven alternative to fossil fuel-based transportation. Consumption of ethanol derived from sugarcane has been rapidly growing in several countries, including Latin America’s largest nation, Brazil, where it has recently displaced gasoline as the consumer’s automobile fuel of choice. But don’t expect to run your car on sugarcane ethanol in this country even if the government mandates more ethanol use. Instead, if you have to put ethanol in your car it will be the more expensive and inefficient kind—corn-based.

With a population of 200 million, Brazil is a major agricultural producer with a vast undeveloped interior. The nation decided decades ago to promote ethanol as a fuel. It is made in Brazil using various types of plant matter from corn to sugarcane to switchgrass. Ethanol use in Brazil reached critical mass only in the past few years, after the government mandated that gasoline stations sell it and that most cars sold in the country be adapted to run on ethanol-rich “flex-fuel.” Now, nine out of 10 new cars sold in Brazil can run on gasoline, ethanol, or a mixture of the two. With global oil prices extremely high for so much of last year, ethanol sales in Brazil surpassed those of gasoline for the first time. Brazil is the second-largest producer of ethanol in the world and the largest producer of ethanol from sugarcane. It wants to expand its production of sugarcane and ship enormous amounts overseas, including far more than it currently exports to the United States.

The U.S., the No. 1 global producer of ethanol, doesn’t want Brazilian sugarcane ethanol even though it’s cheaper and more efficient to use than American corn ethanol. American corn-growing conglomerates such as Archers Daniels Midland (ADM) have lobbied to maintain longstanding U.S. policies giving agricultural subsidies and tariff protection to corn ethanol. Now the American ethanol industry has become a power in its own right, and it intends to keep American tax and consumer dollars flowing its way. Last year, Congress passed a $300 billion farm bill over President Bush’s veto that contained a 45-cent tax credit for every gallon of corn ethanol that is blended into gasoline (a drop from 51 cents per gallon in a 2005 law). American taxpayers pay at least $4.5 billion a year for the ethanol subsidy. The U.S. also discriminates against Brazilian sugarcane ethanol by slapping a 54-cent per gallon tariff on it, thereby pricing it out of the market.

During his campaign for the presidency Barack Obama spoke often about the need for alternative fuels to displace most fossil fuel use. But he supported retaining the tariff on Brazilian ethanol and the subsidy for American corn ethanol in last year’s farm bill, stances that delighted ADM, the agricultural giant based in his home state of Illinois. (As a U.S. senator, he has allowed ADM to fly him on its corporate jets at least twice.) Obama was campaigning for president and thus absent on May 22 when the Senate voted 82-to-13 to override the Bush veto of the bill. But his strong support for corn ethanol subsidies helped him win downstate Illinois voters when he first ran for the U.S. Senate in 2004 and Iowa caucus voters when he won the first major contest of the 2008 Democratic presidential campaign. As a senator, Obama in 2005 successfully attached an amendment to that year’s highway bill that gave up to $30,000 in income tax credits to gas station owners who installed pumps for E85, a blended fuel containing 85% ethanol.

Senator Obama also promised to keep out foreign sugarcane ethanol.

 “As it relates to our country’s drive toward energy independence, it does not serve our national and economic security to replace imported oil with Brazilian ethanol,” Obama said on the Senate floor while President Bush was negotiating an ethanol agreement with the president of Brazil in 2007. “Brazil has done an excellent job in encouraging its own biofuels industry. America should follow suit,” Obama said. A journalist opined that Obama’s “concerns probably portray the fears of his voters. The senator comes from Illinois, the second-largest producer of corn and ethanol in the U.S. The American version of the biofuel is obtained from corn, while Brazil uses the more cost-effective and environmentally-friendly sugarcane.” (BBC, March 30, 2007)

Senator John McCain, Obama’s Republican opponent during the presidential contest, voted to uphold the Bush veto of the farm bill. His opposition to ethanol subsidies was so politically toxic in Iowa that he skipped the state’s Republican caucus race.

The Renewable Fuels Association

American lawmakers and policy experts who worry about U.S. dependence on foreign oil say we must find better alternatives. Last year Republicans in the House of Representatives staged demonstrations calling for more oil and gas production at home. “Drill, baby drill” was their rallying cry as they called for an end to the moratorium on off-shore oil drilling. Texas oil man T. Boone Pickens is pushing his own plan. He wants a national commitment to replace imported oil with domestically-produced natural gas as a transportation fuel and to generate electricity from wind and solar energy—sources that are more than abundant in Texas. Meanwhile, acolytes of former Vice President Al Gore want us to take public transportation, turn down the thermostat and replace our incandescent light bulbs with compact fluorescent ones—and then turn them off.

Supporters of bio-fuels like ethanol also have lots of ideas. They say we already know how to mass-produce it: What we need now are new technologies that will better exploit our resources. For instance, instead of growing corn, what about producing bio-diesel from algae cultivated in tanks? Huh? “To have it matter as a strategic initiative versus OPEC, we would have to create a vast new kind of industry of algae farms,” says Dr. Robert Zubrin, author of Energy Victory: Winning the War on Terror by Breaking Free of Oil (2007). “Conventional farmers have their act together now.”

Zubrin would have the federal government require cars sold in the United States to be flex-fuel, as in Brazil. Under his plan, public policy would let consumers use both domestic and foreign-produced ethanol, making it price-competitive with oil.

Clearly, there are lots of wheels spinning as individuals and groups think about new ways to produce energy—and make a profit by foisting some of the heavy capital costs onto taxpayers or unwitting consumers. One of the most powerful of the new breed of special interests is the Washington, D.C.- based Renewable Fuels Association, the trade association of the domestic ethanol industry. It represents the big industry players like ADM and VeraSun Energy Corporation as well as many small Midwest producers that want to keep out foreign competition. RFA wants to encourage more use of flex-fuel made of 85 % ethanol, but not if it’s sugarcane ethanol made in Brazil. The association makes the absurd, self-serving claim that removing the tariff amounts to having the U.S. support Brazilian producers. Said an RFA spokesman, “It’s not about free trade, but fair trade.”

RFA publications emphasize the benefits of ethanol refining plants to farmers and small towns. “We used to plant half corn and half soybeans,” South Dakota farmer Dave Dietrich says in one glossy RFA report. “Now that the plant is operating, we are planting about 92% corn with almost all the harvest going to VeraSun.” Dietrich adds, “We’re getting 20 cents to 25 cents more for each bushel we produce. And our land values are increasing as well.”

Such high praise appeals to politicians. The domestic ethanol industry cultivates the support of both Republican and Democratic politicians, especially in the Midwest but also among urban liberals. The Congressional Biofuels Caucus, which supports the industry, counts 12 senators (from Kentucky Republican Jim Bunning to Iowa Democrat Tom Harkin) and 37 representatives (from Speaker Nancy Pelosi and Michigan Democrat John Conyers to Iowa Republican Steve King) among its members.

At the same time, the ethanol industry appeals to urbanites who are infatuated with environmentalism, afraid of global warming, and eager for breakthroughs in “green” technology. “[A]gricultural wastes today— cornstalks, switchgrass, citrus waste, wood chips—are going to be the ethanol feedstocks of tomorrow,” says the RFA report.

Tellingly, the Renewable Fuels Association is a member of the Chicago Climate Exchange, the voluntary cap-and-trade program for pricing trade in greenhouse gases produced by burning fossil fuels. Members of the Exchange look forward to the profitable day when the federal government enacts a mandatory cap-and-trade system. (For more on carbon-restriction profiteering, see Foundation Watch, October and August 2008, and Organization Trends, June 2008.)

The RFA is happy with President Obama’s environmental appointees. “The energy and environmental challenges facing this country are formidable, but not insurmountable. We are confident that the energy and environmental team President-elect Obama is assembling shares his vision of a diverse energy portfolio that capitalizes upon America’s great ingenuity and productivity. Ethanol, today largely derived from grain, is a key component in this nation’s energy transition to homegrown renewable liquid fuel sources…,” it said. Of course, former Iowa governor Tom Vilsack’s selection to be secretary of agriculture is a star pick. Vilsack is a biofuels booster (although he was co-chairman of a Council on Foreign Relations task force that recommended phasing out subsidies for corn ethanol and reducing tariffs on Brazilian sugar ethanol).

In commenting on the nominations of Dr. Stephen Chu, Lisa Jackson, and Carol Browner to be energy secretary, EPA head, and energy “czar,” respectively, the RFA released the following statement on Dec. 11: “Judging by the reported nominations of these well-qualified individuals, we believe President-elect Obama fully intends to build upon the successes renewable energy technologies like ethanol are achieving. We look forward to working with the Obama Administration to make the renewable fuels vision the president-elect detailed during the campaign a reality.”

Like the rest of the economy, the ethanol industry is now going through hard times. After riding high, ethanol prices cratered along with oil prices as the demand for fuel took a dive. VeraSun Energy, which opened a new ethanol plant in Iowa in 2007, with Senator Obama in attendance, filed for Chapter 11 bankruptcy protection at the end of October. Ironically, it attributes “a dramatic spike in corn costs” to its third quarter losses.

However, the Renewable Fuels Association is so well connected in Washington that it may receive a federal bailout this year. On Dec. 24 the Wall Street Journal reported that the Renewable Fuels Association “is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks – never mind the potential damage to engines from such an unproven mix.” The story notes that some state governments are considering raising the ethanol mandate to 20%, even though General Motors warned that using such fuel would void the warranties on its cars.

After investing billions to subsidize a money-losng industry, is it likely that Washington lawmakers will let ethanol producers collapse? As the Obama administration crafts its plans for “fiscal stimulus,” it’s hard to believe that the former senator from Illinois won’t be attentive to the needs of corn growers and ethanol refiners.

Washington’s Bi-Partisan Ethanol Lobby On the Attack

The 33,000-member National Corn Growers Association and the American Coalition for Ethanol ACE) are naturally anxious for continued Washington protection. ACE, which presents itself as the grassroots voice of the ethanol industry representing 1,500 producers, suppliers and investors, pushes for legislation requiring Americans to pay for more ethanol. It wants the government to mandate an increase in the percentage of ethanol that must be mixed into gasoline sold in the U.S., a move that would increase travel costs because American ethanol costs more than gasoline. ACE has a list of key federal policies that it keeps tabs on, including the Renewable Fuels Standard (puts more ethanol into gasoline), the Volumetric Ethanol Excise Tax Credit (gives a tax credit for gasoline-thanol blends), the Small Ethanol Producer Credit, and the secondary offset tariff on ethanol imports (stops foreign ethanol from being competitive with domestic ethanol).

Then there is the National Commission on Energy Policy (NCEP), which uses the cover of bi-partisanship to promote federal government controls over energy planning. Its co-founders include Republican Senator Bob Dole from the corn-rich state of Kansas, and former Senate majority leader Tom Daschle, the South Dakota Democrat is President Obama’s pick for secretary of health and human services. NCEP is bankrolled by the William and Flora Hewlett Foundation. (NCEP was profiled in “The National Commission on Energy Policy: ‘Bipartisanship’: The Cover for a Government Energy Takeover,” by Max Borders, Organization Trends, September 2007.)

One of the commission’s priorities is to give more government subsidies to fuel-growing American farmers at American taxpayers’ expense. NCEP exploits the global warming fad, arguing that ethanol emits 25% less carbon dioxide than gasoline. (Brazilian industry groups claim sugarcane ethanol production emits only 10% of the greenhouse gases that gasoline does.) Under the Dole-Daschle plan, farmers would receive credits, paid for by American manufacturers, for reducing carbon emissions or planting crops that absorb more carbon dioxide than they emit.

Last June Dole and Daschle made explicit the linkage between taxing consumers for using oil-based gasoline and subsidizing farmers for producing corn ethanol. The mechanism is a cap-and-trade mandate. They wrote in a joint report: “Political leaders, members of the business community, and the general public increasingly expect that restrictions on emissions of greenhouse gases (GHGs) will be needed to address the problem of global warming. As Congress moves forward in the near future to draft and debate climate change legislation, American agriculture can play an important role in shaping the eventual policy outcome—and specifically, in ensuring that any future U.S. cap-and-trade program fairly credits farmers and ranchers for GHG reductions and allows them to participate in a new national market for carbon credits. The stakes are extremely high for America’s agricultural producers. Done well, a national GHG emissions control policy can provide a new multi-billion dollar per year market opportunity for farmers.” (italics added)

Flying Down to Rio

When I visited Brazil in December, I rode around in a friend’s car that takes four kinds of fuel: gasoline, ethanol, a gasoline-ethanol blend, and natural gas. In the big cities, natural gas is easy to find at filling stations, and my friend can choose whatever fuel suits him best in terms of price and performance.

Until recently, ethanol has been a great moneymaker for the Brazilian economy, and most people I spoke with expect it to return to profitability. “We’re still doing well,” a financier at a hedge fund told me in Rio de Janeiro. “But we are going through some very difficult times because of our dependence on the United States and Europe.” Ethanol prices have declined with the global economy and Brazilian producers admit that oil must stay above $40 a barrel for their product to be competitive. About 30% of Brazil’s automobile fleet is still gasoline-only.

Brazilians believe they need more access to First World markets to prosper. But when American politicians block Brazil’s ethanol exports to the U.S., they create market distortions and create new vested interests. For example, a Brazilian ethanol producer recently signed a major deal with a company in Peru to distill its ethanol there because Peru has a free trade agreement with the United States. Obviously, routing sugarcane across the Andes is not the most cost-effective way to get ethanol to the United States, but it avoids the U.S. tariff (although American corn ethanol still enjoys a government subsidy.) The end result? The American consumer will pay more for Brazilian sugarcane ethanol than he would if it were imported directly from Brazil, while the Brazilian and Peruvian producers and Peru’s government gain a vested interest in the inefficient status quo.

Jamaica already has a vested interest in keeping Brazilian ethanol tied in knots. This small island nation is a major sugarcane grower and it wants to export large amounts of sugarcane ethanol to the United States without competition from Brazil. As Jamaica’s Sunday Observer noted (Nov. 2, 2008), “Jamaica ethanol exports to the U.S. market, under the CBI [Caribbean Basin Initiative], benefit from a duty-free access, while Brazilian ethanol attracts a 54-U.S. cent-per-gallon tariff for entry. The island, as a consequence, is attractive to Brazilian energy companies that seek to reroute the fuel as the tariff restriction pushes up the price of ethanol imported directly into the U.S. from the South American country.”

Even ADM is hedging its bets. It supports the tariff on imports but has begun to invest in the Brazilian sugarcane industry.

Conclusion

Even if it is seldom mentioned, protecting the U.S. corn ethanol industry and corn growers will be a priority for the Obama administration. During the campaign, Obama energy adviser Heather Zichal said as much. Bloomberg quoted (Nov. 6) Zichal saying that Obama plans to continue Bush’s goal requiring that fuel producers use a minimum of 36 billion gallons of biofuels by 2022. The Obama administration will direct as much support to the domestic ethanol industry as the Bush administration provided, including tax credits aimed at increasing consumption, she said.

Zichal echoed Obama in touting renewable fuel as a source of “green jobs” and an alternative to foreign oil. “Obama recognizes how important the renewable and biofuels industry is to creating jobs and meeting our goal of reducing dependence on foreign oil,” she said. “He’s fully committed to it and sees tremendous value in the renewable fuels standard and continuing down this path.”

Joseph A. D’Agostino is a Washington, D.C.-based freelance journalist currently writing a book tentatively titled Triumph of Patriarchy. He is a former Associate Editor of Human Events and former Vice President for Communications at Population Research Institute.

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