Problems With Ethanol Subsidies and Mandates
The St. Joseph News-Press ran an article this past week about the biodiesel industry’s fight for a tax credit extension. Show-Me Institute research analyst Christine Harbin wrote about the negative consequences of corn ethanol subsidies on our blog recently, and provided good analysis about why such subsidies hurt taxpayers. The St. Joe’s article is filled with quotes from people within the industry that exemplify why the tax credits are counterproductive:
“Any further delays will cause additional harm to the industry,” said Michael Frohlich, director of communications for the National Biodiesel Board. “(The expiration has) really been devastating. What you’ve seen is a complete drop in demand.”
Frolich essentially concedes here that the subsidy drives demand, implying that ethanol cannot, on its own, be a profitable endeavor. But the industry leaders interviewed in the article go on to argue that these subsidies will make the industry competitive in the future:
“(The tax credit) is crucial in order for (the biodiesel industry) to keep running,” said Brooks Hurst, a state director for the Missouri Soybean Association. “As we’re starting out, it’s critical to make us cost competitive with petroleum diesel.”
Soybean oil is a feedstock for the production of biodiesel.
If the tax credit were eliminated altogether, the industry would likely “cease production,” Mr. Hurst added.
“The biodiesel industry is an infant industry,” he said. “We’re trying to build demand.”
The nascent or infant industry argument is one used throughout history to protect emerging industries. It suggests that new industries need to be protected temporarily in order to gain the economies of scale that their competitors already enjoy. This is later expanded by Frolich, however, who says:
“Obviously, the long-term goal is for a multi-year (tax credit) extension.”
Ethanol needs the subsidy in order to be profitable, but subsidy proponents argue for more than just economic viability. Some claim that ethanol is better for the environment than standard gasoline, and suggest that it should be subsidized for that reason alone; however, there is a substantial body of research showing that this is not the case. A 2005 study in BioScience debunked that notion by looking at the effects of ethanol use in both Brazil and the United States, concluding that it did not bring net environmental gains. From the study’s conclusion (emphasis added):
The use of ethanol as a substitute for gasoline proved to be neither a sustainable nor an environmentally friendly option, considering ecological footprint values, and both net energy and CO2 offset considerations seemed relatively unimportant compared to the ecological footprint. As revealed by the ecological footprint approach, the direct and indirect environmental impacts of growing, harvesting, and converting biomass to ethanol far exceed any value in developing this alternative resource on a large scale.
[…] In the US case, the use of ethanol would require enormous areas of corn agriculture, and the accompanying environmental impacts outweigh its benefits. Ethanol cannot alleviate the United States’ dependence on petroleum.
Other studies have replicated these results, such as another piece from 2005, printed in the Renewable and Sustainable Energy Reviews. The authors reached a similar conclusion about E10, the ethanol mixture used for Missouri gasoline:
The study indicates that E10 is of debatable air pollution merit (and may in fact increase the production of photochemical smog); offers little advantage in terms of greenhouse gas emissions, energy efficiency or environmental sustainability; and will significantly increase both the risk and severity of soil and groundwater contamination.
A 2004 study published in Natural Resources Research concluded that ethanol creation uses more energy than the ethanol itself provides:
Specifically about 29% more energy is used to produce a gallon of ethanol than the energy in a gallon of ethanol. Fossil energy powers corn production and the fermentation/distillation processes. Increasing subsidized ethanol production will take more feed from livestock production, and is estimated to currently cost consumers an additional $1 billion per year. Ethanol production increases environmental degradation. Corn production causes more total soil erosion than any other crop. Also, corn production uses more insecticides, herbicides, and nitrogen fertilizers than any other crop. All these factors degrade the agricultural and natural environment and contribute to water pollution and air pollution.
Missouri is at a disadvantage because the state’s ethanol mandate requires at least 10 percent ethanol in the gasoline sold here. Show-Me Institute policy analysts David Stokes and Justin Hauke published a case study analyzing the effects of the mandate, concluding that it cost the taxpayers much more than it saved — the opposite of the cost-savings argument originally made in favor of the mandate. Requiring ethanol to be used in the state’s gasoline also discourages research toward better and more efficient forms of biofuel by propping up the corn ethanol industry.
The data shows that the ethanol mandate is expensive and does not help the environment. Ethanol may even harm the environment, by discouraging more efficient and environmentally solutions. That being the case, what justification is left to protect the ethanol industry with mandates and subsidies?