Posted on 06/20/2008 11:55:19 AM PDT by K-oneTexas
The High Cost of Ethanol Subsidies
By Dr. Tracy C. Miller
An Indian government official recently criticized the Bush administration for blaming the growing middle classes of developing countries, such as India and China, for rising food prices. Although he may have misinterpreted the president’s remarks, his and other Indian critics’ responses are worth thinking about. They argue that the United States is the real culprit behind high food prices. Has the United States played an important role in contributing to rising food prices and, if so, what should be done to correct the problem?
Growing world demand for food is part of the explanation for recent food price increases. Higher incomes of people in developing countries have enabled them to consume more calories and more meat, which has had an impact on food prices. The fact that many people in the world can afford better diets is something we should be thankful for, even if it results in higher food prices for us. What should concern us, however, is how the U.S. government has contributed to the recent run-up in world food prices by subsidizing the production of bio-fuels.
While a variety of factors have contributed to food price increases, the actions of the U.S. government to promote the production of corn for ethanol cannot be ignored. Joseph Glauber, the chief economist of the U.S. Department of Agriculture, predicts that 31 percent of the entire U.S. corn crop in 2008 and 2009 will be devoted to ethanol production. This growth in ethanol production is the result of the combination of a government mandate, a 51 cents per gallon tax credit for ethanol production, various other subsidies, and a 54 cents per gallon tariff on ethanol imports.
U.S. government mandates for increased ethanol production ignore economic reality, diverting a growing portion of U.S. cropland from food production without taking account of the cost of doing so. As more land is used to produce corn, production of other crops has declined to the point where the United States has actually had to import wheat. Because the United States is a major producer and exporter of food and feed grains, reductions in U.S. output have a major impact on world food and feed prices. As more corn is diverted to ethanol production from feeding livestock, meat prices have risen as well.
Corn is a very expensive source of fuel, not just because of its value in feeding livestock, but because of the resources involved in converting it to fuel. The amount of energy required to produce a gallon of ethanol is almost as much as the energy that results from burning the ethanol. When factoring in the other costs of using corn to produce ethanol, it should be evident why it is a waste of resources.
There is nothing inherently wrong with growing crops to produce fuel, even if doing so causes food prices to rise. Rather, the extent to which corn and other crops are used for fuel should be determined by the choices of consumers and producers in response to market prices that are unhampered by government intervention like those mentioned above—this is also known as free market prices. Because free market prices reflect people’s voluntary preferences, market prices serve as indicators of relative scarcity, reflecting the priorities of all who could potentially benefit from what could be produced from the land. Competition for resources in the market will result in those resources being used for purposes that consumers value the most. Without market prices, government officials lack the ability to estimate accurately the net benefits of additional ethanol production for society. Unlike consumers who bear the costs of their decisions through the prices they pay in the market, government officials do not bear the full costs associated with their decision to subsidize ethanol.
Ethanol subsidies and mandates also contribute to environmental degradation as more land is plowed and more pesticides are used to increase yields. They contribute to rising government deficits as well. The only reason for politicians to continue these policies is that farmers and residents of rural communities, whose incomes increase as a result, will reward them with more votes. If more Americans can become informed about how much this is costing the rest of us, perhaps our elected representatives will see that they might actually lose votes by continuing to support this waste of taxpayers’ money.
Dr. Tracy C. Miller is an associate professor of economics at Grove City College and contributing scholar with the Center for Vision and Values. He holds a Ph.D. from University of Chicago.
The price of corn has already exceeded the subsidy level, so the whole point is moot, unfortunately for the publish-or perish crowd. This article is about a year behind the times.
“The ethanol mandates that have been foisted on American taxpayers are not just fiscal insanity, they are immoral. Congress has created a system of subsidies and mandates that requires the U.S. to burn food to make motor fuel, at a time when there is a global shortage of food and no global shortage of motor fuel.”
....and drumroll please.....
(snip of above below)
“So, where did the claim that ethanol is more energy efficient originate? I believe it originates with researchers from Argonne National Laboratory, who developed a model (GREET) that is used to determine the energy inputs to turn crude oil into products (4). Since it will take some amount of energy to refine a barrel of crude oil, by definition the efficiency is less than 100% in the way they measured it. For example, if I have 1 BTU of energy, but it took .2 BTUs to turn it into a useable form, then the efficiency is 80%. This is the kind of calculation people use to show that the gasoline efficiency is less than 100%. However, ethanol is not measured in the same way. Look again at the example from the USDA paper, and lets do the equivalent calculation for ethanol. In that case, we got 98,333 BTUs out of the process, but we had to input 77,228 to get it out. In this case, comparing apples to apples, the efficiency of producing ethanol is just 21%. Again, gasoline is about 4 times higher.
OK, so Argonne originated the calculation. But are they really at fault here? Yes, they are. Not only did they promote the efficiency calculation for petroleum products with their GREET model, but they have proceeded to make apples and oranges comparisons in order to show ethanol in a positive light. They have themselves muddied the waters. Michael Wang, from Argonne, (and author of the GREET model) made a remarkable claim last September at The 15th Annual Symposium on Alcohol Fuels in San Diego (5). On his 4th slide , he claimed that it takes 0.74 MMBTU to make 1 MMBTU of ethanol, but 1.23 MMBTU to make 1 MMBTU of gasoline. That simply can’t be correct, as the calculations in the preceding paragraphs have shown.
Not only is his claim incorrect, but it is terribly irresponsible for someone from a government agency to make such a claim. I don’t know whether he is being intentionally misleading, but it certainly looks that way. Wang is also the co-author of the earlier USDA studies that I have critiqued and shown to be full of errors and misleading arguments. These people are publishing articles that bypass the peer review process designed to ferret out these kinds of blatant errors. I suspect a politically driven agenda in which they are putting out intentionally misleading information.
One of the reasons I haven’t written this up already, is that 2 weeks ago I sent an e-mail to Wang bringing this error to his attention. I immediately got an auto-reply saying that he was out of the office until March 31st. I have given him a week to reply and explain himself, but he has not done so. Therefore, at this time I must conclude that he knows the calculation is in error, but does not wish to address it. In the interim, ethanol proponents everywhere are pushing this false information in an effort to boost support for ethanol.
Look at the Minnesota Department of Agriculture claim again: "the energy yield of ethanol is (1.34/0.74) or 81 percent greater than the comparable yield for gasoline". If the energy balance was really this good for ethanol and that bad for gasoline, why would anyone ever make gasoline? Where would the economics be? Why would ethanol need subsidies to compete? It should be clear that the proponents in this case are promoting false information.”
“The only reason for politicians to continue these policies is that farmers and residents of rural communities, whose incomes increase as a result, will reward them with more votes.”
I call BS on that statement as it seems to me theirs is a relatively niche community of voters within the mass of a really pissed off National Consumer electorate.
I keep thinking of Ma Chalmers from “Atlas Shrugged”, and her soybean subsidies.
As is much of editorial comment, this article is interesting for what is left out. Just a few include the following:
1. Ethanol plants typically have either cattle feed lots sprung up nearby or big trucks haul waste products to nearby existing feed lots. A significant percentage of the corn input to these plants is used for cattle feed.
2. Up until last year, the price that the farmer received for wheat hardly covered the production cost, thus if it was possible, wheat was replaced with crop(s) with a higher per acre return. For much of the wheat belt however, there is no real alternative. A significant factor in the increase in the price of wheat was the reduced yield due to drought in Australia.
3. The requirement for clean burning fuel is a significant factor in the use of ethanol as a fuel additive. The elimination/reduction of brown skies is an advantage to all of us. The previously used substance had the unfortunate side effect of not being readily biodegradable, would likely eventually be found in/on all of our underground water sources and would be bad for everyone's health. 4. I'm not sure what the "subsidy" is, how it is distributed and who gets it. It is not paid to the farmer. It appears to be a tax reduction to the ethanol producer. This producer still has to compete in the market place to buy the grain with any one else interested among which are the foreign buyers. It is my understanding that they have bought approximately 35% of last year's corn crop. None of that is hauled to US feedlots. Don't know the percentage the ethanol people have bought.
As is much of editorial comment, this article is interesting for what is left out. Just a few include the following:
1. Ethanol plants typically have either cattle feed lots sprung up nearby or big trucks haul waste products to nearby existing feed lots. A significant percentage of the corn input to these plants is used for cattle feed.
2. Up until last year, the price that the farmer received for wheat hardly covered the production cost, thus if it was possible, wheat was replaced with crop(s) with a higher per acre return. For much of the wheat belt however, there is no real alternative. A significant factor in the increase in the price of wheat was the reduced yield due to drought in Australia.
3. The requirement for clean burning fuel is a significant factor in the use of ethanol as a fuel additive. The elimination/reduction of brown skies is an advantage to all of us. The previously used substance had the unfortunate side effect of not being readily biodegradable, would likely eventually be found in/on all of our underground water sources and would be bad for everyone's health. 4. I'm not sure what the "subsidy" is, how it is distributed and who gets it. It is not paid to the farmer. It appears to be a tax reduction to the ethanol producer. This producer still has to compete in the market place to buy the grain with any one else interested among which are the foreign buyers. It is my understanding that they have bought approximately 35% of last year's corn crop. None of that is hauled to US feedlots. Don't know the percentage the ethanol people have bought.
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