EDITORIAL: Energy and farm aid

June 6, 2005
If US lawmakers are correct when they say Americans want action on energy policy, the chief motivation almost certainly is the elevated price of gasoline.

If US lawmakers are correct when they say Americans want action on energy policy, the chief motivation almost certainly is the elevated price of gasoline. So why does the Senate Committee on Energy and Natural Resources propose a bill that would raise gasoline prices? Why does it propose a bill that would not only raise gasoline prices but also lower government revenue and aggravate air pollution?

Two answers: President George W. Bush wants an energy bill. And politicians of both major parties, including Bush, want to coddle grain farmers and distillers, even if doing so tramples the interests of consumers and taxpayers.

Ethanol mandates

That agriculture trumps energy in US politics has never been more apparent. In April, the House passed an energy bill that, like its failed predecessors, would mandate the sale of 5 billion gal/year of grain ethanol in gasoline by 2012. Last month, the Senate energy committee passed legislation that would raise the mandate to 8 billion gal/year.

There is no good energy policy reason to require ethanol at any level in gasoline. The argument that fuel alcohol from corn offers the US a way to grow its way out of dependency on imported oil-advanced often by the president-overstates a solution to an exaggerated problem and ignores costs. An analysis last month by the US Energy Information Administration estimates that an 8 billion gal/year ethanol mandate might reduce US sales of oil from abroad by 260,000 b/d in 2012, no more than 2% of the projected import rate.

Such a tiny dent in US import dependency isn’t worth the cost. According to EIA, a requirement for 8 billion gal/year of fuel ethanol would raise the average pump price of all gasoline by 2.4¢/gal in 2012. That’s before correction for ethanol’s dilution of gasoline energy content, which lifts the extra cost to consumers in 2012 to 3.6¢/gal. The energy content of ethanol is about two thirds that of the gasoline it displaces.

Because grain ethanol receives a tax credit when blended into gasoline, a requirement for increased sales of the substance also would lower government revenue. EIA, assuming renewal of the credit at the current level of 51¢/gal, says the 8 billion gal/year ethanol requirement would add $3.2 billion (in 2003 dollars) to government revenue losses from ethanol use during 2006-10. The cumulative additional cost of the requirement to the federal government during 2006-25 would be $21.3 billion. In relation to the total federal budget, that’s not much. Yet it would represent money foresworn by government in service to a program certain to raise gasoline prices.

Some Americans think air-quality gains might justify costs of an ethanol mandate. Overall, however, there would be no such gains. Contrary to propaganda from the renewable-fuels lobby, increased use of ethanol in gasoline in many places aggravates air pollution. Ethanol increases gasoline volatility, promoting the formation of ozone precursors. Especially when conditions favor evaporation, ethanol causes more pollution than it prevents.

The 5 billion gal/year ethanol mandate in the House bill presents similar disadvantages. Costs of the two proposals aren’t easy to compare because of differences other than size of the mandate, such as treatment of methyl tertiary butyl ether and the size of credits for ethanol from cellulosic biomass. But they remain disadvantages.

The clear winners of an ethanol mandate at either proposed level would be corn farmers, grain distillers, and makers of ethanol from cellulose. They would profit greatly from a market enlarged by government for their already heavily subsidized product.

Oil refiners and marketers would endure the cost and inconvenience of handling ethanol but otherwise would suffer little. They would install the necessary equipment, sell the required product, make money when markets were strong, and lose money when markets were weak.

The losers

The clear losers would be gasoline consumers and taxpayers. And thanks to ozone pollution worsened by increased ethanol use, they could expect further costly adjustments to gasoline specifications.

Higher gasoline prices. Lower government revenue. More air pollution. These outcomes can’t be what most Americans have in mind when they say they want Congress to enact energy policy. In fact, what’s proposed on ethanol is not energy policy. It’s farm aid. The oil and gas industry should oppose it.