EDITORIAL Archer's ethanol assault

There's only thing wrong with the new congressional assault on U.S. subsidies for fuel ethanol: It took too long to begin.

Since 1978, the U.S. has sustained with generous tax breaks an industry that wouldn't otherwise exist. The industry produces no broad national benefits. It helps only producers and blenders of ethanol and, to a lesser extent, growers of corn and soybeans.

The U.S. does not, as a matter of national interest, need a fuel ethanol industry. It shouldn't have to pay for one.

The cost

So how much is the nation paying to sustain producers and blenders of fuel ethanol? At the request of Rep. Bill Archer (R-Tex.), chairman of the House ways and means committee, the General Accounting Office studied that question and several others (see related story, p. 22).

During 1979-95, GAO says in a report this month, a partial exemption from the gasoline excise tax for biologically derived fuel alcohol-ethanol-cost the Highway Trust Fund $7.1 billion, $615 million in 1995 alone. Producers and blenders of ethanol also enjoy credits against income taxes, but the dollar amounts are not as large.

The federal tax breaks amount to 54¢/gal, enough to make ethanol economic as a gasoline additive, which it otherwise would not be. Taxpayers of several states provide further assistance.

This is a lavish subsidy for a substance that doesn't deliver promised benefits. Ethanol was supposed to meaningfully supplement gasoline supplies. Yet it accounted for less than 1% of the volume of transportation fuel consumed in 1995 on a volumetric basis. In terms of energy content, it was even less significant.

Ethanol also was supposed to improve air quality. It doesn't. As an oxygenate, it provides some benefits, mainly by improving the efficiency of combustion. It also boosts gasoline octane. But the benefits are offset by drawbacks related to volatility and reduced energy content. In the next few weeks, ethanol supporters and opponents will vigorously debate the environmental balance. But they'll be arguing over marginal effects. In no way does ethanol produce air quality benefits worthy of its subsidy.

Direct economic benefits of ethanol tax breaks are very narrow. The GAO notes that three companies control 65% of ethanol production capacity. One of them, Archer Daniels Midland (ADM), controls 50% of the total. Grain growers indirectly benefit from elevated demand for corn and consequent price support for corn and possibly soybeans. But those effects represent costs to food consumers and farmers with livestock to feed.

For the most part, ethanol subsidies simply divert money from the Highway Trust Fund to ADM and a few other companies. The disproportionate political support they enjoy results largely from ADM's notorious generosity toward helpful politicians.

Reaction to Archer's welcome initiative came swiftly. Fuel ethanol supporters naturally promised a study refuting GAO's findings of the already obvious. That should make for some amusing reading.

And the move gave Edwin Rothschild, the Energy Action energy policy director who hadn't been heard from since gasoline prices last rose, something new to whine about. Enlarging upon cost-benefit concerns expressed by the Departments of Agriculture and Energy, Rothschild warned that Archer has invited criticism of "exploration tax credits" and cited the 15% credit for qualified costs of enhanced oil recovery. Why the EOR credit should matter in discussions of the ethanol subsidy will remain a mystery to everyone but Rothschild, a steadfast industry critic to whom distinctions such as those between exploration and production have never mattered much.

Political trading

If Congress chooses to review the EOR credit, so be it. But the analysis must not degenerate into a political trading match between industries.

For any tax subsidy, the question must be whether broad national benefits result from and warrant the cost. For fuel ethanol, the answer is clearly no.