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The Conservative Curmudgeon
August 12, 2008

Subsidizing Ethanol: The Unintended Consequences of Market Interference
by Allan C. Brownfeld

[Breaker: Millions pay the price for political tampering]

In 2005, the Republican-led Congress and President Bush backed a bill that required widespread ethanol use in motor fuels. This year, the Democratic-led Congress passed and President Bush signed energy legislation that boosted the mandate for minimum corn-based ethanol use to l5 billion gallons — about l0 percent of motor fuel — by 20l5. This was strongly backed by farm-state lawmakers of both parties.

Now, however, we observe what can be called the unintended consequences of politically interfering with the marketplace. Food riots in many parts of the world, a weak dollar, high energy costs, low crop yields in places such as Australia — all exacerbated by the subsidization of ethanol achieved by diverting food to fuel.

“The price of grain is now directly tied to the price of oil,” says Lester Brown, president of Earth Policy Institute, a Washington research group. “We used to have a grain economy and a fuel economy. But now they're beginning to fuse.”

Those who use corn to feed cattle, hogs, and chickens are being squeezed by high corn prices. In April, Tyson Foods reported its first loss in six quarters and said that its corn and soybean costs would increase by $600 million this year. Egg producers are passing high corn prices on to consumers. The wholesale price of eggs in the first quarter soared 40 percent from a year earlier, according to the U. S. Agriculture Department. The retail prices of many food items, from cereal to salad dressing, are moving upward because of more expensive ingredients such as corn syrup and cornstarch.

The problem with subsidizing the production of ethanol is multidimensional, leading not only to increased food costs but also to increased energy costs. Economist Walter Williams declares that, “Ethanol contains water that distillation cannot remove. As such, it can cause major damage to automobile engines not specifically designed to burn ethanol. The water content of ethanol also risks pipeline corrosion and thus must be shipped by truck, rail car, or barge. These are far more expensive than pipelines.

Ethanol is 20 to 30 percent less efficient than gasoline, making it more expensive per highway mile. It takes 450 pounds of corn to produce the ethanol to fill one SUV tank. That's enough to feed one person a year. Plus it takes more than one gallon of fossil fuel to produce one gallon of ethanol. After all, corn must be grown, fertilized, harvested, and trucked to ethanol producers — all of which are fuel-using activities.”

In Williams' view, “Ethanol is costly and it wouldn't make it in a free market. That's why Congress has enacted major ethanol subsidies... which is no less than a tax on consumers. In fact, there's a double tax — one in ethanol subsidies and another in handouts to corn farmers to the tune of $9.5 billion in 2005 alone.”

Food Shortages
A quarter of American corn is now turned into ethanol, and that is set to rise. Last year, the federal government mandated that ethanol production grow fivefold by 2022. Also last year, two economics professors predicted the current food shortage. C. Ford Runge and Benjamin Senauer wrote in Foreign Affairs: “By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world. Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships among food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security.”

Environmental Consequences
There are also negative potential implications for the environment involved with government subsidization of ethanol. Dr. William Laurance, a scientist with the Smithsonian Tropical Research Institute, reports that, “Biofuel from corn doesn't seem very beneficial when you consider its full environmental costs.” He notes that the $11 billion a year American taxpayers spend to subsidize corn producers is having “some surprising global consequences.” That includes clear-cutting Amazon forests so that farmers can plant soybeans.

Scientists are showing that ethanol will exacerbate greenhouse gas emissions. A February report in the journal Science found that “[C]orn-based ethanol, instead of producing a savings, nearly doubles greenhouse emissions over 30 years... Biofuels from
switchgrass, if grown on U.S. corn lands, increase emissions by 50 percent.”

State Resistance
The state of Texas is now in official opposition to the federal ethanol mandate. Gov. Rick Perry has petitioned the Environmental Protection Agency for a one-year reprieve. Because of the federal mandate to add ethanol to gasoline, Texas ranchers are
being forced into bidding wars with ethanol plants for the grains they feed their cattle. Governor Perry calculates that the mandate for ethanol may push the price of corn to $8 a bushel (it is at $6 now, up from $2 in 2004), and could cost the Texas economy nearly $3.6 billion this year.

Congressional Shuffle

In May, Senator Kay Bailey Hutchison (R-TX) called for a freeze on ethanol mandates and quickly got the support of two dozen of her Republican Senate colleagues, among them Senator John McCain — who has traditionally opposed ethanol subsidies. Farm-state senators of both parties led by Senators Charles Grassley (R-Iowa) and Tim Johnson (D-SD) are defending ethanol. Senator Hillary Clinton (D-NY) had opposed ethanol subsidies in the past, but she embraced them prior to the Iowa caucus.

Senator Barrack Obama (D-IL) proposed mandating a staggering 65 billion gallons a year of ethanol. His energy plan calls for “expanding federal tax credit programs” for ethanol and proposes “an additional subsidy per gallon of ethanol” for locally funded ethanol plants. By mid-May, as the facts of ethanol's real impact upon the economy and food supply became increasingly clear, Obama suggested that perhaps helping “people get something to eat” was a higher priority than biofuels.

Finally, some lawmakers are moving to suspend the law mandating the growth of ethanol production. Neither economically nor morally can we afford to subsidize the burning of so much corn while people go hungry.

Both Republicans and Democrats in Congress have created an artificial demand for ethanol to satisfy the farm lobby — and business interests such as Archer Daniels Midland (ADM), the country's largest producer of ethanol. Soaring food prices have sent farmers' incomes to record heights, yet Congress lavished additional welfare upon them by passing a new, five-year $280 billion farm bill.

“When millions of people are going hungry,” Palaniappan Chidambaram, India's finance minister declared, "it's a crime against humanity that food should be diverted to biofuels."

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The Conservative Curmudgeon is copyright © 2008 by the Fitzgerald Griffin Foundation, www.fgfBooks.com. All rights reserved. Editors may use this column if this copyright information is included.

Allan C. Brownfeld is the author of five books, the latest of which is The Revolution Lobby (Council for Inter-American Security). He has been a staff aide to a U.S. Vice President, Members of Congress, and the U.S. Senate Internal Subcommittee.

He is associate editor of The Lincoln Reveiw and a contributing editor to such publications as Human Events, The St. Croix Review, and The Washington Report on Middle East Affairs.

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