Among the mandates, tax credits, and tariffs that are all used to prop up an ethanol industry that depends on government support like a tick to a dog, which is the worst subsidy? I would say that the tariff is the worst of the three, followed closely behind by the mandate here in Missouri that a 10 percent ethanol blend be included in all gas sold in the state. I don’t like the tax credit, but without the mandate and the tariff, ethanol’s credit is no worse than other farm subsidy programs. So, the blender’s credit might be the least bad of the three, but it is still absurd.

Why is the tariff on sugar cane ethanol from Brazil the worst of the three? In my opinion, it is because it directly contradicts the main reason politicians say that we should be supporting ethanol in the first place. Of all the arguments for ethanol subsidies, the one that hits the hardest is that we need to do all we can to end our reliance on oil from the Middle East. Using American gas dollars to support governments that (directly or indirectly) fund terrorists to kill Americans is something I recoil from. So, in order to stop relying on Middle Eastern oil, wouldn’t we want as much ethanol as possible being used in the United States?

Well, apparently not, because we have this stupid tariff on sugar cane ethanol from Brazil. Perhaps Brazil is actually an enemy of ours and we can’t possibly allow American gas dollars to benefit the Brazilians.

I, for one, would gladly welcome war with Brazil. I think it would go down a lot like our war with our supposed “ally” England in the early 1960s. During that British invasion, our hearts and ears were conquered by English rock stars. I think the same thing would happen here, except that we would be invaded by supermodels instead of rockers. We’d probably have to arrest both Tom Brady and Leonardo DiCaprio because of their conflicted loyalties, but let’s all admit that should probably be done anyway.

If the ethanol industry is to be believed, the unstoppable Brazilian supermodel army would do little environmental harm to our country because their tanks probably run on green ethanol fuel. I don’t think it would be a particularly violent war, either. I think a lot of American soldiers would be more than happy to surrender to the attacking supermodels.

War with Brazil in 2012. Fought over energy. Powered by ethanol. Conquest by Gisele.

Brazil: A land entailing natural wonders, a powerhouse economy, and sugar cane ethanol? Yes, that’s right. Ranked second in terms of production and first for exporting, Brazil has long been a pivotal mover and shaker in the global ethanol industry.

Together with the United States, Brazil produces nearly 88 percent of the world’s ethanol supply. However, Brazil uses sugar cane as a preferred alternative to corn in its ethanol production.

With an annual yield of nearly 370 million bushels of corn, many Missourians are deeply connected to the corn-based ethanol industry. If the industry were to dry up, thousands stand to suffer in the short run. Even so, could there be a sweeter alternative?

Well, quite literally, yes. The Brazilian sugar cane industry is said to be seven times more efficient than that of the United States, and less expensive, too — nearly 30 percent cheaper, in fact. Regardless, it appears that the federal government has little interest in the more viable Brazilian blend.

In order to offset a federal tax credit targeted to ethanol blending companies, the United States has levied a tariff on Brazil’s ethanol, perhaps as a way to keep the international market out while spurring on its own domestic product.

Current and past administrations have vowed to reduce foreign oil imports, claiming that we have become too dependent on them. So, why a virtual ban on Brazilian imports? If ethanol is federally promoted as a solution to the so-called national security issue of dependence on Middle Eastern oil, why wouldn’t cheap, clean-burning ethanol from friendly Brazil be satisfactory? If officials are serious in addressing this as a national security issue, they would invest in other forms of energy — namely, those which are not harmful to our country’s environment and well-being.

Thankfully, it appears that lawmakers might be making a move in a better direction. Last week, Sen. Tom Coburn (R-Okla.) fathered an amendment that would slash government subsidies of the corn industry while also lifting the tariff. Unfortunately, Coburn’s amendments may never become actual laws. Nonetheless, the Senate has shown an ever-increasing readiness to bring ethanol subsidies to the curb.

So, is investing in the precarious, ever-expanding corn-based ethanol industry worth the higher food prices, loss of necessary agricultural groundwater, and increased pollution that result? Well, some would argue that the aforementioned are a small price to pay to support an industry. I contend the contrary. Surrounding Missouri’s ethanol industry, we have corn farmers benefiting from subsidies, cattle farmers suffering from feed shortages, and mandates that often require we burn at least 10 percent less-fuel-efficient ethanol in our cars.

When subsidies are involved, benefits for some lead to costs for others. So, who’s right? You be the judge.

My father founded and ran several area gas stations until his death. At first, he embraced the use of oil and gas mandates like those that regulate the ethanol industry — he saw ethanol as a possible revenue stream. However, optimism dwindled as each fall’s harvest brought bushels of despair, not what others had promised. He would one day realize the strife that comes with perverse government regulations.

Many have regarded ethanol to be the proverbial “fuel of the future,” claiming that it reduces the cost of gasoline at the pump while also emitting less pollution. Although ethanol can replace gasoline in some ways, it is less beneficial than many expect.

The Department of Energy began releasing data in 1997 determining that some of the benefits derived from ethanol don’t outweigh the costs, as researchers had previously believed. Ethanol may emit less pollution when burned in place of gasoline, but the Environmental Protection Agency reports that it releases carcinogens at far higher levels than they predicted when it’s created.

Despite the abundance of new testimonies and information, however, both the federal and state government continue to support ethanol ardently, as our country’s energy messiah.

Pointing to often-circulated claims of environmental friendliness and cost-effectiveness, Rep. John Shimkus from Illinois recently introduced new legislation that would impose further government mandates for the production of ethanol. Amid another distressing year for Detroit, this governmental decree would require that 50 percent of all new automobiles be capable of running on ethanol and other non-petroleum fuels by 2014. That number would stiffly rise to 95 percent just three years later.

So, do the advantages of ethanol outweigh the costs? The answer, simply, is no. Aside from its counterproductive environmental effects and proven efficiency loss for each mile to the gallon, ethanol is a precarious investment for the government to force on us for several reasons:

• First, it has been shown that increases in ethanol production are correlated with an increase in food prices. These effects can be felt not only statewide, but also nationally and internationally.
• Second, and as a direct result of government mandates, a cloud of pseudo–market demand now hangs heavily above the heartland. Simply put, the current supply/demand ratio did not arise naturally from the decisions of producers and consumers, interacting voluntarily in the market. Instead, the ethanol industry is artificially bolstered by government sanctions.
• Finally, both this mandate and others like it point to the essence of how government controls harm the economy. There are too many hands in the cookie jar, and, as a result, everyone’s hand gets stuck; the cookie crumbles. Automakers should not be burdened with absurd requirements such as this from legislators who seek to alter the free market for the sole benefit of their constituents, and at the expense of everyone else.

Don’t get me wrong, I support the development of renewable energies and green solutions. Markets reward efficiency. However, as both a Missouri resident and an owner of my father’s businesses, I find that legislation like our own E-10 mandate and the proposal advanced by Rep. Shimkus in Illinois are harmful — especially in the long run.

Neither supply nor demand would exist at anywhere near current levels without both federal and state mandates, both of which have propelled ethanol into the forefront of the American auto and oil industries. As it stands, the eagerly pushed supply of ethanol more than satisfies current market demand. And that, folks, is just basic economic principle.

Gov. Jay Nixon wants to make Missouri a green state. According to an article in the Missouri Watchdog, the governor sent a letter to the leaders of the Missouri General Assembly encouraging them to pass legislation that supports the development of energy alternatives. From the letter (emphasis in the original):

My administration looks forward to working with the General Assembly to determine where those sources of renewable energy must be located in order to carry out the will of the people and promote a renewable energy economy in Missouri.

Sounds good, huh? Greener energy is a good thing for Missouri, right? Unfortunately, this is a problematic way to get to that goal. I strongly support the development of renewable energy, but I do not want the state to subsidize it!

The free market and basic economic forces, not government programs, will determine the development of alternative fuels. When the government enacts policies that impose higher mandates for alternative energy, such as the 2008 Missouri Renewable Energy Initiative referenced in the letter, it imposes high hidden costs and defeats its ostensible goal of helping the environment.

Just as government officials don’t know the socially optimal mix of any set of products and services, they do not have special predictive power, nor do they have access to perfect information. Politicians can’t identify new technologies and business opportunities as well as the unrestricted market can, because they are too far removed from the science of energy technologies to know the optimal state of the market. Plus, government is slow to react to changes in the economic environment because it is bogged down in bureaucracy.

Furthermore, when lawmakers in Jeff City roll out proposals for encouraging the development of alternative energies, Missourians would be wise to question whose interests their elected officials actually have in mind. Policymakers often bend the truth to promote their own political agenda, under the guise of helping the environment. Corn ethanol, which we discuss frequently on Show-Me Daily, is a classic example. Al Gore touted the corn ethanol industry with the ostensible goal of helping the environment. Last November, he changed his position on ethanol, admitting that he had previously supported ethanol as a means of pandering to Iowa voters. Gore had the interests of his political career—not the environment—in mind.

My recent editorial, “New Year’s Resolutions for Missouri Public Policy,” ran in the St. Louis Beacon and the Joplin Globe, and was linked to by Combest.

The following are additional resolutions that didn’t make the final list. I tried to model these after resolutions that individuals commonly make for themselves. I thank my colleagues for their collaboration, and I encourage our Show-Me Daily readers to leave additional resolutions in the comments section.

1. Get Out of Debt:
    
   This year, state and local governments in Missouri should resolve to get a handle on their finances. Policymakers can accomplish this by holding off on the pork barrel spending projects and fitting in time for fiscal fitness. Eliminating and reducing debt will have positive fiscal consequences in the future, because the state will not be spending tax monies on interest on debt. Government should resolve to live within its means, as an individual does. There are many policy areas that could save money. For example, school districts could elect against giving superintendents health care for life.
2. Eliminate Clutter:
    
   The state government should conduct a top-down, bottom-up review of all state agencies and regulations to eliminate waste, inefficiency, and government intrusion unrelated to public health and safety. To accomplish this, policymakers may pursue public-private partnerships, privatize services, eliminate underperforming programs, etc.
3. Get Organized:
    
   The state can take measures to reduce bureaucracy and red tape, especially huge mistakes and oversights in its expenditures. For example, the state government is issuing targeted tax credits too quickly to keep track of them. According to an article from the Associated Press, 56 businesses, nonprofit groups, and individuals in Missouri have failed to meet the mandates of a 2004 state law that requires annual progress reports after receiving tax credits. The state government awarded $2 million in tax credits to a convicted embezzler for a development project in Cape Girardeau. With better organization, scandals like this would be much less likely.
4. Find a Job:
    
   The state unemployment rate continues to exceed 9 percent. Missouri would attract a greater number of businesses to the region if it implemented strategies that reduce the cost of doing business in the state. Specific strategies that policymakers can implement are: eliminating personal and corporate income taxes, reducing occupational licensing requirements, and eliminating property tax surcharges.
5. Lose Weight:
    
   Just as individuals need to lose weight to remain fit and healthy, cities and other taxing districts need to save money by cutting out the fat whenever possible in order to remain fiscally sound. Policymakers in Missouri should take steps to limit this growth. Individual governments in Missouri can share resources, consider consolidation or disincorporation when appropriate, and contract with private service providers as much as possible. Individuals make the tough choices to eat less for better health. Taxing districts can make those same hard decisions to outsource, privatize, consolidate, or share services in order to perform key public services at as low a cost as possible. (Hat tip: David Stokes!)
6. Spend More Time With the Kids:
    
   Missouri can take measures to improve educational outcomes, such as increasing school choice. A specific strategy that policymakers can implement would be to expand access to charter schools and virtual schools, the latter of which can provide 24-hour education services to meet flexible schedules. It’s important to note that the most successful charter schools lengthen both school hours and the school year in order to help students catch up with their peers in other schools. (Hat tip: John Payne!)
7. Quit Smoking:
    
   Even staunch environmentalists now understand that the total carbon emissions from the use of ethanol are worse than the emissions from the fuel that ethanol replaces. Energy specialists recognize that it takes more energy to produce a unit of ethanol than the energy that unit returns. It’s bad for your health, your wallet, and the environment. It’s time for the state of Missouri to quit subsidizing, mandating, and abusing this substance.
8. Travel Less:
    
   Gov. Jay Nixon has the habit of holding ribbon-cutting ceremonies for subsidized projects around the state, and then billing the expenses to other agencies. These travel expenditures come at the expense of other programs because they compete for the agencies’ services. Taxpayers in Missouri would be better off if they weren’t footing the bill for these trips, because they could keep a greater proportion of their earnings. (Hat tip: Audrey Spalding!)
9. Spend More Time With Family and Friends:
    
   Just as an individual resolves to “Spend more time with family and friends,” a state government can resolve to increase the level of civil society interaction in Missouri through privatization. Instead of seeing government employees take care of your water utility, or going to a government-sponsored health clinic, we can interact with members of our community that we choose to do business with privately. This resolution could also describe hanging out with a family member or friend while they African-braid your hair or examine your horse’s teeth, even though they do not have a license.

I am to ethanol what Chrissy is to tax credits, so I have been mildly remiss in waiting a few days to write about the latest on the massive scam economic growth opportunity that is the ethanol industry.

First, the bad news, which is really not all that bad — yet. The Environmental Protection Agency (EPA) approved increasing the amount of ethanol allowed in the standard blend of gas, from 10 percent to 15 percent. The important thing to note here is that the agency has allowed such an increase, not required it. There is really no argument against allowing the option for retailers who wish to undergo the expense in order to sell a higher blend, or to consumers who choose to buy that higher blend. So, as long as it remains an option rather than a rule, I see nothing wrong with the EPA’s decision.

The fear, of course, is that states like Missouri will subsequently require the higher blend for gas sold in the state. We currently have a ludicrous law that requires a 10-percent blend of ethanol in Missouri gas, whether we want it or not. If the state were to increase that requirement now, it would be a sick joke. I am tepidly optimistic that this won’t happen, because the higher blend is not recommended for most old cars.

I agree with this part of the article suggesting that, minus the requirement, most gas stations won’t choose to sell the higher blend, and we might not have much to worry about:

Critics said the decision could be a frustration to drivers and argued that many retailers will opt not to sell the higher blend because of the expense of adding new pumps and signs.

In places where there is enough demand, retailers will choose to sell it. Customers should also be informed enough to realize that the suddenly cheaper option at the pump might not be right for their cars. If everyone read this blog, they would already understand this.

On to the potentially more exciting news: getting rid of federal ethanol subsidies entirely! The main ethanol support programs are scheduled to expire at the end of the year, and Congress has yet to renew them. Abolishing these subsidies — or, more accurately, just letting them expire — would be the sole crowning achievement of the 111th Congress. Seriously, getting rid of those subsidies would be a victory for markets and freedom, and a loss to rent-seekers everywhere. The 111th Congress would deserve praise for letting them expire.

I guess the news has finally reached Washington. In a recent post on the Political Fix blog, Bill Lambrecht pointed out that the political heat around subsidies is increasing, and this time it is fueled by ethanol. Almost two years to the date after the Show-Me Institute’s release of its case study of the E-10 ethanol mandate in Missouri, another nonprofit research organization has published a study about the inefficiencies of federal ethanol subsidies. The Environmental Working Group’s analysis of the ethanol subsidies concluded:

Americans have spent $17 billion since 2005 to achieve reductions in gasoline consumption that could have been achieved for free.

Today, proponents of ethanol are attempting to piggyback on the recent oil crisis in the Gulf of Mexico in order to gain support for their most recent push to increase the amount of ethanol in the U.S. gasoline supply and keep their subsidies. In a Post-Dispatch article yesterday, Jeffrey Tomich pointed out:

The ethanol industry is also lobbying Congress to extend a tax credit for blending ethanol with gasoline and maintain a tariff on imported ethanol — measures implemented years ago to help a fledgling industry grow. Both the tax credit and tariff are set to expire at the end of the year.

Letting the tax credits and tariffs expire wouldn’t be such a bad thing. Who knows, besides saving the American taxpayers $17 billion dollars, we might actually come up with an alternative energy idea that works.

Photo from the Kansas City Star.

Sing along:

Go ahead and hate your gasoline,

Go ahead and scam a friend.

Do it in the name of subsidies,

You can justify it with an E-10 blend.

There won’t be any markets working,

Come the judgment day,

On the inefficient morning after …

One free marketer rides away.

(continue singing)

And, I should add, rides away with 3 percent less gas mileage.

Thanks to Billy Jack Combest for the KC Star link.

The big news in Missouri today is President Barack Obama’s visit to an ethanol plant in Macon, so I thought it would be worth briefly rehashing the airtight case against ethanol subsidies, as we have done here so many times in the past.

Most obviously, ethanol costs more than gasoline, so consumers have to pay more for energy to run their vehicles. However, because ethanol diverts foods like corn from their more traditional use as energy for humans and farm animals, food prices are driven up by greater ethanol use. Ethanol backers like to claim that such costs are justified by the environmental benefits of ethanol, but those benefits appear to be completely illusory. From the abstract of a 2008 study on biofuels:

Most prior studies have found that substituting biofuels for gasoline will reduce greenhouse gases because biofuels sequester carbon through the growth of the feedstock. These analyses have failed to count the carbon emissions that occur as farmers worldwide respond to higher prices and convert forest and grassland to new cropland to replace the grain (or cropland) diverted to biofuels. By using a worldwide agricultural model to estimate emissions from land-use change, we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years.

Research has repeatedly confirmed that ethanol subsidies only drive price inflation for both energy and food without cutting greenhouse gas emissions, and it is long past time for politicians to admit that such programs are nothing more than a means for buying favor with voters in agricultural states.

I’ll be appearing on the Mike Ferguson Show on The Eagle, 93.9 FM in Columbia, this afternoon to discuss ethanol. Everyone can listen live online, and I hope you will tune in.

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?

This month, the University of Missouri Food and Agricultural Policy Research Institute released its 2010 US Baseline Briefing Book (PDF). Among other topics, the report explores the effects of eliminating the credits and tariffs currently in place for corn ethanol. The current corn ethanol tax credit has many unintended negative consequences, and the United States would be better off if the program were scrapped entirely.

1. This production incentive encourages overproduction. This is undesireable from an environmental perspective, because it leads to deforestation. It’s also detrimental for the American economy because it results in an inefficient allocation of resources.
2. It increases the cost of fuel for taxpayers. Each gallon of ethanol that is produced costs them $4.18. This is separate from and in addition to the price that they pay at the pump. In a piece on The Huffington Post, Nathanael Greene explains how this happens:
   

   [N]ext year the oil companies will be required to buy 12.6 billion gallons of conventional corn ethanol, but because tax payers are giving them $5.85 billion they’ll consume 1.4 billion more than required. That works out to $4.18 per extra gallon.

3. It drives up the prices for corn, soybeans, and wheat. This is bad for consumers because they have to pay more for food. This is also bad for the environment because it leads to land-use change and further overproduction and deforestation. The FAPRI report quantifies that eliminating the tax credit for corn ethanol would cause the prices of these grains to fall. According to p. 64, if the production incentives were removed, the average corn prices would decrease by approximately $0.15 per bushel during the 2010-2019 period:
   
4. It discourages the development of biofuels that are cleaner and more renewable than corn ethanol. These alternatives are forced to compete at a disadvantage because they do not receive the financial favor that corn ethanol does.

The corn ethanol production incentive program is an application of the broken window fallacy. Politicians in Washington fail to consider the cost to taxpayers, and the aforementioned negative consequences. When taxpayers are forced to spend their money on subsidizing the overproduction of corn ethanol, they cannot spend it on something else, such as infrastructure or education or alternative renewable fuels.

Supporters of the production incentives will argue that discontinuing the program would hurt farmers’ bottom lines. However, government payments constitute a very small amount of their compensation relative to sales, as shown on p. 62 of the report. For this reason, eliminating the production incentives would not actually be detrimental to this group: