Ethanol has Tanks Full of Caveats

It took a while for ethanol to catch on in the U.S.—two energy crises and three decades, to be precise. But now that Washington has embraced this “wonder fuel,” it is changing America’s landscape, both figuratively and literally.

In the United States, 95 per cent of ethanol is derived from corn. Elsewhere, as in Brazil, ethanol is derived from sugar cane.

Whatever the source, ethanol advertises a number of benefits, including reductions in petroleum usage, reductions in certain emissions and even lower gasoline prices. However, there are lots of caveats.

According to a Congressional Research Service (CRS) report, “Since ethanol has a somewhat lower energy content than gasoline per gallon, more fuel is required to travel the same distance.”

Plus, more water is required to produce ethanol than to produce gasoline. Not only is corn a water-intensive crop, but ethanol-production facilities consume huge amounts of water, something the city of Tampa learned when U.S. EnviroFuels announced plans to build a plant at the Port of Tampa. As The St. Petersburg Times reported in 2007, the company told Tampa officials it would need a whopping 400,000 gallons of water a day.

According to The St. Petersburg Times analysis, by the end of this year the demand from new ethanol plants in the U.S. will require “a 254 per cent increase in the volume of water used by the industry over the previous decade.”

This may help explain why a growing majority of Canadians now oppose construction of a local ethanol plant, according to news reports in major Canadian daily papers.

There are also distribution drawbacks. A CRS survey found that E85 ethanol has limited availability. In 2006, for instance, only 556 filling stations offered E85 in the U.S., compared to 120,000 that offered conventional gasoline. In fact, 65 percent of the E85-equipped stations are found in just five Midwestern states. And since this is where the corn is, it’s also where most ethanol plants are. Not surprisingly, a significant majority of the 131 ethanol plants in the U.S. are clustered in and around these states—far away from the more congested traffic centers on the coasts.

It’s important to remember that ethanol cannot be transported via pipeline. Since transporting ethanol to the coasts by truck would undermine its energy-saving goals—and building ethanol plants closer to the coasts could exacerbate water shortages—ethanol doesn’t seem to be an ideal answer for the thirsty and far-flung cities in the western U.S.

But that’s not stopping U.S. policymakers from charging ahead. On the strength of government incentives and mandates, the U.S. pumped almost seven billion gallons of ethanol in 2007, and that number is certain to grow: The Energy Independence and Security Act of 2007 requires the production of 36 billion gallons of renewable fuel by 2020.

Ethanol has been aided by subsidies dating back three decades and five presidents. Today, subsidies for biofuels are estimated as high as $7.3 billion per year.

Thomas Elam, an agriculture economist with FarmEcon, concludes that “federal support policy has significantly increased the attractiveness of ethanol and biodiesel production to levels well beyond that furnished by market forces alone.”

To be fair, many other industries benefit from subsidies. The U.S. oil industry, for instance, has enjoyed an estimated $150 billion in tax breaks in the last four decades. However, as Jerry Taylor and Peter Van Doren of the Cato Institute observe, petroleum subsidies today are “six to eight times less than ethanol subsidies.”

The burgeoning U.S. ethanol industry is also aided by tariffs and duties on foreign ethanol. A tariff on Brazilian ethanol, for instance, has been in place since 1980. Washington slaps a duty of 54 cents per gallon on foreign ethanol.

The ethanol boom has had a ripple effect beyond the filling station. Spurred by government intervention, farmers are planting more corn—and diverting about a quarter of the corn crop to ethanol. According to The Economist magazine, “This year America’s maize harvest will be a jaw-dropping 335 million [metric tons], beating last year’s by more than a quarter. The increase has been achieved partly at the expense of other food crops.”

Most observers believe changes in planting and usage patterns have contributed to an increase in beef, pork and poultry prices, since cows, hogs and chickens depend on corn feed. Even long-time ethanol supporters are noticing the effects of the “food to fuel” tradeoff. “The high price of corn is beginning to affect the price of food,” President Bush concedes.

Of course, ethanol is not the only culprit for the highest food inflation in decades. Droughts in Australia, floods in the U.S., commodities speculation, energy costs and changing diets in India and China share the blame.

However, by inducing farmers to grow corn for ethanol and mandating energy suppliers to produce ethanol, it seems that Washington has created a case study in the Law of Unintended Consequences.