Monday, April 23, 2012
Ethanol in Gasoline: Unintended Consequences
Since 2007, virtually all gasoline sold in the U. S. has contained 10% ethanol, which is about as much as you can put in most cars without having to do a major redesign of the fuel system. The reason is a federal law called the Energy Independence and Security Act (ERISA), which until last year also subsidized ethanol production to the tune of 45 cents a gallon and imposed a steep tariff on imported ethanol. Why was this done? As is often the case with politically-influenced actions, there were advertised reasons and not-so-advertised reasons. And now that five years have passed, an economist at Texas A&M University has taken a good hard look at the effects of the ERISA mandate, and it is a lesson in unintended consequences.
The advertised reasons for the law were clear. As the U. S. imports more oil, we become more dependent on the unstable geopolitical situations that prevail where much of imported oil is produced, our trade imbalance grows, and we make a bad situation worse, generally speaking. The pipe dream of many environmentalists is to convert the entire energy economy to renewable sources: wind, solar, and biofuels. At the time, ERISA was passed, ethanol was the only biofuel that had any reasonable chance of making it into the nation’s gas tanks in a reasonable time frame. While corn was the only practical biofuel feedstock in 2007, it was hoped that cellulose and other waste products could be turned into ethanol in the future. So far, this hope has not been realized.
People have been making ethanol (grain alcohol) from corn ever since the first moonshiner ran his first still. It is a fairly straightforward and cheap process, so even without the federal subsidy, so-called “E10” gas (90% gasoline, 10% ethanol) is cheaper than straight 100% stuff. But instead of simply allowing refiners to mix in up to 10% ethanol if the market and production environment made it favorable, the law mandated a steep ramp-up to full sales of nothing but E10 in a very short time. So on the surface, we would move that much closer to energy independence with this law. Well and good.
The not-so-advertised reasons for the law have to do with the strength of the agricultural lobby. The E10 mandate was a tremendous windfall for everybody who grows corn. While some ethanol from corn was being used voluntarily as a fuel additive before 2007, the mandate caused this use to skyrocket. By 2011, according to the Mosbacher Institute report by economist James Griffin, 37% of the entire U. S. corn crop went toward ethanol production. And corn prices soared from $2.50 per bushel up to as high as $7.50.
If the only people hurt were U. S. food consumers (not everybody drives a car, but everybody eats), it would be bad enough. But the U. S. grows and sells more corn than any other nation, and much of it is exported to poorer countries, where it is a staple in many diets. While the rise in corn prices was not solely responsible for the worldwide inflation in food costs that led to food riots in many nations in recent years, the timing is suspicious, and there is no question that the ERISA law led to hardships for many poor people around the world who were now even less able to afford to eat.
Another argument in favor of the ERISA law had to do with global warming. If you burn gasoline, that directly adds the carbon in the gasoline to the air. On the other hand, growing corn actually absorbs carbon dioxide from the air, so at first glance you’d think adding ethanol would lower every driver’s carbon footprint. But a closer analysis that includes all the mechanical energy (fuel-powered) to grow corn and make ethanol reduces ethanol’s edge to only about 20% less carbon emitted per gallon than gasoline. So that benefit isn’t all it was advertised to be either.
Unintended consequences show up all the time in considering engineering ethics, and the ERISA mandate has plenty. The parties who appear to have benefited are: growers of corn and producers of corn-based ethanol (a lot), the U. S. driving public (a little), and the U. S. overall, from the viewpoint of slightly improved energy security. The losers include refiners (who have had to fool with the mandate and change their processes), anybody who buys corn (U. S. food consumers, U. S. livestock growers, and millions of foreign food consumers, many of whom are poor), and the U. S. public in the sense that they have had to pay the 45-cent-a-gallon subsidy through the U. S. treasury. Quite a mixed bag, to say the least.
The ERISA experience has shown that mandates of this kind always have unintended consequences, whether or not they are anticipated. Whether the unintended consequences outweigh the intended benefits often cannot be decided until the mandate has been in place and people have had time to deal with its effects. It appears to me that we could do without the mandate now that there’s a lot of production capacity in place. I don’t think corn prices would collapse, and ethanol use in fuels might fluctuate around a reasonable value that would strike a better balance between the advantaged groups and the disadvantaged groups. But it’s very hard to displace such legislation once it’s in place, so we may have ERISA with us for many years to come.
Sources: All statistics cited are from economist James Griffin’s report “U. S. Ethanol Policy: The Unintended Consequences” available at http://bush.tamu.edu/mosbacher/takeaway/TakeAwayVol3Iss1.pdf.