By Gary D. Libecap
Ethanol is a politician's dream. It is supposed to reduce automobile emissions of carbon monoxide and other gases, promote energy independence, and assist midwestern corn farmers (not to mention large ethanol producers such as Archer Daniels Midland and Cargill). In April, the Senate Environment and Public Works Committee approved a plan that, if enacted, would double ethanol production.
But ethanol fails to perform as promised. Its use appears to have no net positive air quality benefits; its production may entail other environmental costs such as soil and water degradation; and it probably does not contribute to energy independence. Only in helping corn growers and ethanol producers does ethanol pull through as advertised.
Ethanol's political history goes back to the Arab oil embargo of 1973 and the related oil price shocks, which made America's growing dependence on foreign oil a political issue. Ethanol, which is alcohol produced from renewable sources of biomass such as corn, looked like a way to stretch gasoline supplies.
Although the cost of producing ethanol was nearly twice that of gasoline in 1980, forecasts of gasoline prices issued by the U.S. National Alcohol Fuels Commission-as high as $4 per gallon by 1990-1991-made ethanol seem a reasonable supplement. The nineteen congressional members of the commission came mostly from agricultural states.
The actual subsidy began with the Energy Tax Act of 1978, which authorized exemptions from the federal highway excise tax for biomass-derived fuels such as "gasohol," a mixture of 90 percent gasoline and 10 percent ethanol. Subsequent laws added income tax credits for blenders of ethanol and gasoline and provided more than $1 billion in loan guarantees for ethanol plants (Kane and LeBlanc 1989). Some states provided an added subsidy of $.20 to $.30 per gallon of ethanol (GAO 1997).
In 1986, a study of ethanol released by the U.S. Department of Agriculture (USDA) concluded that ethanol production could not survive through 1995 without "massive Government subsidies" (Gavett, Grinnell, and Smith 1986, iv, 45). But ethanol advocates moved quickly to repudiate the report's findings, and a 1988 USDA study argued the opposite: By raising corn prices, farmers' deficiency payments would fall to such an extent that there would be a net savings to the government (LeBlanc and Reilly 1989, 39).
In the early 1990s, political competition with MTBE (methyl tertiary-butyl ether) developed. The 1990 Clean Air Act Amendments required that gasoline be reformulated with oxygenates to reduce volatile organic compounds (VOCs) and carbon monoxide emissions in areas where air quality was low. Either ethanol or MTBE could be added to gasoline to reduce carbon monoxide emissions.
Farm-state politicians attempted to mandate only renewable oxygenates. In response to their lobbying, the Environmental Protection Agency (EPA) in 1994 issued an administrative rule that required at least 30 percent of the oxygenates used in reformulated gasoline come from renewable sources (EPA 1994, National Research Council 1996, 4)-even though ethanol would have to be specially blended in order to avoid increasing VOC emissions.
The EPA's rule was challenged in appeals court. The American Petroleum Institute and National Petroleum Refiners Association argued that the EPA lacked statutory authority to impose a mandate to use renewable oxygenates and that the mandate undermined the VOC emission reductions required by the Clean Air Act. The court agreed, reversed the EPA ruling, and scolded the agency for taking action that could increase air pollution (American Petroleum Institute v. EPA 1995, 1118).
Efforts to advance ethanol continued, however. Congress extended the ethanol subsidy through 2007. And problems developed with MTBE. To meet Clean Air Act standards, the California Air Resources Board required that by 1996 all gasoline sold in the state be oxygenated during winter months. MTBE was the preferred oxygenate because reformulated gasoline with ethanol could not meet California's limits on VOCs. But MTBE is water-soluble, and leakage from storage tanks potentially could contaminate groundwater supplies. It has an unpleasant smell and taste, and it may be a carcinogen. In 1997 the EPA issued a drinking water advisory regarding MTBE. The next year, the EPA formed a blue-ribbon panel to review use of MTBE and other oxygenates. Concerns about MTBE also raised questions about the need for any oxygenates to meet the requirements of the Clean Air Act (U.S. House 1998).
In March 1999 Governor Gray Davis ordered the phase-out of MTBE from California gasoline supplies by December 31, 2002. California regulations allowed refiners to produce complying fuel without any oxygenates. But in June 2001, responding to lobbyists, the new Bush administration denied California's request for a waiver from federal oxygenate requirements and ordered the state to include ethanol as a fuel additive. California resisted, with Governor Davis filing suit to block EPA requirements for ethanol use in reformulated gasoline. Today, a political compromise is under consideration (Carlsen 2002, A15).
Numerous scientific assessments in the early 1990s challenged the environmental benefits of ethanol. Studies by the EPA, National Academy of Sciences, the White House National Science and Technology Council, and the Committee on the Environment and Natural Resources of the National Science and Technology Council did not find conclusive air quality benefits from the use of any oxygenate additive.1 In 1994 policy debates, representatives of the Sierra Club, Environmental Defense, and Resources for the Future, opposed the oxygenate mandates. Ethanol advocates never dropped their environmental claims, however.
The most recent information suggests that ethanol, when mixed with gasoline, has higher emissions of VOCs than does gasoline blended with MTBE, and the use of ethanol could increase the release of nitric oxide and other pollutants such as carcinogenic aldehydes into the atmosphere. A 1999 National Academy of Sciences study found no significant pollution reduction from ethanol's use and instead possible increases in pollutants that cause smog (National Research Council 1999).
Nor is it likely to contribute to energy independence. A critical study of ethanol's energy and environmental effects published in the Encyclopedia of Physical Science and Technology (Pimentel 2002) concluded that conversion of corn and other food/feed crops into ethanol by fermentation is a net energy user.
Ethanol illustrates the workings of the political process when there is an entrenched, well-organized beneficiary, heterogeneous opponents with less at stake, and technical information that makes it difficult for general voters to assess the issue. Unless a constituency emerges in whose interest it is to expose ethanol, or unless the costs of the subsidy rise substantially, this agricultural support program will continue.
1. These studies are documented in the chapter from which this essay is excerpted (Libecap 2003).
Carlsen, William. 2002. MTBE Ban May Choke Gas Supply, Raise Prices. San Francisco Chronicle, January 20.
Environmental Protection Agency. 1994. Regulation of Fuels and Fuel Additives: Renewable Oxygenate Requirement for Reformulated Gasoline. 40 Code of Federal Regulations ¤80.
Gavett, Earle E., Gerald E. Grinnell, and Nancy L. Smith. 1986. Fuel Ethanol and Agriculture: An Economic Assessment. Agricultural Economic Report 562. U.S. Department of Agriculture, Office of Energy. Washington, DC: Government Printing Office.
General Accounting Office. 1997. Tax Policy: Effects of the Alcohol Fuels Tax Incentives. GGD-97-41. Washington, DC: Government Printing Office.
Kane, Sally M., and Michael LeBlanc. 1989. Ethanol and U.S. Agriculture. AIB-559, U.S. Department of Agriculture, Economic Research Service. Washington, DC: Government Printing Office.
LeBlanc, Michael, and John Reilly. 1989. Ethanol: Economic and Policy Tradeoffs. AER-585, U.S. Department of Agriculture, Resources & Technology Division, Washington, DC: Government Printing Office.
Libecap, Gary. 2003. Agricultural Programs with Dubious Environmental Benefits: The Political Economy of Ethanol. In Agricultural Policy and the Environment, ed. Roger E. Meiners and Bruce Yandle. Lanham, MD: Rowman & Littlefield, 89-105.
National Research Council. 1996. Toxicological and Performance Aspects of Oxygenated Motor Vehicle Fuels. Committee on Toxicological and Performance Aspects of Oxygenated Motor Vehicle Fuels, Board on Environmental Studies and Toxicology, Commission on Life Sciences. Washington, DC: National Academy Press.
---. 1999. Ozone Forming Potential of Reformulated Gasoline. Washington, DC: National Academy Press.
Pimentel, David. 2002. Limits of Biomass Utilization. In Encyclopedia of Physical Science and Technology, 3rd ed., vol. 2. San Diego: Academic Press, 159-71.
U.S. House of Representatives. 1998. Implementation of the Reformulated Gasoline Program in California. Hearings before the Committee on Commerce, 105th Congress, 2nd sess. Washington, DC: Government Printing Office.
U.S. Senate. 1995. Ethanol, Clean Air, and Farm Economy. Hearing before the Committee on Agriculture, Nutrition, and Forestry. 104th Congress, 1st sess. Washington, DC: Government Printing Office.
American Petroleum Institute v. Environmental Protection Agency, 52 F.3d 1113 (D.C. Ct. App., 1995).
Gary D. Libecap is professor of economics and director of the Karl Eller Center at the University of Arizona. During 2003, he is serving as one of PERC's two Julian Simon Fellows. This article is excerpted from "Agricultural Programs with Dubious Environmental Benefits: The Political Economy of Ethanol," in Agricultural Policy and the Environment, edited by Roger E. Meiners and Bruce Yandle (Rowman & Littlefield Publishers, 2003).