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Monday, January 24, 2011

Bad ideas in government last forever

If ever there was a bad idea for a government policy, support of ethanol would rank right up there. It is contributing to rising grain prices which are rippling through the rest of the economy, yet it is not achieving any of the environmental benefits it was supposed to.
About 40% of U.S. corn production is used to produce feed for animals. As corn prices rise, beef, poultry and other prices rise, too. The price squeeze has already contributed to the bankruptcy of companies like Texas-based Pilgrim's Pride Corp. and Delaware-based poultry maker Townsends Inc. over the past few years.

This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals. Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. But Cornell University scientist David Pimentel calculates that if the entire U.S. corn crop were devoted to ethanol production, it would satisfy only 4% of U.S. oil consumption.

The Environmental Protection Agency has found that ethanol production has a minimal to negative impact on the environment. Even Al Gore, once an ethanol evangelist, now says his support had more to do with Presidential politics in Iowa and admits the fuel provides little or no environmental gain.
Yet the government continues its mandates on ethanol blends in gasoline. Plus the farmers get tax credits for blending ethanol into gasoline.

Yet with concerns about rising food prices, increased recently by fears of what the floods in Australia will do to wheat prices, the United States is increasing the amount of our corn crop that is devoted to ethanol. Check out this chart from the WSJ of the trend in the percent of our corn crop going to ethanol.
Does this make sense? Perhaps if all the dreams of how ethanol would provide cleaner energy. But all evidence is contrary to that. Yet our subsidies and tax credits for ethanol continue. And the price of food goes up. The perfect government program - bad in all its effects, yet continuing to be mandated and subsidized by the federal government.


Stuart Hutchings said...

Its a stupid subsidy. Frankly I'd like a cost benefit analysis on all of our agricultural subsidies.

When President Bush first proposed supporting expanded ethanol production I liked it but I assumed there would be more aggressive efforts to develop cost effective production methods using wood waste or more importantly things like switch grass. Of course it was 'cheaper' to leap directly to corn. Corn based ethanol is not environmental sound, not cost effective, and does very little to help control GHG production.

Now, finally, progress has been made on production techniques to use wood waste and switch grass, both of which would be better for the environment and GHG, without artificially inflating food costs. Plus switch grass requires very little effort to grow and on basically any quality of land. Thus helping farmers profit off their lands when demand expectations for their food crops is not high. We also get to avoid government paying the subsidy to help farmers in this situation.

If I've read correctly, three wood waste/switch grass ethanol plants are now under construction or will begin shortly. Unfortunately, politics demanded immediate response, not a Presidential proposal that would take 10 years to realize, and thus the corn issue.

Rick Caird said...

Ethanol is a very corrosive substance. It is corrosive to metal, engines, gas tanks, politicians, and farming. In spite of Stuarts post, ethanol, not matter what source is used, is unlikely to provide a net positive energy contribution. Even with the rising cost of oil, ethanol plants need an additional 50% subsidization by the idiotic idea of going to an E15 blend. The idea is that cares made later than 2000 will not be harmed by this blend. So, are we going to an additional tank and pump at every gas station? I doubt it.

Even Brazil achieved energy independence, not from ethanol, but from drilling. No rational person looking at the cost and benefits of ethanol would ever choose it as a solution. But, politics is not rational.

Pat Patterson said...

I'm not sure if that's accurate as in 1976 Brazil began to mandate the use of sugar cane ethanol in all new cars where today only a small class of trucks and cars are still run on gasoline. Now if we are talking about the exporting of petroleum then that has indeed made Brazil more 'independent' in the political sense.

Rick Caird said...

I don;t think that is completely right, Pat. Brazil is dual use, gasoline and ethanol. Energy independence means the exports equal or exceed the imports. That is true because, if necessary, the exports could be redirected to internal use and eliminate the imports. Brazil only achieved energy independence based on the PBR discoveries and production of oil.

In Brazil's case, the use of ethanol depends on the price of gas. Being rational human beings, the Brazilians will go for what is cheaper:

pumping-irony said...

I understand corn ethanol is energy-inefficient. It takes almost as much energy to make a gallon of corn ethanol as you get out of it when you use it. Sugar cane ethanol is much more efficient and the switch grass stuff even better still. But very little sugar cane grows here and switch grass doesn't vote.

Just another example of how when government gets involved, capital flows to the best political uses instead of the ecnomic ones.