Burning Issues Over Ethanol

May 14, 2008

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

Detractors of ethanol are trying to decelerate its take off. Ethanol production is ramping up to meet federal mandates, which critics say has created global food shortages and potentially more greenhouse gas emissions.

Federal policies have favored ethanol production as a way to lessen the dependence on foreign oil and as an innovative to way to clean the air. But critics say that this country's strategy is not working, pointing out that ethanol is made mostly from corn. That has diverted about a quarter of the nation's corn crop away from food production and into ethanol use -- an amount that will grow to 30-35 percent this year.

Those skeptics also say that it takes an awfully lot of energy to create a gallon of ethanol from corn. A recent study presented by Science magazine says that by the time corn is converted to ethanol, more global warming gases will have been released than if fossil fuels were directly burned.

Other examinations, however, reach different conclusions. A study by the University of California at Berkeley says that ethanol can generate higher energy content than petroleum while producing 10-15 percent fewer greenhouse gas emissions -- a powerful reason to expand ethanol use. Today, cars run on 90 percent gas and 10 percent ethanol, although manufacturers can make vehicles that are able to run on 85 percent ethanol.

The Energy Act of 2007 laid out a plan to grow ethanol use from a base of 6.5 billion gallons. In 2008, the federal mandate for ethanol production is 9 billion gallons. By 2015, the directive will be 15 billion gallons and by 2022, it will be 36 billion gallons. Federal law also gives generous tax breaks to producers of ethanol, providing them with $3.2 billion in all last year and the biggest energy-related subsidy ever granted, says the U.S. Energy Information Administration.

The result has created a skewed marketplace. Farmers are replacing other crops with corn, thereby creating shortages of other food products. Since February 2006, the price of corn, wheat and soybeans has increased by more than 240 percent, according to World Agricultural Supply and Demand -- a third of which is the direct result of diverting corn to make ethanol.

"We need to assess the corn-based ethanol mandate and its unintended effects on food prices for American consumers," says Sen. Kay Bailey Hutchinson, R-Texas. "When we passed the ethanol mandate, the EPA was given the authority to waive the mandate or make necessary adjustments to prevent collateral damage." The senator has introduced legislation, along with the presumptive Republican presidential nominee and Arizona Senator John McCain that would freeze the current ethanol requirements at current levels.

Playing Politics

While energy independence and environmental concerns are the driving forces behind ethanol development, politics also plays a big part. Both parties, in fact, are trying to win the influential farm vote by doling out billions in tax credits.

Ethanol producers say that they are not starving anyone, noting that the nation's corn crop is the biggest that it has been in 60 years and 130 million more bushels than last year. Total acreage devoted to corn production is up 20 percent from last year to 90 million acres. World food shortages, they add, are the result of growing demand from developing countries -- not because more corn is now used to make ethanol.

"Retreat from bio-fuels is just an empty gesture that won't fill anybody's stomach and won't fill anyone's gas tank," says Archer Daniels Midland Chair Patricia Woertz, in a conference call. The nation's biggest ethanol producer, which contributed $700,000 to political campaigns last year, goes on to say that any attempt to curb the subsidies given to the industry would be "foolish and dangerous."

Corn-based ethanol has plenty of critics. But cellulosic-based ethanol has far fewer. Such fuel sources, comprised of wood chips and switchgrass, are abundant and could supply billions of gallons of ethanol. But the conversion process is expensive and undeveloped. To move it along, the U.S. Department of Energy is investing about $385 million in six projects over the next four years. When fully operational, the "bio-refineries" are expected to produce more than 130 million gallons of cellulosic ethanol per year.

For now, though, the reliance is on corn. Because the United States is the world's breadbasket, that has created global shortages and driven up all food costs, critics say. While corn acreage has grown in this country, most of it now goes toward fuel production and not food. An estimated 15 percent of all such land was dedicated to fuel in 2005 but today that is about 33 percent, and growing, as farmers abandon less profitable crops in favor of those that are highly subsidized.

The key policy question then becomes whether the ethanol should be subsidized, particularly to the tune of billions per year. If ethanol can supplant foreign oil and diminish greenhouse gases, then a strong case can be made. But if that is wishful thinking that leads to adverse consequences, then the overall policy needs to be rethought.

"An array of analysts and scholars warned policymakers against the politically expedient path of using food crops for fuel," says Competitive Enterprise Institute Senior Fellow Marlo Lewis. "We can only hope now that past ethanol advocates will acknowledge the results of their policies and support the repeal of bio-fuel mandates."

None of this is to say that corn-based ethanol does not have a place in today's energy economy. It does. But it must come along side other viable options that include all renewable energy forms as well as clean coal and nuclear. It's one thing to try to offset oil consumption. It's quite another to distort global food and energy markets.


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Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

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