Inconvenient truths
A recent Iowa State University study concluded that increased demand for ethanol has added $47 to the average American market basket over the past year. In turn, heightened demand for corn as ethanol feedstock has farmers forgoing planting other grains, which are now feeling their own upward price pressures.
How green is ethanol, anyway? Canada committed $2 billion in incentives for increasing its ethanol production because it is widely believed that ethanol-containing transportation fuels burn more cleanly than petroleum derivatives. Yet a recent Environment Canada study found no significant difference in the greenhouse emissions of regular unleaded and unleaded diluted 10% with ethanol (E90). What's more, some note that because ethanol isn't a very stable gasoline additive, it evaporates faster than pure gasoline in hot weather, increasing smog at just the wrong time.
And what of the cost to taxpayers of federal and state sops for ethanol production? The biggest is certainly the 51-cents/gal ethanol tax credit that is scheduled to expire in 2010. By then, about 12 billion gallons a year of refinery capacity should be eligible. However, bills that have passed the Senate Committee on Energy and Natural Resources would make 36 billion gallons eligible by 2022, and Senators Lugar (R-Ind.) and Tom Harkin (D-Iowa) are sponsoring another bill that targets 60 billion gallons by 2030. Dozens of new loan guarantees and subsidies for ethanol also are being proposed without any concern about their funding.
Finally, what good is producing ethanol if it's hard or costly to distribute to the point of sale? Ethanol is very corrosive, so it can't be sent through gasoline pipelines. Harkin's solution is to grant rights-of-ways along U.S. highways for new ethanol pipelines. Another legislator has even proposed creating a Strategic Ethanol Reserve.
Invisible hands
With every kernel spoken for in the U.S., you'd think $20 billion a year in agricultural subsidies wouldn't be needed to offset the costs of distilling corn and distributing ethanol. According to the USDA, rising corn prices have contributed to a decrease in farm subsidies of $10 billion over the past five years. However, payments to farmers will continue at over $2 billion a year regardless of the price of corn.
I think a more-effective public policy (to support any new technology) is to boost demand through legislation and let producers respond to it. For example, how about mandating that all new cars be able to run on ethanol or gasoline? It would add only about $100 to the sticker price.
Washington also could accelerate technology development by incentivizing investment in demonstration projects and basic research. That approach has done wonders for alternative energy technologies like photovoltaics and wind, and evolutionary ones like clean coal combustion. Often, however, the feds forget that once an industry has matured, it's time to take off the training wheels and let the market drive prices.
—Dr. Robert Peltier, PE Editor-in-Chief
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