Ethanol is currently the pretty boy of alternative fuel options. Embraced by lobbyists, politicians, environmentalists, and funded by Wall Street, the ethanol currently being produced is created from sustainable, renewable sources; produces 20% less harmful emissions than current fossil fuel blends; and can cut US dependency on foreign oil.

However, the ethanol produced in the US comes from a less-than-ideal source: corn. The amount of energy required to refine corn-based ethanol is significantly higher than that of many other alternatives — particularly, sugarcane. Ethanol distilled from sugarcane is much cheaper to produce, and generates far more energy per unit of input—eight times more, by most estimates—than corn.
The most recent US Energy Bill, signed into law in August ‘06, calls for a doubling of ethanol use by 2012, and it’s all about corn. The US Agriculture Department is predicting that the ethanol industry will consume 2.15 billion bushels of this year’s corn crop. That amount represents 20% of the U.S. corn harvest, and 63% more corn than the industry used just two years ago (growers are often paid not to grow).

To protect American corn and ethanol producers, while increasing the cost of ethanol to American consumers, keeping cheap ethanol from the American consumer, a 54-cent tariff per gallon is imposed on imported ethanol and sugar by the US government. As an additional boon to the corn industry, last year the Federal government gave roughly $8.9 billion in subsidy checks to corn farmers to compensate them for low prices. Rising market prices this year (over $3 per bushel) may reduce the government’s subsidy obligations to the point that Federal checks to corn growers could fall to $2 billion annually in 2007.

Regardless of the extent of the subsidies, the bulk of the agri-welfare and profits derived from this protectionism are pocketed by large conglomerates with extraordinary political power. Congressmen and Senators from key states such as Iowa, Michigan, and Ohio have been in no mood to tamper with the tax. Ironically, when the Bush Administration proposed eliminating the ethanol tariff this past spring, Congress quickly tabled the idea. Several powerful mid-western senators, including Barack Obama, Charles Grassley (R-Iowa), Max Baucus (D-Mont.), and Dennis Hastert (R-Ill.) — whose state is the home of the biggest ethanol producer, Archer Daniels Midland — all continued to support the tax.

The theoretical goals of the the ethanol industry (besides profit) are: to reduce the United States dependence on volatile foreign oil supplies, cut harmful carbon emissions, and provide a sustainable alternative to fossil fuels.
Brazil presents an obvious model for success with its sugarcane-based ethanol refining industry (in the very near future Brazil will be energy-independent). US ethanol costs at least 30% more than Brazil’s product, in part because corn’s starch must first be processed into sugar, before being distilled into alcohol. According to the US Department of Energy, it may take the US decades to bring the cost of ethanol down to 80 cents a gallon — equivalent to Brazil’s most efficient producers (it took Brazil 30 years to get there), while US trade barriers will effectively keep the cheaper Brazilian ethanol out of the American market.

Wall Street is now pumping millions into building scores of new corn-based ethanol refineries – while simultaneously jacking up the price of corn in the commodities markets – a nasty brew for consumers. Over-expansion, and falling oil prices only make the situation more unstable.

The Bottom Line: Bowing to powerful special interests may make corn the easy short-term choice, but by tethering our ethanol industry to a primarily corn-based process we may mitigate ethanol’s longterm viability, and slow its adoption. At least for the immediate future, American consumers’ major motivation for switching to ethanol will be rising oil prices and cheaper ethanol or E85 prices at the pump. If we were to remove harmful import tariffs, explore bio-mass alternatives to corn, and diversify government subsidies and tax breaks to encourage innovation — we could only strengthen the possibility of reducing our levels of harmful emissions, while lessening our dependence on Middle Eastern oil. After all, isn’t competition the American Way?

Wall Street Journal – Ethanol

New Yorker

NYT – Brazil article

Ethablog