Read an Excerpt
Who Pays? Who Benefits?
By Ken G. Glozer
Hoover Institution PressCopyright © 2011 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
This book has a twofold purpose. The first part is devoted to documenting the political history of federal ethanol policy and showing how it has evolved from 1977 through early 2009. Part I attempts to answer important questions about when the policy started, how it evolved, what the major political and market forces were that drove it, and, most importantly, which officials shaped it.
The second part of the book evaluates the major claims made by the policy's advocates over a thirty-year period. It assesses the following questions:
Will the policy significantly reduce U.S. petroleum imports and increase energy security?
Does using corn ethanol as a transportation fuel improve the environment?
How sound are other frequent claims, including whether the policy reduces federal budget costs, reduces the U.S. balance of payments deficit, or increases rural employment?
Who pays for the policy, and who benefits from it?
All of that is important because the federal agencies involved (Environmental Protection Agency and the Departments of Energy and Agriculture — hereafter EPA, the DoE, and the DoA, respectively) have become promoters of the policy, along with such private advocacy groups as the Renewable Fuels Association, National Corn Growers Association, and Clean Fuels Association. They and others have made claims about the tremendous benefits bestowed on consumers and taxpayers in the process of securing enactment of the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007.
Those Acts contained the Renewable Fuels Standard, which requires petroleum refiners and importers to blend 15 billion gallons of ethanol annually in gasoline by 2015. That incentive supplements the tax credit of 45 cents per gallon of ethanol blended into gasoline and the import fee on ethanol imports of 54 cents per gallon. The latter two policies have existed since the early 1980s.CHAPTER 2
Ethanol as a Transportation Fuel
How Federal Corn-Ethanol Policy Evolved
Ethanol, also called ethyl alcohol, is a pure form of alcohol that has been used as an automotive fuel since the first days of the automobile. Ethanol can be made by fermenting sugars (Brazil) or in the case of corn (U.S.), converting corn starch into sugar, then fermenting the sugars into ethanol. Ethanol can be made from other crops such as sorghum and other feed stocks, such as switchgrass, corn, and rice stalks. The latter process requires more processing steps and is referred to as cellulosic ethanol.
Ethanol is a high-octane fuel. Henry Ford championed it as an automotive fuel, and his Model T was designed to run on either pure ethanol or gasoline. Ethanol competed with gasoline in the 1920s and '30s in the United States, but eventually lost the battle as automotive-fuel consumption increased and major oil discoveries were made that provided the volume of fuel needed at very competitive prices. It reappeared briefly during the fuel shortages of World War II, but did not appear in consumer markets until the energy crises of the 1970s, prompted by incentives from state and federal governments. The incentives were aimed at growing the biomass, building the distilleries, and selling the final product, and to do that they made use of an extensive array of income supports, government research, tax breaks, loans, and outright mandates for use. Ethanol was not again produced in volume for automotive use until the 1970s.
Starting from a base of virtually no commercial sales in the mid-1970s, ethanol has grown to a point where it now accounts for over 6 percent (by volume) of U.S. gasoline sales. And current legislation mandates further increases that could take ethanol beyond 10 percent of sales by 2010. Today, virtually all ethanol comes from corn and sorghum in a distillation process that first isolates a sugar-rich byproduct from the production of corn syrup and animal feed, ferments the byproduct, and distills the pure alcohol from the fermented biomass. Distillation of ethanol for fuel is the same process used to produce alcohol for consumer beverages. Nowadays, almost all gasoline sold contains low concentrations of ethanol, but about 6 million vehicles (out of 230 million) on the road are capable of running on E85 gasohol — a blend of gasoline with up to 85 percent ethanol.
The first significant market for ethanol emerged mainly in the corn-growing states of the Midwest, where gasoline was blended with 10 percent ethanol to produce a fuel known as gasohol. The original rationale for federal support for ethanol was to help boost farm incomes, and that became linked to a desire to reduce dependence on crude oil imports. The many federal programs that support the industry acted to create a demand for the fuel, artificially lower its production costs, eliminate competition, and remove environmental regulations that restricted its production and use.
Three phases in the growth of the industry stand out. The first significant federal program to promote ethanol was the exemption — in 1978 — of ethanol blends from a portion of the federal motor-fuel taxes. Combined with state tax exemptions, that made the fuel marginally competitive with gasoline in the Midwest and jump-started the market. Early federal programs to provide tariff protection against low-cost ethanol imports (produced from sugar cane in Latin America), financial incentives for ethanol plant investment and production, mandates for government purchases of alternative-fuel vehicles, and government research and developments spending also helped to develop the industry.
Then, in the 1990s, the rationale for ethanol support expanded to include clean air. For the first time, clean air legislation mandated the formulation of gasoline to create a new market for ethanol as an environmental blending agent — or oxygenate — to help reduce carbon monoxide emissions. Most of that oxygenates market was claimed by the compound MTBE (methyl tertiary butyl ether), which also helped to boost gasoline octane rating. However, when a growing number of state-level bans on MTBE use took effect, around 2000, the market for ethanol as a major octane enhancer began to increase.
Third, the most recent federal legislative action, in 2007, pushed ethanol as a panacea for global warming and U.S. energy security by mandating five-fold increases in the amount of fuel blended with gasoline, to 15 billion gallons annually by 2015. Those levels go well beyond limits for ethanol as an octane enhancer in a slowly growing gasoline market, and they could only be met if ethanol were marketed in concentrations well above the 10-percent level, perhaps going all the way to E85 gasohol in some regions.
Throughout that history, political activities of the groups representing corn producers and ethanol producers have been critical to the industry's development. The early advocates of the fuel adroitly used the national political process at key points to build a highly influential and effective lobby that today dominates the legislative process in Washington. In the early years, the lobby was dominated by the interests of the corn states, which were facing new competition abroad, excess production at home, and falling prices. Those corn interests included the newly emerging industry of corn syrup manufacturers (in particular, Archer Daniels Midland) with excess feedstock that could be made available for fermentation and alcohol production. All presidents have recognized the political importance of the farm states.
As a result, the DoE and DoA, as well as the EPA, have consistently supported the expansion of corn ethanol production.
The ethanol lobby had the backing of several groups, starting with policymakers who were looking at any and all technologies that could help protect the nation from oil-supply disruptions. Together those interests helped to secure the first federal-tax subsidy for ethanol and, by 1980, tariff protection as well. In 1988, the lobby added domestic automakers to the fold by crafting an arbitrary and generous CAFE (corporate average fuel economy) benefit for the production of "flexible-fuel" vehicles capable of burning E85 gasohol.
Early environmental support for ethanol had always been mixed. Advocates also pointed to the benefits of using it to lower vehicle emissions of carbon monoxide, and they worked to weaken government restrictions on gasoline vapor pressure — put in place to check other harmful emissions of ozone precursors and carcinogens — to boost the market for ethanol blending. But the growing concern with global warming in the past decade had the effect of pulling environmental interests strongly behind the most recent push to craft a strong renewable-fuels standard for the country.
Taken together, the power of such political concerns as energy security and a healthy environment, the critical placement of agricultural interests in federal politics, and the effectiveness of corn and ethanol lobbying have combined to produce several major — and many minor — political successes for ethanol. Among the most noteworthy policy developments of the past three decades are these:
Exemptions of ethanol sales from federal taxes on motor fuels and a tariff on imported ethanol, first authorized under the Carter administration;
Billions of dollars authorized for federal loans and loan guarantees for ethanol plant construction, greatly expanded in the Carter administration but mostly rescinded under Reagan;
Credits against fuel economy standards for automakers that produce vehicles capable of burning E85 gasohol (even if they seldom actually do), authorized during the Reagan administration;
Mandates for the use of ethanol (and other oxygenated fuels such as MTBE) in reformulated gasoline, authorized under the first Bush administration;
State-level bans on MTBE, starting under Clinton, which boosted demand for ethanol in reformulated gasoline and created a new market for ethanol as an octane enhancer;
Renewable fuels standards, authorized under the second Bush administration, that require annual quantities of ethanol to be blended into gasoline far in excess of octane needs — including 15 billion gallons of ethanol from corn and 21 billion gallons from cellulosic and other biomass sources.
But clouds have gathered on the horizon, as a world food shortage and record prices for grains emerge and some countries halt their corn ethanol program. Further, recent research has disclosed that corn-based ethanol may substantially increase greenhouse gas emissions, if indirect land-use impacts of forest or grassland conversions into cropland are properly taken into account. And even with ethanol prices rising sharply along with gasoline, corn prices rose even more quickly in 2008 (to over $6 a bushel in future's markets). That squeeze is greatly undermining the profitability of ethanol production. And in 2008 and 2009, the sharp, dramatic decline in oil and ethanol prices forced a number of ethanol producers into bankruptcy.
The following sections document the federal policy history of corn ethanol from the Carter administration through that of George W. Bush, describing the significant legislative and administrative building blocks and the evolution of today's ethanol policy. Included in this part are three important figures. Figure 2.1 displays crude oil prices year by year from 1970 through 2008, with each of the major federal ethanol policy interventions identified in the given year. Figure 2.2 displays U.S. corn production and prices year by year from 1970 through 2008, noting the years when weather had a major and adverse impact on corn production. Figure 2.3 displays year by year, from 1975 through 2008, annual U.S. petroleum imports and domestic ethanol production.
A. Carter Administration — Jump Starting a New Industry with Tax Incentives, Tariffs, and Financial Support
The decade of the 1970s saw sharply rising oil prices and outright shortages of gasoline supply, precipitated by the Arab oil embargo of 1973–74 (see Figure 2.1). Those problems were exacerbated by the federal system of crude-oil price controls and petroleum-product price and allocation controls, first imposed by the Nixon administration in 1971. Domestic events unrelated to the oil embargo also were disrupting markets for coal and natural gas. Subsequent reductions in world oil supplies, following the Iranian Revolution and related events in 1979 and 1980, combined with the partial controls over crude oil and gasoline prices still in place to further roil energy markets. Policy makers desperately sought new and reliable domestic supplies of energy — especially gasoline — and the advocates of corn ethanol took advantage of that situation.
Corn farmers and land owners, suffering from large corn inventories and low prices (a result of federal corn-price supports and related subsidy programs), were eager for new markets (see Figure 2.2). The rural communities supporting those farmers were equally eager for the economic development and jobs that would come with increased corn production and a new industrial base.
One firm, the Archer Daniels Midland (ADM), which enjoyed considerable political influence in Washington, served as the catalyst for enactment of many federal measures to promote the industry. ADM's political activities started with efforts to expand the market for high-fructose corn syrup (at the expense of domestic beet sugar and imported sugar); the activities included financial contributions to President Nixon that were revealed in the Watergate investigations.
President Carter campaigned on the promise to do something about the energy crisis. And in April 1977, just three months after his swearing in, Carter proposed his first National Energy Plan (NEP I). The cornerstone of the plan was a broad policy goal to "reduce demand through conservation." It included a number of specific targets for cutting the rate of growth of the demand for energy, substantially reducing oil imports and gasoline consumption, and increasing the production of coal and solar energy. The government support for meeting those targets was to come from an array of new taxes, regulations, and subsidies. In 1978, after much debate, Congress passed the National Energy Act — encompassing five different bills that implemented many, though not all, elements of NEP I.
But in November 1978, as the National Energy Act was being completed, the Iranian Revolution and strikes by oil field workers there precipitated the second oil-price shock of the decade. The Carter administration and the 96th Congress were again under extreme pressure to act on energy policy, and in May 1979, Carter sent Congress a second National Energy Plan. NEP II, continued the energy conservation strategy and most of the alternative-fuel supply initiatives contained in NEP I, including some that had not made it into the National Energy Act of 1978.
The 95th and 96th Congresses passed a number of key legislative initiatives to promote alcohol fuels. Although the initial NEP I plan had not included anything specific for ethanol, with the aid of corn interests, ideas soon came forward and, helped by commercial corn interests, made it into legislation. Additional proposals to promote the demand and supply of corn-based ethanol were specifically included in NEP II. Spearheaded by corn state legislators but supported by Members across the country, nearly 30 separate ethanol-related pieces of legislation (not counting appropriations bills) were introduced in the House and the Senate in the first half of Carter's term in office; more than 80 other bills were introduced in the second half. The new programs that were enacted ran the gamut of policy significance, from major tax-code revisions and manufacturer supports to minor public relations activities (such as the National Alcohol Fuels Commission).
Among the many initiatives helping to jump-start the industry in those years, three are especially noteworthy. The first of all ethanol policies, and among the most important ones thus far, exempted ethanol from a part of the federal motor-fuels tax. Congress added the exemption, not part of the NEP I, to the Energy Tax Act of 1978 (Public Law 95-618). (That measure was one of five components of the National Energy Act of 1978, the principal law implementing some of the Carter program.) The second involved an ethanol tariff of 40 cents a gallon, imposed in 1980, that covered nearly all imported ethanol; the tariff was among a number of "fixes" to the fuel tax exemption. The third initiative, also enacted in 1980, established federal support for the construction of ethanol manufacturing plants, through investment tax credits, loans, and loan guarantees administered by the DoE and DoA, and related measures.
Excerpted from Corn Ethanol by Ken G. Glozer. Copyright © 2011 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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