Rent-Seeking Run Amok

By | 2018-11-20T23:11:59+00:00 November 21st, 2018|
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President Trump announced last month that his administration will take actions to allow the year-round sale of fuel containing 15 percent ethanol, which is currently banned during summer months. The rent-seeking justification for this expansion of a flawed policy revved up immediately, in the form of a Wall Street Journal op-ed by Iowa U.S. Senators Chuck Grassley and Joni Ernst. They lauded the decision, as well as the existing federal mandate to blend ethanol with transportation fuels, citing the contributions to the nation’s job growth, GDP, and tax revenues.

The same arguments could be made for a federal law mandating that all the alcohol in hard liquor and mouthwash be derived from corn. Would that be sound public policy?

Politics aside, any defense of U.S. ethanol policy must embrace a series of fallacies which include:

  • ethanol produced from corn makes the U.S. less dependent on fossil fuels,
  • ethanol lowers the price of gasoline,
  • an increase in the percentage of ethanol blended into gasoline boosts the overall supply of gasoline, and
  • ethanol is environmentally friendly and lowers global carbon dioxide emissions.

Although none of these claims is true, the ethanol lobby continues to promote them, and many politicians—particularly in the major corn-producing states—seem intoxicated by them.

Politicians like to say that ethanol is environmentally friendly, but these claims are misleading. Although corn is a renewable resource, it has a far lower yield relative to the energy used to produce it than ethanol from sugar cane. Moreover, ethanol yields about 33 percent less energy per gallon than gasoline, so mileage drops off significantly. Fuel costs for Americans are often artificially inflated due to the low energy content of ethanol (in spite of a possible octane boost) and the high costs faced by fuel companies trying to comply with ill-conceived fuel regulations. In a 2014 study, the Congressional Budget Office found that raising the mandated use of corn ethanol raises motor fuel prices.

The truth is that the federal Renewable Fuel Standard (RFS)—which mandates the ethanol blends—has failed miserably in achieving any of its stated goals.

Lower-cost biomass ethanol—for example, from rice straw (a byproduct of harvesting rice) or switchgrass—would make far more environmental sense, but large volumes of ethanol from biomass will not be commercially viable for many years. (And production will be delayed by government policies that specifically encourage corn-based ethanol by employing subsidies.)

U.S. legislators and policymakers seem oblivious to the scientific and economic realities of corn-ethanol production. Brazil and other major sugarcane-producing nations enjoy significant advantages over the United States in producing ethanol, including ample agricultural land, warm climates amenable to vast plantations, and on-site distilleries that can process cane immediately after harvest.

Thus, in the absence of cost-effective, domestically available sources for producing ethanol, rather than using corn, it would make far more sense to import ethanol from Brazil and other countries that can produce it efficiently.

But none of those actions would be a sop to Midwestern farmers, so rent-seeking justifications, as exemplified by the Grassley-Ernst op-ed, have to be mobilized.

Politicians may be drunk with the prospect of corn-derived ethanol, but it is consumers who will ultimately suffer the hangover.

Photo Credit: Getty Images

Colin A. Carter Henry I. Miller
Colin A. Carter is a professor of agricultural and resource economics at the University of California, Davis. Henry I. Miller, a physician and molecular biologist, is a senior fellow at the Pacific Research Institute. He was the founding director of the FDA’s Office of Biotechnology.