American biofuel policy increases hardship on the Guatemalan poor, and you help every time you buy gasoline

Michael Giberson

Next time you see one of those “This product may contain up to 10 percent ethanol” stickers on a gas pump, ask yourself why federal government biofuel policies are forcing you to help increase hunger and hardship among poor Guatemalans.

Sure, politicians in their comfortable offices in Washington, DC, didn’t intend to help starve the world’s poor. But biofuel policy is requiring conversion of food to fuel and contributing to higher corn prices, so having that effect.

Looking at you, Iowa Congressional delegation.

Ethanol industry struggles through regulatory change

Michael Giberson

Usually I wouldn’t take pleasure in reports an industry is losing money. But when the industry is is a net drag on society sustained almost entirely by governmental action rather than economic contribution — when we’re talking about ethanol — then I will take a bit of pleasure.

Reported by Minnesota Public Radio: “Ethanol industry lurches in wake of lost subsidy, oversupply“:

WORTHINGTON, MInn. — After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation’s ethanol producers may have been too optimistic.

Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.

Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.

At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.

Unfortunately, it is mostly transitory pain, and the industry will survive this little economic storm under the sheltering arms of the Renewable Fuels Standard.

One part of the problem is that the petroleum refining industry stocked up on ethanol at the end of last year, when the blenders tax credit was still in place. Not surprisingly, demand for ethanol dropped in January (and yet some in the ethanol business seem surprised). In addition, the high price of gasoline is leading consumers to drive less, also reducing demand for the ethanol blended into gasoline.

[Doug Punke, CEO of Renewable Products Marketing Group] said another plus for the ethanol industry is the overseas market. Brazil, a country that produces its own ethanol, but where demand is high, has been a major customer.

“We’re seeing some export demand pick back up, which is necessary for this industry right now to balance out that supply and demand,” he said.

Last year U.S. ethanol companies sold about 8 percent of their production abroad.

What? We’re exporting home-grown American energy? Quick, somebody call Congressman Markey’s office, I’m sure he’ll want to put a stop to it right away!

RELATED: The Des Moines Register , “Ethanol 11 cents per gallon in red in January.”

EPA fines companies for not doing the impossible

Michael Giberson

If you read Jonathan Adler’s post at the Volokh Conspiracy (and reposted at PERC’s Percolator blog), it makes the EPA seem a little silly for insisting on fining companies when it would be impossible for companies to comply with the law.

But don’t blame the EPA, which is just implementing a law that Congress passed and President G. W. Bush signed, the Energy Independence and Security Act of 2007. Here is Bush at the signing ceremony:

The bill I sign today takes a significant step because it will require fuel producers to use at least 36 billion gallons of biofuel in 2022. This is nearly a fivefold increase over current levels. It will help us diversify our energy supplies and reduce our dependence on oil. It’s an important part of this legislation, and I thank the members of Congress for your wisdom. (Applause.)

Blame the younger Bush president, blame the members of Congress for their wisdom – or more precisely, for their failed insights in trying to drive the path of technological progress at consumer and taxpayer expense AND, a special note for anyone involving themselves in electioneering this year, failing to sweep this destructive nonsense out of the law any time in the last four years – but the EPA is only the messenger of this madness.

More from the former President:

The legislation I’m about to sign should say to the American people that we can find common ground on critical issues. And there’s more we can accomplish together. New technologies will bring about a new era of energy. So I appreciate the fact that Congress, in the omnibus spending bill that I’m going to sign later on, recognizes that new technologies will help usher in a better quality of life for our citizens. And so we’re going to spend money on new research for alternative feedstocks for ethanol. I mean, we understand the hog growers are getting nervous because the price of corn is up. But we also believe strongly that research will enable us to use wood chips and switchgrass and biomass to be able to develop the ethanol necessary to help us realize the vision outlined in this bill.

With these steps, particularly in the bill I’m about to sign, we’re going to help American consumers a lot. We’ll help them by diversifying our supplies, which will help lower energy prices. We’ll strengthen our security by helping to break our dependence on foreign oil. We’ll do our duty to future generations by addressing climate change.

And so I thank the members of Congress. I appreciate the fact that we’ve worked together, that we can show what’s possible in addressing the big issues facing our nation. This is a good bill and I’m pleased to sign it.

(The bill was signed.) (Applause.)

Ah, yes, “we also believe strongly that research will enable us to use wood chips and switchgrass and biomass to be able to develop the ethanol necessary to help us realize the vision outlined.” Turns out that the “vision” was a bit off.

By the way, yes it was the Energy Independence and Security Act of 2007 that gave us the standards blocking the sale of 100 MW 100 W incandescent light bulbs, beginning in 2012. Also, coincidentally, the EISA bill was signed in December 2007 and later the business cycle folks at the National Bureau of Economic Research identified December 2007 at the end of a 73-month long economic expansion and the beginning of the recession.

SEE ALSO: Kenneth Green’s post at AEI’s Enterprise BlogFill ‘er up with rainbows and unicorn sweat!, and the Matthew Wald New York Times article cited by both Green and Adler.

[EDIT: As a commenter hints, the reference to 100 MW light bulbs was in error. -MG]

Loss of ethanol subsidy boosts gasoline prices a little, E85 prices a lot

Michael Giberson

The basic math is pretty simple: most gasoline in the U.S. has about 10 percent ethanol, so the the 45 cents/gallon VEETC subsidy reduced the price of gasoline about 4.5 cents. The subsidy expired at the end of 2011, so one reason gasoline prices have gone up a few cents since New Year’s Day comes from the loss of the subsidy. (World crude oil prices are up a bit, too.)

Normally, a subsidy would be shared by producers and consumers, so the loss of a subsidy would be shared. But the Renewable Fuels Standard quantity mandate protects producers from taking a hit. The main effect here is that the consumers’ mandated purchases of ethanol will no longer be subsidized by taxpayers, and therefore the price rises.

But lest you gasoline consumers feel too bad, consider the plight of the drivers relying on E85, a blend of 85 percent ethanol and only 15 percent gasoline. The math here is simple, too: 85 percent of 45 cents meant that E85 was receiving about a 38 cents/gallon subsidy, and now that subsidy is gone.

The Minneapolis, MN Star Tribune reports, “The Road for E85 Just got Rougher“:

The high-ethanol fuel known as E85 has gained a small foothold in Minnesota in recent years, thanks in part to a subsidized price advantage and the presence of major producers and blenders in the state.

Now, the federal tax credit that boosted the industry is gone, raising questions about the fuel’s future.

Without the 38-cent-per-gallon subsidy that went away Jan. 1, E85 prices are moving up. It’s still cheaper than gasoline, but the shrinking difference may not be enough to compensate drivers who get fewer miles per gallon because of the fuel’s lower energy content.

[Recall that ethanol has a lower energy density than gasoline, so drivers get fewer miles per gallon with E85.]

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it’s no longer competitively priced. Minnesota is the nation’s fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

[...]

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That’s as little as a 5 percent price difference. E85′s price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

At Lerum Auto, the only E85 dealer in Richfield, owner Dean Lerum had another 1,000 gallons of E85 delivered on Wednesday — at the new, unsubsidized price.

“I am going to let the market decide,” said Lerum, for whom E85 once represented 25 percent of fuel sales, but now accounts for 5 to 7 percent. “If it drops a whole lot more, I will get rid of it.”

Two more related stories from around the web

Kevin Drum at Mother Jones makes the call: “Ethanol Subsidies: Not Gone, Just Hidden a Little Better

As the Congressional Budget Office wrote back in 2010, “In the future, the scheduled increase in mandated volumes would require biofuels to be produced in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.” [Italics mine. -KD] In other words, the mandates have grown so large that the tax credits barely made a difference anymore. Demand for ethanol is driven by the mandates, not by the tax credit. When you take away the tax credit, nothing happens: Demand stays high because the law says so, corn prices go up accordingly, and corn farmers stay rich. The subsidies were a nice little fillip on top of that, but at this point it’s basically chump change.

The RFS mandates are the real reason that buffoons can ramble on about the history-making public policy magnanimity of the ethanol lobby. Drum cites Aaron Smith, of UC-Davis, writing in the American Enterprise Institute’s American.com: “Children of the Corn: The Renewable Fuels Disaster

[W]hy did the powerful corn ethanol lobby let [the subsidy] expire without an apparent fight? The answer lies in legislation known as the Renewable Fuel Standard (RFS), which creates government-guaranteed demand that keeps corn prices high and generates massive farm profits. Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.

And Smith is just getting started, so if want more reasons to hate ethanol policy then read the whole thing.

ADDED, Here is a more complete analysis of the relationship between the Renewable Fuels Standard mandates and the (now expired) tax credit, and also see the list of readings at the end of the commentary: de Gorter and Just, “The Forgotten Flaw in Biofuels Policy: How Tax Credits in the Presence of Mandates Subsidize Oil Consumption,” RFF Weekly Policy Commentary (June 9, 2008).

Claims by lobbyists that deserve to be laughed at

Michael Giberson

Sometimes politicians and lobbyists make claims that deserve to be laughed at in the most public way possible.

Here is an example from the ethanol lobby, via The Hill‘s Congress Blog:

US ethanol makes history by sacrificing a subsidy

By Bob Dinneen, president and CEO, Renewable Fuels Association – 01/05/12 11:26 AM ET

With growing concerns about gridlock in Washington and greed on Wall Street, Americans are wondering whether anyone with a stake in public policies is willing to sacrifice their short-term advantage for a greater good.

Well, someone just did.

Without any opposition from the biofuels sector, the tax credit for ethanol blenders (the Volumetric Ethanol Excise Tax Credit – VEETC) expired on January 1.

In fact, American ethanol may well be the first industry in history that willingly gave up a tax incentive. Facing up to the fiscal crisis in this country, industry advocates have engaged in discussions with the Administration, Congress and our own constituents in an effort to frame forward-looking policies that balance the needs for deficit reduction and the development of clean-burning, American-made motor fuels.

Incentives should help emerging industries to develop and grow, not to be forever subsidized by the nation’s taxpayers. The Volumetric Ethanol Excise Tax Credit — which actually accrued to biofuels blenders, not producers – has helped the renewal fuels industry to stand on its own two feet. So now it is time for this subsidy to be phased out.

But make no mistake: While this subsidy has gone away, American ethanol is here to stay. From the economy to the environment and energy security, ethanol is an American success story.

With more than 200 biorefineries in nearly 30 states, American ethanol directly employs more than 70,000 workers in plants, on farms and at construction companies and suppliers, while indirectly supporting an additional 330,000 jobs. In the midst of more than 8 percent unemployment, the ethanol industry provides high-skill, high-wage jobs that can’t be outsourced, with more than 99% offering healthcare and other benefits. The industry contributes $53 billion to the Gross Domestic Product, raises household incomes by $16 billion and pays $7 billion in federal taxes and $4 billion in state taxes.

Nor are ethanol’s benefits limited to the rural communities where the industry provides jobs for workers, markets for farmers, customers for businesses, and tax dollars for the local schools and police and fire departments. In 2010, the use of 13 billion gallons of ethanol reduced the need for oil imports by 445 million barrels, making our nation less dependent on increasingly unstable regimes in the Middle East. On the environmental front, ethanol use reduces greenhouse gas emissions by 48 to 59 percent, compared to gasoline. At the nation’s gas pumps, blending ethanol with gasoline saved American families an average of $0.89 per gallon in 2010, according to a study conducted by economists at Iowa State University and the University of Wisconsin.

By helping to reduce the federal budget deficit and the nation’s dependency on imported oil, the US ethanol industry is doing its part to address America’s challenges. Meanwhile, the well-established and highly profitable oil industry is still receiving huge subsidies and refusing to give up any.

Having benefited from federal subsidies for the past century, Big Oil rakes in federal tax breaks and other advantages totaling from $3.6 to $4.5 billion a year. Indeed, the Environmental Law Institute recently reported that, from 2002 to 2008, federal subsidies to fossil fuels such as oil and coal totaled approximately $72 billion, compared to only $29 billion in incentives for renewable energy sources, such as solar, wind, geothermal and biofuels.

When it comes to crafting policies that promote fiscal responsibility and energy sustainability, the US ethanol industry has proven that it is willing to come to the table.

But every energy policy must be on the table.

From coal to hydroelectric, nuclear, wind, solar and geothermal energy, virtually every source of energy has been subsidized in its early years. But there is no reason for established industries, such as Big Oil, to enjoy eternal subsidies for almost a century.

What’s needed, instead, are timely, targeted, and temporary subsidies so that new energy sources  can be developed, commercialized and allowed to compete on a level playing field with established energy sources. That is why the biofuels industry is seeking opportunities to accelerate the development of new ethanol feedstocks, such as switch grass, wood wastes and even garbage, while modernizing the nation’s fueling infrastructure through blender pumps.

Now that the ethanol blenders’ tax credit has become history, let’s make history by incentivizing America’s energy future, not providing perpetual subsidies for fossil fuels.

 ** Bob Dinneen is the president and CEO of the Renewable Fuels Association, the national trade association of the US ethanol industry. **

You be the judge: A great moment in the history of U.S. public policy, or laughable nonsense?

Well, to be fair, not everything Dinneen says is laughable nonsense, for example he truthfully points out that the tax credit for ethanol blenders expired on January 1. Most of the rest of it is hilariously weak.

Note the related post from a few days ago: “Ethanol industry allows its politicians to permit expiration of its tax credit and tariff.”

Ethanol industry allows its politicians to permit expiration of its tax credit and tariff

Michael Giberson

The Des Moines Register has one version of the story - the agribusiness industry decided it could do without the subsidy since the renewable fuels mandate seemed securely in place:

So established is corn-fed ethanol that the industry allowed the expiration of the 45 cents-per-gallon tax credit for ethanol production, as well as the 54-cent fee on ethanol imports, to lapse at the end of this year, preferring to fall back on defense of the Renewable Fuel Standard set in the 2007 law.

The New York Times describes the story somewhat differently. In the Times version, the end of the subsidy and tariff was a victory for environmentalists and fiscal conservatives over agribusiness. The story includes approving remarks from both the Senator Dianne Feinstein (D-CA) and Rep. Jeff Flake (R-AZ), from both Friends of the Earth policy analyst Michal L. Rosenoer and Competitive Enterprise Institute fellow Marlo Lewis.

The Register headline appears to predict ethanol industry growth, “EPA: Ethanol production expected to grow in 2012,” with the first sentence indicating “an increase of about 1.25 billion gallons from this year.” But the expected growth is actually just the increase in the mandate, as the story in the Sioux Falls Argus Leader makes clear: “The federal government has set its target for biofuels production in 2012, increasing by 1.25 billion gallons the amount of ethanol and biofuels that must be blended into the fuel supply.”

The Register story also notes the self-imagined munificence of the ethanol lobby:

“We may be the only industry in U.S. history that voluntarily let a subsidy expire,” said Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers. “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago. Ethanol is 10 percent of the nation’s gasoline supply.”

To me it sounds like the doctor telling me “now that the tapeworm is well established they’ve decided to remove several of the leeches.” Don’t get me wrong, I’m happy to see the end of the tax credit and tariff. But it is a little galling to see the ethanol industry package this story as a little gift they are giving to taxpayers and consumers.

National Research Council committee on the Renewable Fuel Standard: costly program of uncertain benefits

Michael Giberson

Congress asked the National Research Council to evaluate the economics and environmental effects of the advanced biofuels mandate in the Renewable Fuels Standard (“RFS2″). The result? It isn’t pretty: barring unforeseen technological advances that dramatically reduce costs or oil prices consistently in the neighborhood of $190 a barrel or higher, RFS2 just doesn’t make much sense.

The real kicker is that the environmental benefits are uncertain and not necessarily positive. That is to say, promoting cellulosic ethanol, the supposedly more-environmentally friendly high-tech version of the fuel, may make the environmental worse.

The news was not welcomed at the Department of Agriculture. Agriculture Secretary Tom Vilsack sneered, “Facts? We don’t need no stinking facts.”

Well, not exactly in those words, but here he is quoted in the Des Moines Register:

Agriculture Secretary Tom Vilsack slammed the study as based on old data. “I think it’s unfortunate that reports that are based in my view on somewhat outdated information are basically suggesting we should give up the ghost,” he told reporters. He did not provide examples of data in the study that he considered outdated.

I ask you, is this the kind of “science-based” response you expected from this administration? The story also notes that the RFS2 mandate “calls for motorists to use 500 million gallons of cellulose-based fuel [in 2012] but the government estimates that as little as 3.5 million gallons will actually be produced.” So much for technology-forcing policies.

The politics of advanced biofuels are interesting in that most of the political support for the current version of ethanol-as-corporate-welfare is driven by Midwestern agribusiness interests, and especially corn growers. RFS2-quality fuels need not be corn based and hypothetically could be grown elsewhere, and I think that makes the current ethanol caucus at best a weak proponent of RFS2. But at present, corn-based ethanol needs RFS2 as a fig leaf to cover its own inadequacies as a pro-environment policy. In this political drama, current ethanol plays “bridge biofuel” to the forthcoming glories of advanced biofuels.

Well those forthcoming glories are highly uncertain of environmental benefit, but fairly certain to be expensive. We don’t want to go there, we don’t need the bridge.