James Surowiecki on Sugar Tariffs and Ethanol

Lynne Kiesling

James Surowiecki had a nice little column about sugar and ethanol tariffs in the New Yorker a couple of weeks ago. As is his wont, he concisely summarizes the pros and cons of ethanol, focusing on the higher net energy balance that cane sugar ethanol has relative to corn ethanol. He also applies a basic lesson from Mancur Olson about how concentrated benefits and diffuse costs lead to political lobbying by special interests:

Unfortunately, the ethanol produced in the U.S. comes from a less-than-ideal source: corn. Corn ethanol’s “net energy balance”—the amount of energy it yields in proportion to how much energy goes into its production—is significantly lower than that of other alternatives, and modern corn farming isn’t easy on the land [it’s also not easy on the fish down in the Gulf of Mexico who are killed by fertilizer runoff. -ed.]. By contrast, 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 does. In the nineteen-seventies, Brazil embarked on a program to substitute sugar ethanol for oil. Today, every gallon of gas in Brazil is blended with at least twenty per cent of ethanol, and many cars run on ethanol alone, at half the price of gasoline.

What’s stopping the U.S. from doing the same? In a word, politics. The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago. So the prospects for a domestic-sugar ethanol industry are dim at best.

More important, protectionist rules flourish because the benefits are concentrated among a small number of easy-to-identify winners, while the costs are spread out across the entire population. It may be annoying to pay a few more cents for sugar or ethanol, but most of us are unlikely to lobby Congress about it.

Maybe we should, though. Our current policy is absurd even by Washington standards: Congress is paying billions in subsidies to get us to use more ethanol, while keeping in place tariffs and quotas that guarantee that we’ll use less. And while most of the time tariffs just mean higher prices and reduced competition, in the case of ethanol the negative effects are considerably greater, leaving us saddled with an inferior and less energy-efficient technology and as dependent as ever on oil-producing countries.

A worthwhile read, which highlights how meshed and pernicious these political incentives are once they are unleashed. All the more reason to take as many important decisions as possible outside the reach of political processes.

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