Commentary

Ethanol Makes Gasoline Costlier, Dirtier

In his State of the Union address, President Bush spoke a lot about energy independence and alternative energy sources such as ethanol. According to the president, ethanol is the magical elixir that will solve virtually every economic, environmental, and foreign policy problem on the horizon. In reality, it’s enormously expensive and wasteful.

Untruths and misconceptions about ethanol include:

Ethanol will lead to energy independence. If all the corn produced in America last year were dedicated to ethanol production (14.3 percent of it was), U.S. gasoline consumption would drop by 12 percent. For corn ethanol to completely displace gasoline consumption in this country, we would need to appropriate all U.S. cropland, turn it completely over to corn-ethanol production, and then find 20 percent more land for cultivation on top of that.

The U.S. Energy Information Administration believes that the practical limit for domestic ethanol production is about 700,000 barrels per day, a figure they don’t think is realistic until 2030. That translates to about 6 percent of the U.S. transportation fuels market in 2030.

Ethanol is economically competitive now. According to a 2005 report issued by the Agriculture Department, corn ethanol costs an average of $2.53 to produce, or several times what it costs to produce a gallon of gasoline. Without the subsidies, costs would be higher still. A study last fall from the International Institute for Sustainable Development found that ethanol subsidies amount to $1.05-$1.38 per gallon, or 42 percent to 55 percent of ethanol’s wholesale market price.

Ethanol reduces gasoline prices. If you lived in California and other areas that used reformulated gasoline last summer – that’s the environmentally “clean” gasoline required for areas with air pollution problems, and that’s where most of that ethanol went – you might have paid up to 60 cents a gallon more for gasoline than you would have otherwise. That’s because the federal government required oil refineries to use 4 billion gallons of ethanol in 2006 regardless of price, and gasoline pump prices last summer reflected the fact that ethanol was twice as expensive as wholesale conventional gasoline.

Ethanol is a renewable fuel. According to a group of academics from UC Berkeley who published in Science magazine last year, 5 percent to 26 percent of the energy content of ethanol is “renewable.” The balance of ethanol’s energy actually comes from the staggering amount of coal, natural gas and nuclear power necessary to produce corn and process it into ethanol.

Ethanol reduces air pollution. A review of the literature by Australian academic Robert Niven found that, when evaporative emissions are taken into account, E10 (fuel that’s 10 percent ethanol and 90 percent gasoline, the standard mix) increases emissions of total hydrocarbons, nonmethane organic compounds, and air toxics compared to conventional gasoline. The result is greater concentrations of photochemical smog and toxic compounds.

Ethanol reduces greenhouse gas emissions. At best, E10 reduces greenhouse gas emissions by from zero to 5 percent; pure ethanol by 12 percent. The International Energy Agency, however, estimates that it costs about $250 to reduce a ton of greenhouse gases this way, or more than 10 times what Yale economist William Nordhaus thinks is economically sensible given the economics of climate change. Ethanol as an anti-warming policy is what academics refer to as “crazy talk.”

Ethanol subsidies are necessary to “level the playing field.” Petroleum subsidies are something less than $1 billion a year – six to eight times less than ethanol subsidies – and work out to about 0.3 cents per gallon.

Switchgrass (aka, “cellulosic ethanol”) will set us free. Guy Caruso, the head of the EIA, noted in a speech last December that the capital costs associated with cellulosic ethanol production were five times greater than those associated with conventional corn ethanol production. Estimates like that are a bit soft, however, because there is no cellulosic ethanol industry in existence at present, so data is hard to come by. Betting the farm on an industry that doesn’t yet exist to produce a product that is known to be staggeringly expensive isn’t the best use of tax dollars.

If ethanol has commercial merit, it doesn’t need the subsidy. If it doesn’t, no amount of subsidy will bestow it. And that’s the truth.

Jerry Taylor and Peter Van Doren are senior fellows. Peter Van Doren is also editor of Regulation magazine.