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Ethanol is a false solution with unintended consequences

July 31, 2009

By Max Schulz

If there's one thing at which Washington excels, it's crafting unnecessary policies from which a torrent of unintended consequences cascade. Meanwhile, the initial problem policymakers set out to address is relieved in no meaningful way.

That perfectly sums up our nation's experience with ethanol, which is shaping up as a policy disaster with a significant economic and environmental toll. Yet for all the unintended strife and economic dislocation our ethanol policies are causing, they are having a negligible effect on lowering our imports of foreign sources of petroleum and our oil consumption generally.

The specter of foreign oil dependency was invoked by ethanol boosters, including President George W. Bush and corn state senator Barack Obama, when the Energy Policy Act of 2005 ordered that increasing amounts of ethanol be blended into our fuel mix. The same justification was used in 2007 to supersize those mandates. This year consumers are being forced to buy more than 11 billion gallons of ethanol. By 2022, the figure will rise to 36 billion gallons, 15 billion gallons of which are supposed to come from corn ethanol. (To give some perspective, in 2005 the ethanol industry produced less than 4 billion gallons, mostly for use as a gasoline additive.)

The idea behind the mandates was to grow our fuel at home, depriving terrorist-sponsoring oil states of revenue, all the while helping out American farmers. Sounds great, right?

What neither Congress nor the Bush administration figured (full disclosure: I served in the Bush Energy Department, though before the biofuels mandates were implemented) was that mandates of this size and scope would distort energy and agricultural markets or would have adverse environmental consequences.

That's too bad. Laws mandating the production and consumption of vastly larger amounts of ethanol created an artificial demand for corn, driving up its price. Before the global economic slowdown, the price of corn had essentially doubled from a year before. With corn fetching high prices, farmers began planting corn in place of other crops. So with land for other crops moved to corn production, the prices of those displaced crops increased. Between early 2007 and early 2008, prices for wheat tripled, while soybean and rice prices doubled.

The United States produces about 40 percent of the global corn supply and is responsible for more than two-thirds of the world's corn exports. It exports other agricultural commodities as well. Any policy that grossly distorts the market for these commodities in the United States will have effects felt not just at home but all over the world. So we have seen soaring food prices lead to riots in Senegal, Cameroon, Niger, Egypt, and Burkina Faso. Residents in Mexico City rioted after prices for corn tortillas spiked. The political unrest over food prices drove mobs to storm the presidential palace in Haiti.

Last year, the United Nations' Food and Agricultural Organization, the International Food Policy Research Institute, the Organization for Economic Cooperation and Development, The World Bank, and the International Monetary Fund all published studies indicating that Western biofuels policies were largely responsible for the run-up in global food prices.

Then there's the environmental cost. Two reports in Science magazine last year suggest that the land-clearing aspects of biofuels production arguably increase greenhouse gas emissions; so significant is this that the U.S. Environmental Protection Agency signaled in May that it will take this factor into account in implementing the government's ethanol mandates. The National Oceanic and Atmospheric Administration (NOAA) has sounded the alarm about a growing "dead zone" in the Gulf of Mexico, an algae-filled area with oxygen levels too low to maintain marine life. Since 1990, this dead zone has averaged about 4,800 square miles. NOAA warns it could nearly double, thanks to expanded use of fertilizers to grow more corn and flooding along the Mississippi River. Land clearing for biofuels in Indonesia, meanwhile, is threatening the orangutan and other endangered species.

And for what, exactly? American farmers planted a record 94 million acres in corn in 2007, yielding a record 13 billion bushels. Yet we displaced just 3 percent of our total oil consumption with ethanol. It's not clear we could even make any sort of significant dent in our oil consumption. According to researchers at the Polytechnic University of New York, "Using the entire 300 million acres of U.S. cropland for cornbased ethanol production would meet about 15 percent of the demand."

Our ethanol policies might be enriching Archer Daniels Midland and other Midwest agribusinesses. But we're deluding ourselves if we think they are keeping Hugo Chavez or oil-soaked Middle Eastern kleptocrats awake at night.

Max Schulz is a senior fellow at the Manhattan Institute.



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