U.S. Ethanol Policy Has Negative Consequences, Says Texas A&M Prof.

The Energy Independence and Security Act of 2007 (EISA), which mandated a steep rise in domestic ethanol production, is causing unforeseen negative consequences for food prices while failing to live up to the desired gasoline results and other expectations, concludes a Texas A&M University research team headed by an economics professor who studies energy issues.

James M. Griffin, director of the Mosbacher Institute for Trade, Economics & Public Policy, which is part of Texas A&M’s Bush School of Government and Public Service, and Mauricio Cifuentes Soto, a graduate student assisting him, say in their report that the goal of EISA was to cut greenhouse gas emissions and to ease dependency on imported oil. Policymakers also thought the new blend of ethanol and conventional gasoline would cost motorists less, they note.

“EISA mandated ethanol production to grow from 4.9 billion gallons in 2006, to 36 billion by 2022,” says Griffin, author of A Smart Energy Policy: An Economist’s Rx for Balancing Cheap, Clean, and Secure Energy. “Today, at 14 billion gallons, we’re not even halfway there and the unintended consequences of the policy, especially those influencing world food prices, are negative and far outweigh the positives.”

With the best of intentions, he observes, lawmakers believed the policy would have a positive effect by lowering prices at the pump. Moreover, since corn plants absorb CO2 from the atmosphere, greenhouse gas emissions would fall significantly, and the U.S. would build energy security as domestic ethanol replaced oil imports from the Middle East.

On the positive side, the researchers point out that after adjusting for ethanol BTU efficiency losses of 40 percent less compared to conventional gasoline, refining costs, taxes and subsidies, the net benefit of the ethanol policy is just about 2.2 cents per gallon or $24 per year for a typical household consuming 1100 gallons per year.

Additionally, using CO2 life-cycle estimates by the Argonne National Laboratory, the authors assert that, ethanol reduced U.S. and world greenhouse gas emission — 0.42 percent of U.S. and 0.08 percent of world emissions.

Nevertheless, these benefits are minuscule when put in perspective. “Corn-based ethanol has done little to reduce the nation’s carbon footprint,” Griffin adds. “In contrast, the policy’s unintended consequences for food prices raise grave economic and ethical issues.”

Rising corn and grain prices have been attributed to ethanol production.

The Texas A&M researchers also traced an increase in corn and grain prices to ethanol production. They refer to the United Nations’ FAO Food Price Index which shows that between Jan. 2007 and Sept. 2011, after adjusting for inflation, corn prices increased by 68 percent, cereals by 69 percent and dairy products by 46 percent.

One study (Hayes et al, 2009) the researchers cite quantifies how a $1 per bushel increase in corn prices impacts a wide variety of food products. The study shows, for example, that between 2005 and 2011 corn prices rose by $5 per bushel, beef rose 18.5 percent, pork 16 percent, poultry 17.5 percent, eggs 27.5 percent, milk 10.5 percent, cheese 9 percent, sugar and sweets 3.5 percent.

The researchers claim that not all these price increases are due to U.S. ethanol policies. However, even “if only one-fourth of this additional expenditure is attributable to ethanol, this would imply a loss to American consumers of $40 billion over the last 4 years.”

Even though these increased food prices might not look so significant, the world’s poor disproportionately share the burden of these policies because a large portion of their income is devoted to food alone, they add. According to the U.N., rising food prices plunged nearly 70 million people into extreme poverty in 2010-2011.

Finally, in regards to energy security, the authors claim that the benefits of ethanol policy are largely elusory. The fact that in 2011 ethanol displaced 5.6 percent of imported petroleum is irrelevant because the world oil market and its effects are global. Even though the U.S. imports no oil from Iran, for example, a disruption of Iranian supplies would trigger world-wide increases in all oil prices — even domestically.

Griffin and Cifuentes conclude that, instead of marching blindly ahead to EISA’s 2022 mandated production target of 36 billion gallons, the ethanol policy should be reassessed.

“To be sure, we should continue to support R&D for advanced biofuels such as cellulosic ethanol,” Griffin says. “In the interim, we should dismantle the ethanol mandates and trust markets to sort out the proper mix of ethanol in gasoline.”

For more on the study, go here.