Ethanol Subsidies: It's Not Easy Being Green

By :: April 23rd, 2009

It seems TPC has gone green. Len Burman has told us what he thinks of the bike subsidy (not much) and Rosanne Altshuler has struggled to figure out what tax breaks she can get for installing energy efficient windows.

Not to be outdone, here is my own contribution: Big tax subsidies to encourage production of ethanol have helped yield two results: They have contributed to an increase of as much as 15 percent in the cost of food, and they have produced no measurable reduction in auto-related greenhouse gas emissions. Oops.

So says CBO in a nice new paper. Senator Chuck Grassley (R-Iowa) and other supporters of these incentives would vehemently disagree, but this is a tax boondoggle as high as an elephant's eye. 

It is not as if the tax incentive isn't encouraging more production of corn-based fuel. In that respect, the give-away works perfectly. Give the blenders a 45 cent per gallon credit, and they’ll buy lots of corn at really high prices. CBO figures demand for ethanol alone increased the price of corn by as much as 25 percent, or 80 cents per bushel. Pretty sweet. 

Thanks largely to the subsidy, consumption of biofuels increased from essentially zero a couple of decades ago to 9 billion gallons in 2008. Nearly 3 billion bushels of corn were turned into fuel last year. The cost in lost federal revenues: $3 billion.

But that’s just the beginning. Farmers, who could make far more turning corn into motor fuel than food, sensibly reduced the supply of corn they grew for human or animal consumption. Because almost all processed food in the U.S. has corn in it (see Michael Pollan’s The Omnivore’s Dilemma for that story), this shift has dramatically driven up all food prices. The effect was especially powerful in 2007-2008, the period CBO was studying.

Let’s leave aside the problem of starvation for a moment and just look at the federal deficit. Not only did the subsidy reduce tax revenues by $3 billion, but it drove up government spending on nutrition programs by $600 million to $900 million in fiscal 2009 alone. So now, we’re looking at an annual budgetary cost of nearly $4 billion.

Cheap at the price, you say, if it would reduce those dreaded greenhouse gasses. Trouble is, there is no evidence that it did so in any measurable way. CBO figures increased ethanol use cut transportation-related CO2 emissions by 0.7 percent in 2008.  

CBO does say that using other plant material as feedstock for ethanol, such as switchgrass or corn stalks, might be more environmentally beneficial—reducing transportation-related CO2 emissions by as much as 6 percent by 2022. Maybe. But so far, this subsidy has produced little more than a windfall for a handful of corn farmers. As energy and tax policy, it’s been a lot of hot air. As food policy, it has been a short-term disaster.

Happy day after Earth Day.