TPPF COMMENTARY: The folly of food as fuel

“Bravo!” to Governor Rick Perry and U.S. Senator Kay Bailey Hutchison for recognizing the damage caused to Texas consumers and businesses by the mandatory federal renewable fuel standard for grain-based ethanol.

A growing mountain of evidence reveals the economic and environmental folly of federal ethanol policy. Gov. Perry’s requested 50% waiver and Sen. Hutchison’s proposed freeze on the renewable fuel standard (RFS) would alleviate the pressure on corn for fuel.

Texas is only beginning to see the rising food prices that federal ethanol policy could generate. Last year’s more than 4% rise in food prices stems from the 2005 Energy Policy Act. New energy law enacted in 2007 significantly enlarged the RFS. Food prices may increase as much as 8% this year. And consider where the largest price increases occurred.

The retail price of eggs increased 29% last year; cereal products, 6.5%; sweetened beverages, 4.5%; beef, 4.4%. All depend on corn-based ingredients or corn feed grains. One-fourth of the 2007 U.S. corn crop was converted to ethanol; the U.S. Department of Agriculture (USDA) projects that 30-35% of this year’s crop will become ethanol.

New energy law will force more corn to become fuel. Meeting the 36-billion-gallon RFS mandate in 2022 will require 115% of last year’s U.S. corn crop.

Texas is the appropriate state to call for a change in federal ethanol mandates. The indirect costs of ethanol hurt Texans in the grocery store as well as key agricultural sectors of the state economy. All animal agriculture – beef cattle, dairy, swine, and poultry – uses corn-based feed grains.

Four years ago – before the RFS – corn cost $2 per bushel; last year, it was $4. As Gov. Perry’s letter to the U.S. Environment Protection Agency highlights, these higher corn prices cost the Texas economy at least $1.17 billion.

A hefty 51-cent-per-gallon tax credit and a 54-cent-per-gallon import tariff also artificially drive the ethanol boom. The tax credit cost the U.S. Treasury $5 billion in 2006; that will rise to $10 billion in 2012.

The U.S. fuel supply may not be able to absorb the mandated volumes of ethanol. Most of the approximately 240 million US vehicles cannot use gasoline with more than a 10% ethanol blend. Perhaps only 6 million are Flexible Fuel Vehicles capable of using 85% ethanol (E85). Only around 1,000 of the 172,000 U.S. gas stations – mostly in the Midwest close to ethanol production – can dispense E85. The Big Three U.S. automakers recently pledged that half of their 2012 vehicles will be flexible-fuel. Yet this amounts to only 2% of total vehicles on the road. It takes decades for a complete fleet turn-over.

Ethanol is an ineffective means of reducing reliance on imported oil. While domestic production of ethanol doubled between 2003 and 2007, imports of oil and refined gasoline increased. A deficit in refining capacity and an approaching surfeit of ethanol production capacity will not increase the security of our gasoline supply or stability of gasoline prices. But what happens to a grain-based fuel supply during the next major drought?

Ethanol has two-thirds the energy value of petroleum-based fuels. A vehicle requires three gallons of ethanol for the mileage of two gallons of gasoline. Would today’s consumers choose fuel 30% more expensive than gasoline?

Producing one gallon of ethanol may well take more energy than the end product contains. With fertilizer, water, an energy-intense fermentation process, and transportation necessarily by rail or truck instead of existing pipeline, ethanol production utilizes much more energy than crude oil to reach the pump.

While combustion of ethanol involves less CO₂ and particulate emissions than petroleum-based fuels, ethanol causes more NO_x emissions – the main ingredient in ozone formation.

And ethanol may increase net CO₂ emissions. A February 2008 article in Science magazine concludes that the CO2 released from converting forest and grasslands to corn crops could amount to a doubling of CO₂ emissions from these lands. Millions of acres long enrolled in the USDA Conservation Reserve Program have now been tilled for corn. Intensive fertilization and irrigation impact water quality and supply.

Perry and Hutchison deserve praise for recommending solutions to the folly of our current federal policy to transform a major foodstuff into a fuel.

Kathleen Hartnett White is Director of the Center for Natural Resources at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin, Texas. She served six years as Chairman and Commissioner of the Texas Commission on Environmental Quality.

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TPPF COMMENTARY: Washington’s Answer To Energy Problems Doesn’t Add Up

The label of a “Do Nothing” Congress might well serve as a badge of honor, given the misguided national energy bills now being debated.

Despite being described by proponents as “energy” bills, these proposals would neither produce more energy nor make energy more affordable. Instead of workable solutions to meet today’s energy needs and provide an economically viable roadmap for the future, the collage of ill-conceived legislative provisions is based more on political expediency.

The bills will wreak further havoc on the nation’s energy challenges, denting both the national economy and the pocketbooks of Texans. The energy bill just passed by the House will harm both our nation’s reliable energy supply and our national economy.

Both chambers have set their sights on so-called “price gouging” – the Senate as part of its energy bill, the House in stand-alone legislation. While seemingly noble in their intent, the proposals would effectively impose price controls, raising gas prices for consumers and limiting the availability of fuel for American families and businesses. Apparently, many in Congress have forgotten our disastrous 1970s experiment with these. Rather than punish energy providers through additional taxes and regulations, Congress should promote increases in America’s refining capacity.

The legislation imposes government mandates requiring massive increases in the use of renewable fuels, such as corn-based ethanol. Besides raising costs for livestock feed, the price of corn adversely affects consumers through higher prices for meat, dairy products, and other dietary staples. The House bill requires a five-fold increase in biofuels production – to 36 billion gallons of biofuels per year – by 2022.

Now that speculators have sped up production due to new mandates and federal subsidies, we have a glut of ethanol in the Midwest, because it must be shipped and stored separately from other fuels. Requiring consumers to use enormous amounts of subsidized ethanol does not make practical, fiscal, or environmental sense.

Pending mandates on utilities will require use of a certain percentage of renewable energy sources for electricity. The House bill requires electric utility companies to obtain at least 15 percent of their power generation from renewable fuel sources. Renewable energy holds great promise and will clearly be part of our nation’s future energy portfolio, but forcing the adoption of alternative energy upon consumers comes with great economic risk, namely in the form of higher utility bills.

Until these important segments of the industry mature, consumers have relatively affordable and convenient access to energy sources that should not be disrupted. Consumers should not pay a forced premium because promising technologies have yet to fulfill their promise.

The House bill also includes a 10-year, $21 billion tax increase; requires fuel economy be increased to an industry average of 35 miles per gallon by 2020; calls for phasing out the incandescent light bulb; and mandates increased standards for appliance efficiency.

What is not in the bills, however, is even more concerning. There no additional provisions to increase U.S. energy production and capacity, and the bills remove existing incentives and add regulatory obstacles to increasing needed supply – the key factor guiding today’s energy prices.

A reliable supply of energy will become increasingly critical for Texas. In 2005, Texas’ population was 23 million. That number is projected to increase to 28 million by 2020 and 35 million by 2040. At these growth rates, Texas’ electricity demand will increase 20 percent by 2015 and 43 percent by 2025. Meeting the 2025 demand will require Texas to add 50 to 100 new, large power plants, according to the Electric Reliability Council of Texas.

Additionally, while everyone speaks about the benefits of renewable energy, wind, solar, and other renewable technologies are not yet able to generate the enormous amounts of electricity needed in our communities. Only coal in the near term – and nuclear a little farther off – can provide sufficient power. Emissions from coal-fired plants continue to decline, while nuclear is a safe, proven, near zero-emission source of reliable energy.

Policies that allow the market system to increase capacity, production, and supply are the key to sound energy policy. Sadly, today’s political formula – noble goals plus special interests plus unintended economic consequences equals ineffective legislation – simply doesn’t add up for consumers.

Drew Thornley is an economic freedom policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin, TX. Margo Thorning is senior vice president and chief economist for the American Council for Capital Formation in Washington, DC.

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