Tuesday, March 24, 2009

Costs and Benefits of Ethanol Mandates

For members of the environmental left, the costs of mandating ethanol use in fuel have become an inconvenient truth. As I will demonstrate shortly, the costs far outweigh the benefits. The environmental and economic case against the policy is very solid.

Let's begin with the benefits of using more ethanol as a fuel source for automobiles. The main benefit touted by environmentalists is that ethanol has fewer carbon emissions than gasoline; therefore, it is better for the environment. The reasoning is that ethanol emits approximately one third less greenhouse gas than gasoline, all other things being equal. This would in theory help reduce global warming. When we discuss the costs, it will be apparent that they bring the net benefit to almost zero or zero.

The other benefit is the gravy train it provides for its producers. Iain Murray (2008) describes this well in his book The Really Inconvenient Truths,

"If the government pays you to produce something and then tells your customers they must buy it, you don't really have to do much except sit back and collect the checks" (p. 59).

I would like to think that was not their goal in the beginning, but the fact that special interests have a tendency of making their way into policy leads me to believe otherwise.

The costs of this policy are extensive, ranging from increased food prices to environmental costs. There are several reasons that ethanol mandates cause food prices to increase. One reason is that they eliminate a large portion of the supply of corn to food consumers. This causes items like tortillas in Mexico to skyrocket in price. For people that can buy food in Mexico, the increase in tortilla price encourages the consumption of less nutritious substitutes. The effect for people that can't afford food is hunger. Another cost is that corn takes up a larger portion of available crop land robbing the supply of land for other crops such as soybeans, cotton, and barley which subsequently raises their prices (Murray). High food prices also have a political cost. They cause more political instability throughout the world especially in poorer nations. As might be expected, burning food instead of gasoline intensifies famine. One example is that higher food prices reduce the effectiveness of aid from organizations such as the United Nations' World food program.

Ethanol production is more expensive and complex than gasoline production. Higher energy inputs for ethanol production include farming, distilling, and transportation. Because of the high cost of production, the government has to provide subsidies to producers estimated at $5 billion per year to help make ethanol production profitable. This costs approximately 40 cents per bushel paid by all taxpayers. Consumers bear the cost of an ethanol tariff of 2.5 percent from low-cost importers like Brazil which drives up the price per gallon even more. Another cost is that ethanol produces a lower energy output compared to gasoline. One gallon of ethanol only produces two thirds the energy content of a gallon of gasoline. Ethanol reduces the fuel efficiency of every gallon purchased at the pump (Murray).

The costs don't end there. There are several environmental costs involved with mandated ethanol use. The pursuit of meeting biofuel standards by using more land to produce ethanol interferes with the biodiversity of species. Indonesia provides an example of a policy driving the rapid use of natural habitats to make more palm oil which is used to mix with diesel to make biodiesel. The pursuit is accelerating the destruction of the orangutan habitat and thousands of orangutan. It doesn't stop there. Other endangered species such as the Asian elephant and Sumatran tiger are getting in the way of clearing land. Clearing land to sustain ethanol mandates bears another cost as trees are reduced. Fewer trees lessens the ability to absorb carbon dioxide and disrupts habitats for wildlife (Murray).

As I mentioned earlier, one of the benefits of ethanol use is lower emissions of greenhouse gasses. However, there are hidden costs that negate the benefit. The reality is that one gallon of ethanol is actually responsible for the emissions of nearly two gallons of gasoline. Ethanol emission increases are due to less efficient energy requiring the use of more fuel to go the same distance. Ethanol also has a higher fossil fuel energy cost in its production than it replaces. Corn ethanol uses 29 percent more energy than it replaces. Renton Righelato of the World Land Trust added up all the costs and estimated an increase of between two and nine times more greenhouse gas released into the atmosphere from biofuels than fossil fuels (Murray).

Iain Murray builds a strong case against mandated ethanol in his book, but neglects to mention at least a few costs. What are the effects on vehicles using the fuel? Does ethanol affect engine life negatively? First, ethanol attracts water and water in the fuel system is bad for engines. Even though it does appear that most vehicles prevent the attraction of water by ethanol, the threat is always there. Second, we know that ethanol has a tendency to damage boat fuel tanks that are made of fiberglass causing costly repairs. Mechanics are forced to cut through a boat's hull, remove the ruined tank piece by piece, and make further engine repairs (Douglass, 2008). I think adding these costs would make Murray's case even stronger.

Those primarily affected by government mandates of ethanol are the poor. The poor are affected more sharply by price increases because they have less income. Less income means a higher percentage of their income must be devoted to food. The effects of U.S. ethanol policy are not limited to the United States. They affect prices all over the world. For instance, tortilla prices in Mexico, pork prices in China, soybean prices in Indonesia, and many other markets are all going up due to less supply and higher input costs.

After all costs of mandating ethanol production and use are figured, the benefits in terms of emissions reduction are small and maybe even non-existent. Microscopic benefits means that every cost almost fully reduces the net benefits from ethanol use. This policy causes higher prices, increased hunger, political instability, and the reduction of wildlife habitat in the name of reducing greenhouse gas emissions that are at best minuscule (Murray). Congress may do well to rethink their costly decisions related to ethanol policy and engage in something more useful like organic lawn care.


Douglass, E. (2008). Effects of ethanol-laced gasoline rock boaters. LA Times.

Murray, I. (2008). The really inconvenient truths. Washington, DC: Regnery.