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A Case Study in the Law of Unintended Consequences
June 14, 2007
A boom in ethanol production is taking place today for variety of reasons. Undoubtedly, the most significant factor is government support and subsidies for biofuel production. The rationale for subsiding biofuels arises from a convergence of security, environmental, and nationalistic concerns, which has led policy makers to endorse stiffer mandates and increased subsidies.
While fuels produced from crops such as corn have been mandated and subsidized for decades, politicians are expressing new urgency for energy independence in the face of high and volatile oil prices and political instability in oil-producing regions. Fears about rapid catastrophic global warming caused by carbon dioxide emissions from fossil fuels have helped build support for the development of alternative energy sources—particularly biofuels.
With tax incentives, grants, and loans for biofuel development and mandates for greatly expanded biofuel use, farmers are rapidly shifting to corn production for ethanol to feed the expanded, government-driven demand for corn as an ethanol feedstock.
However, this demand has already created unforeseen problems—which are likely to be exacerbated by new energy proposals to dramatically increase biofuel use mandates and production subsidies. Experts predict an increase in soil erosion, increased use of fertilizers leading to greater runoff, decrease in water quality, and more fuel used in the transportation of ethanol.
As with environmental consequences, the unintended economic consequences of U.S. ethanol policy are far-reaching. With new government subsidies and mandates for ethanol, corn producers are increasingly turning to ethanol production, leading to the price of corn skyrocketing. Since corn goes into so many foods—from livestock feed to cereals—high prices for corn translate into higher costs for manufacturing a wide array of foods. Those costs are passed on to consumers in the form of higher prices, with the poor suffering the most, since they pay a larger proportion of their incomes on food.
The ethanol bubble may not be about to burst yet—government support is likely to keep it going for a while. But there are already some strong signals of discontent among other interest groups affected by the high costs of corn.
Consumers, the largest group affected, are not yet mobilizing since the costs of ethanol policy are dispersed among millions of consumers and thousands of foodstuffs. However, as consumers begin to feel the effects at the supermarket, especially in many food staples, they may well make their voices heard to their legislators.
With the volatility of oil prices in world markets, policy makers are increasingly looking to alternative energy sources in attempts to secure the unrealistic goal of “energy independence” in a world of globalized energy markets. Ethanol has been the U.S. government’s alternative fuel of choice. But ethanol is not the “magic bullet” that its proponents claim.
Today, producers of ethanol and other biofuels benefit from complex and highly remunerative “incentive” programs that include biofuel use mandates, subsidies, tax credits, grants, loans, and import restrictions. These programs benefit politically influential agribusinesses to the detriment of American consumers and should be ended.