Ending the Ethanol Experiment



Despite visits to both the Bush and Obama administrations, Brazilian President Luiz Inacio Lula da Silva’s request to end the U.S. tariff on Brazilian ethanol has fallen on deaf ears. Mr. Lula might be in luck – the tariff is set to expire at the end of 2010, and current congressional gridlock could prevent its extension. Supporters of sensible U.S. trade policy can only hope that happens.

Ethanol represents a small percentage of the total U.S. fuel supply. Because of federal mandates, most gasoline purchased today is actually a mixture of 90 percent gasoline and 10 percent ethanol, E10. Ethanol has been unable to prove itself as an efficient form of renewable energy, though it may perhaps play an important role in our nation’s future energy supply.

Taxes on imported ethanol force consumers to rely on inefficient and expensive ethanol produced from corn in the United States. These tariffs, in effect, declare war on consumers, raising the price at the pump as well as the price of all goods and services that require transportation to their final point of sale.

They also perpetuate our dependence on foreign oil by reducing investment in the global ethanol industry. If foreign ethanol is less profitable because the U.S. effectively shuts it out of our market, less money is poured into its development. The irony is delicious. While politicians pay lip service to diversifying our energy sources, trade policies such as import tariffs may have the opposite effect.

Taxing foreign ethanol is bad, but subsidizing domestic production is as bad or worse. The current ethanol subsidy is a 45-cents-per-gallon federal tax credit, and payments since 2005 have exceeded $20 billion. This acts as a double benefit: Ethanol producers already are guaranteed income through legislation that requires gasoline to be blended with ethanol. These companies are provided guaranteed business and then a subsidy on top of it.

Agriculture Secretary Tom Vilsack recently made comments suggesting that the mandate would be raised from 10 percent ethanol to 15 percent, a move that would raise the price of gasoline and has the potential to damage our nation’s automobiles, lawn mowers and anything else with a gas-powered engine.

Rather than allowing the government to pick winners, it is best to let markets decide our future energy sources. Investors are skilled at identifying profitable opportunities in providing energy. They also are able to acknowledge when an idea has failed. The government is not. It is much harder to convince a group of savvy investors that your ideas are worth funding than it is to lobby politicians to earmark billions of dollars for your industry.

This phenomenon is especially true when politicians can muddle the truth with questionable promises of energy independence and “green” job creation. This claim was made most recently by Sen. Kent Conrad, North Dakota Democrat, and Sen. Charles E. Grassley, Iowa Republican, with their introduction of the GREEN (Grow Renewable Energy From Ethanol Naturally) Jobs Act of 2010. The bill would extend ethanol tax subsidies as well as the ethanol tariff until 2016.

Some politicians have legitimate concerns over instability in the regions from which the U.S. imports oil. They cite this as an excuse to provide undeserved taxpayer money to politically favored green-energy companies, but at the same time they fail to recognize the enormous difference between ethanol imports from Brazil and oil imports from certain hostile nations.

Creating “green” jobs isn’t the clear-cut path to prosperity that politicians make it out to be. If these jobs were truly wealth-creating, it is likely they would be funded without government assistance, just like any other business. Each dollar the federal government pours into “creating jobs” through loan guarantees or direct payments is taken from taxpayers. This is money the average American can no longer spend on food, entertainment and other necessities, ultimately resulting in fewer jobs in those sectors.

It is possible that someday ethanol will be an important source that supplies our energy needs. It also is possible that it won’t. Entrepreneurs are most able to figure out the best way to meet our future energy needs. We shouldn’t let the government gamble on finding a winner with taxpayer dollars.