Ethanol is good, except when it’s not

Some people accuse George W. Bush of seeing the world in simple terms, black-and-white, good-and-evil. He has been quoted as saying, “in Texas, we don't do nuance.” But on the issue of ethanol, the Bush administration does so much nuance that they manage to take both sides of the issue—and then some.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />


Ethanol is a fuel made from corn or other plants. Basically, it is moonshine: corn is ground up and soaked until it ferments (becomes alcoholic), and then distilled so that it becomes even stronger. At this point you could drink it (and get drunk very easily), or you could put in your gas tank. If you want to sell it for human consumption, the federal government would probably hit you with the liquor tax. If you want to sell it for automotive consumption, the federal government and state governments will subsidize you until you start blushing.


The Bush administration, like the Clinton administration and the first Bush administration, say that we subsidize ethanol because it's good for the planet. They explain that when ethanol is burnt in a car engine, it gives off much less pollution and CO2 than does petroleum. On that very specific claim, they are correct. However, some scientists argue that ethanol, on the whole, is worse for the planet: it leads farmers to plant only corn, thus degrading the soil; the fuel needed to grow, distill, and ship the ethanol is more than the end product yields; and it evaporates more easily, leading to more hydrocarbons in the air. But the federal government doesn't give these claims or studies much weight.


So, ethanol producers and sellers get all sorts of tax breaks, free gifts, and waivers from environmental rules. Congress has recently voted to mandate we use ethanol. The mandates and subsidies are needed, presumably, because few consumers would choose ethanol of their own free will, it being costlier. But we owe it to our planet, the politicians tell us, to use ethanol, whether we like it or not.


But our government is much more nuanced in its understanding than that. U.S.-made ethanol is good. Foreign ethanol, on the other hand, is bad. You see, one of the subsidies Uncle Sam gives ethanol is a break in federal taxes, worth about 52 cents per gallon of ethanol sold. This tax break happens when the fuel refiner sells his fuel to gas stations. That means the refiner can get the break by selling ethanol from Iowa or from Brazil. That, however, would be unacceptable.


So, Uncle Sam imposes a special tariff on imported ethanol of 54 cents per gallon. You see, Washington is ready to spend your money (or shift a higher portion of the tax burden onto your shoulders) to encourage ethanol, which is good for the air, but only if it is good, homegrown ethanol. Is the foreign ethanol any dirtier? No. Actually, because it's easier to turn sugar into ethanol than corn, Caribbean or South American ethanol might be cleaner on net.


This may be what the Administration was thinking when, in March of 2004, the Export-Import Bank of the United States, a federal agency that uses your money to finance U.S. exports, helped subsidize the sale of “Two molecular sieve dehydration systems to be used in a new fuel ethanol dehydration facility” in Trinidad and Tobago. Companies in Wisconsin and upstate New York were making and selling the dehydration systems, which is why Ex-Im got involved.


So let's see if we have this straight. Ethanol is good, and so we subsidize it. Except foreign ethanol is bad and so we keep it out. Except some foreign ethanol plants use U.S.-made parts, and so we subsidize them. There doesn't seem to be much consistency in these arguments, at first glance, but alas there is. All of these actions—subsidizing U.S. ethanol, keeping out foreign ethanol, subsidizing foreign ethanol—involve increasing our federal government's intrusion into the economy.


They also have this in common: unless you are a member of one of Uncle Sam's favored classes—in this case, corn growers, ethanol makers, or ethanol machinery makers— you are made poorer by all of these actions. Ethanol subsidies shift a greater portion of the tax burden onto you. Ethanol mandates drive up the cost of your fuel, and of your food. Ethanol protectionism further drives up your costs. Ex-Im subsidies come out of your pocket, and the risk of repayment rests on your shoulders.


On the one hand it's all so complex: ethanol is good, bad, and good again. On the other hand, it's all very simple: Uncle Sam rips you off to help the favored classes.