Included in the
pending energy bill are provisions requiring the use of ethanol in
the gasoline supply. This proposed ethanol mandate would raise the
cost of gasoline, running against the original purpose of the
energy bill-to make energy more affordable. For that reason, the
mandate should have no place in the energy bill.
corn-derived motor fuel additive, has long benefited from favorable
tax treatment and federal regulations encouraging its use. But its
sales have not grown quickly enough to satisfy the ethanol industry
or its allies in Congress.
A 5 billion gallon
mandate was included in an earlier version of the energy bill that
was narrowly defeated, on other grounds, in 2003. The House
recently reintroduced its energy bill, with the 5 billion gallon
mandate, while the Senate has two proposals in the works-for 6
billion and 8 billion gallons. Any of these targets could become
part of the final version of the bill. The President has already
signaled his support for increased ethanol use, citing both its
domestic origin and benefits to the agricultural sector.
While an ethanol
mandate would benefit Midwestern corn farmers and ethanol
producers, it would make gasoline more expensive for everyone.
Indeed, the only reason ethanol needs federal help is that it is
too expensive to compete on its own. Whether 5 billion, 6 billion,
or 8 billion gallons, an ethanol mandate would mean significant
cost increases for the driving public.
In 1978, President
Carter signed the Energy Tax Act, which encouraged the use of fuel
ethanol by partial exempting it from the federal gasoline tax.
Though intended only to help the fledgling ethanol industry
establish itself, this tax break has persisted and was recently
renewed through 2010. The current tax credit is 52 cents for each
gallon of pure ethanol. Thus, a blend of 10 percent ethanol and 90
percent gasoline receives a 5.2-cent reduction from the 18.4 cent
per gallon federal gas tax. This tax credit helps offset ethanol's
higher cost relative to gasoline.
Other federal laws
and regulations also encourage the use of ethanol. Since 1996, the
Clean Air Act has required many of the nation's largest
metropolitan areas to use reformulated gasoline (RFG). Originally
intended to reduce summer smog, RFG now comprises one-third of the
nation's fuel supply. RFG must contain 2 percent oxygen content by
weight. This necessitates the addition of oxygenates, either methyl
tertiary butyl ether (MTBE) or ethanol.
MTBE is cheaper
than ethanol and was initially more popular. But concerns about
MTBE contamination of water supplies have led several states to ban
its use. Last year, for example, both New York and California put
bans in place, forcing a switch to ethanol in those states. Thus,
ethanol use has increased in recent years, from less than 2 billion
gallons in 2001 to a record 3.5 billion gallons in 2004.
In addition to the
Clean Air Act, tax credits for small ethanol producers and
assistance and price supports for corn farmers also serve to
promote ethanol. These provisions were enacted through the efforts
of Midwestern legislators. Most ethanol production facilities-as
well as the corn grown to supply them-are located in Iowa,
Illinois, Nebraska, Minnesota, Missouri, Kansas, Indiana, and other
Midwestern states. In Washington, the ethanol lobby has become a
powerful special interest, benefiting from both strong bipartisan
support among the region's legislators and only sporadic opposition
from those representing the rest of the country.
Bill And Ethanol
Doubts over the
environmental benefits of using oxygenates in RFG led to provisions
in previous versions of the energy bill to eliminate the oxygenate
requirement. But this would jeopardize ethanol sales. For this
reason, the ethanol lobby insists on replacing the requirement with
a "renewable fuels" standard, which would effectively mandate 5
billion gallons or more of annual use by 2012. No surprise, ethanol
is the primary renewable fuel that would benefit from the standard,
with other agriculturally derived fuels making up only a small
percentage of the total. Versions of the energy bill containing
this provision have repeatedly passed the House but stalled in the
Senate, on other grounds.
Amidst a backdrop
of rising gasoline prices, Congress has now renewed debate on the
energy bill. The House has reintroduced the 5 billion gallon
target, while the Senate has upped the ethanol provision in its
energy bill to 6 billion gallons by 2012. At the same time, 19
Midwestern senators have introduced a competing 8 billion gallon
Neither the House
nor Senate version of the energy bill alters or eliminates the
existing provisions that benefit the ethanol industry. If the bill
becomes law, ethanol would enjoy an overlapping array of subsidies
and preferential tax treatment-as well as a provision requiring its
The Impact of
an Ethanol Mandate
There is little
doubt that federal ethanol policy has increased the cost of
gasoline. Much of that cost is hidden from consumers and not seen
at the pump due to the preferential tax treatment that masks the
true cost of ethanol. An ethanol mandate would increase this cost
A 2002 Energy
Information Administration study of the energy bill's impact put
the cost of the 5 billion gallon ethanol mandate at no more than
one cent per gallon,
but there is good reason to believe that the cost could be higher.
Raising ethanol production to 6 or 8 billion gallons would increase
costs disproportionately: The higher the level of production, the
more pressure on corn prices, and the harder it is for ethanol
producers to meet demand. Larger ethanol targets also mean that
more of it will have to be used outside of the Midwest. Since
ethanol cannot be distributed through pipelines, the cost of
transporting it long distances will be high.
ethanol mandate could end up adding several cents to the price of a
gallon of gasoline-a burden that American motorists hardly
mandate is an anti-consumer provision. It benefits special
interests at the expense of the driving public. As such, it has no
place in an energy bill that seeks to make energy more affordable
for the American people.
Ben Lieberman is
Senior Policy Analyst in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.