Federal Gov't Finally Kills $6B USD Corn Ethanol Subsidy
December 26, 2011 1:01 PM
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Fresh debate focuses on eliminating blending/consumption mandates or replacing them with non-corn-based targets
Biofuels have become almost a dirty word, thanks to the government's dealings with respect to
. Deep in campaign donations from farm lobbyists, federal politicans have sprinkled billions in subsidies on the corn farmers that helped pay their way into office. Many have argued these subsidies have cost the consumer both in direct taxes and by
raising the cost of corn-derived food products
at the supermarket. Still other critics accuse the government of greenwashing, pointing out that corn ethanol has actually been shown to
increase greenhouse gas emissions
, not cut them.
I. RIP "Dirty" Corn Ethanol Subsidy
In the end, it appears the critics prevailed. The federal government is at last axing the $6B USD in annual federal subsidies it had previously been bequeathing on corn farmers and ethanol production facilities.
As the Congressional year ended, corn ethanol's supporters
failed to muster
the support necessary to
push through a new subsidy
to replace the previous subsidy that was voted out over the summer.
The handouts are finally at an end for corn ethanol. [Image Source: AP]
Tom Buis, CEO of Growth Energy, an ethanol trade group, clearly wasn't thrilled with the decision, but in an interview earlier this month he claimed the ethanol industry would survive without government handouts stating, "The blenders' tax credit initially helped the ethanol industry develop. But today, we don't have a production problem, we have a market access problem. Without the tax credit, the ethanol industry will survive; it will continue to reduce our dependence on foreign oil, create jobs and strengthen our economy."
By some estimates the total gifts to corn ethanol business totalled $45B USD since 1980.
The subsidy cut -- approved by a
73-27 Senate vote
in June -- also is accompanied by the end of a tariff on the importation of Brazilian ethanol. Brazil has an excess of sugarcane ethanol, but the U.S. government had previously penalized this fuel stream as a means of allowing U.S. ethanol producers to escape competing on the free market.
The ethanol debate has divided both political parties and even set federal representatives within certain corn-producing states against each other.
For example Sen. Debbie Stabenow (D-Mich.), whose state is the nation's 11th-largest corn producer -- with 11,000 corn growers using 4 percent of the state's land (2.45 million acres) to produce 315 million bushels in 2010 -- was among those who voted against cutting the subsidy, attacking the plan.
By contrast Michigan Reps.
(R-Zeeland) joined California's
(R-San Diego) and
(D-Orange County) in attacking higher ethanol blends in a letter "E15 is not ready for prime time".
II. The Next Front: Cutting Mandatory Blending Targets
The letter alludes to the next major front in the debate -- the question of mandatory ethanol consumption targets and fuel blends.
Many states have already forced gas stations to vend a blend of fuel that's 90 percent gas and 10 percent ethanol. But this blend is insufficient to fulfill the federal mandates of 15 billion gallons of biofuel to be consumed by 2015 and 36 billion gallons by 2022. These mandates were pushed through by the administrations of Presidents George W. Bush (R) and Barack Obama (D).
U.S. Environmental Protection Agency
has called for using
a higher E15 blend
(15 percent ethanol, 85 percent gas), while offering non-E15 options and warning stickers for drivers of older vehicles. Both the EPA and automakers agree that E15 use could do great harm to older engines. However, the automakers and the EPA dispute its effect on more modern engines. Automakers say
E15 can still cause significant harm
to some modern engine designs, while the EPA claims the automakers
don't know what they're talking about
and that it's own testing has proven E15 use in modern vehicles to be safe.
But the E15 scheme has been shelved indefinitely thanks to a 285-136 vote in the U.S. House of Representatives.
The house is now debating whether to roll back biofuels targets and/or the existing ethanol blending mandates. Downsides to such actions are that other biofuels such as algae and cellulosic ethanol -- which lack the compelling negatives of corn ethanol -- could be harmed. A repeal could also create uncertainty in the fuel market, causing deleterious financial effects.
III. Moving Towards Better Biofuels
An alternative could be to scale back targets, focusing solely on more promising technologies like cellulosic ethanol and algae, while scrapping any sort of federal mandate for corn ethanol. Interestingly such an idea has support from some environmental lobbies who aren't a fan of corn ethanol.
Friends of the Earth
's biofuels policy campaigner Michal Rosenoer cheered the decision to kill the subsidy, stating, "The end of this giant subsidy for dirty corn ethanol is a win for taxpayers, the environment and people struggling to put food on their tables."
His group supports focusing federal funding on "better" biofuels.
One particularly promising biofuel is
Algal oil is a promising corn ethanol alternative, offering a higher octane biofuel.
[Image Source: Jacopo Werther]
While pure-ethanol vehicles can have a better performance power-wise than pure-gasoline vehicles thanks to higher fuel compression ratios, availability mandates mixed vehicles that can burn both pure gasoline or pure ethanol. These dual-mode engines offer the worst of both worlds, in terms of inferior gasoline performance, while falling short of the promised ethanol performance.
By contrast, algal fuel can be produced in a higher octane blend which mirrors standard gasoline. Thus lesser engine modifications are necessary even for pure supplies. Additionally, for blends the performance losses would be lessened.
The U.S. military has been doing some excellent pioneering work in terms of reducing the cost of algae biofuels. A year ago algae biofuel
cost $424 USD/gallon
, this year it
costs $26.67 USD/gallon
Algae biofuel production is inherently scalable, although it works best in relatively frost-free climates like Florida and the American southwest. Aside from the cost of the glass tanks, harvesting/processing equipment, and bioengineered algae strains, the only additional costs involved are the certain fertilizers/growth additives used to accelerate the growth of the oily algae.
Algae's biggest weakness is that it doesn't have the millions in special interest money backing it hat corn ethanol has. Thus even as corn ethanol has some firm advocates on The Hill, algal biofuel is just starting to be considered.
The Detroit News
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RE: Sugar instead of corn syrup?
12/26/2011 10:58:36 PM
didn't think about this long-term. On a short-term basis, there will be a surplus of corn syrup due to the existing oversupply of corn. That won't last for long, however.
On a more long-term basis (one or two growing seasons), farmers won't plant as much corn because the government isn't paying them to do it. Lower demand + excess supply = unprofitable crop, which will result in decreased production.
The corn syrup manufacturers have to compete with other corn consumers (ethanol, canned corn, nachos, grits, etc). The reduced supply coupled with competition will drive up the cost of corn syrup, removing its artificial price advantage against sugar.
RE: Sugar instead of corn syrup?
12/27/2011 1:25:10 AM
You are correct that a long term decrease in quantity demanded will likely result in an adjustment to quantity supplied, but supply and demand always seek equilibrium. It doesn't make sense to argue that a decrease in quantity demanded will eventually cause a boomerang effect and result in prices actually going up. It's just a partial compensatory effect. It's not like corn is an expiring technology that will eventually become rare enough to raise the price, as collectors buy up the last of the corn on the market.
The reason corn syrup is the sweetener of choice in food manufacturing is because it's been cheaper than cane sugar in this country for a long time. (well before the blend/consumption mandates) A change that ultimately results in lower corn prices just exacerbates that difference.
Besides all that, it's not just corn subsidies or a lack thereof that caused corn syrup to be a dramatically cheaper ingredient. It's also the longstanding US sugar import program. In order to protect a small sugar industry in this country, we have tariffs that keep the price of imported cane sugar very high. (It's around 72% more expensive here than the world average) We also spend billions in subsidies on the small, inefficient (compared to cane sugar) beet sugar farming industry in Florida in order to keep them afloat. I won't go into a discourse on all the implications of this program, but this particular scenario is a great example of the law of unintended consequences when it comes to regulations and protectionist trade policies.
RE: Sugar instead of corn syrup?
12/27/2011 3:28:58 PM
Corn syrup, specifically HFCS is cheaper that cane/beet sugar (sucrose) because:
1. We have been paying corn farmers a subsidy, making corn artificially lower priced.
2. We put a quota on the amount of sucrose each sugar producing state can sell. Anything they sell in the US above quota that is penalized with an additional tariff, artificially raising the cost of sucrose. Any excess can be sold outside the US with no additional tariff, thus making selling more sucrose in the US even less practical.
3. We put a high tariff on imported sucrose.
In short, we've artificially limited the supply of sucrose in the US and artificially raised the price of sucrose in the US, while artificially increasing the supply and lowering the price of corn syrup and HFCS in the US.
The US is the only country in the world to use a significant quantity (per capita) of HFCS, because on the world market, sucrose is cheaper. Corn syrup/HFCS in the US is a completely artificial market. End the subsidies, quotas, and tariffs, and sucrose will be cheaper and companies will switch back to it instead of the HFCS that is a major contributing factor to diabetes and obesity in the US.
RE: Sugar instead of corn syrup?
12/27/2011 1:56:11 PM
Farmers in the Midwest generally produce either corn or soybeans (usually alternating crops every year to preserve the soil). The demand for soybeans isn't likely to change, so the vast majority of those farmers will continue to grow corn every other year.
The reduction in ethanol demand is likely to push corn prices down. Corn is a commodity with many different uses (fuel, sugar, livestock feed, chemicals, drugs, etc.) Farmers will sell the corn at the best price they can get. There will likely be some fluctuations in production, but generally, the result will be lower priced corn syrup and therefore more incentive to use it as a cane sugar substitute (not less).
RE: Sugar instead of corn syrup?
12/27/2011 8:33:15 PM
I'd call one growing season (all it'll take, no point to growing without the incentive even once) the short term.
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