Agriculture Update
April 26, 2008
by: John Frydenlund

Government WasteWatch, Spring/Summer 2008

The Disastrous Consequences of Ethanol Subsidies and Mandates

Ethanol subsidies have been in existence since 1978.  Citizens Against Government Waste and many other concerned taxpayer groups have always thought that the subsidies were an unwarranted and wasteful use of taxpayer financing.

A subsidy of $0.51 per gallon for all ethanol blended with gasoline goes to petroleum blenders in the form of a tax rebate.  In addition, the Energy Independence and Security Act of 2007 mandates 9 billion gallons of renewable food-based biofuel use in 2008, 15 billion gallons by 2015, and 36 billion gallons in 2022.  Last year’s renewable fuels mandate was only 5.4 billion gallons.  On top of these requirements, there is an additional $0.10 per gallon subsidy to producers who sell less than 60 million gallons per year and a $0.54 per gallon import duty on ethanol.

Ethanol subsidies and mandates are an egregious example of corporate welfare, with the biggest beneficiary being Archer Daniels Midland (ADM), the country’s largest producer of ethanol.

Ethanol has never made economic sense.  Federal policy has been aimed at increasing ethanol (and other biofuels) production to levels that would not otherwise occur in the marketplace.  But, more than a gallon of fuel, such as oil and natural gas, along with 1,700 gallons of water, are used to produce just one gallon of ethanol.  The result is that despite record high oil prices, the total cost of ethanol is nearly double that of gasoline.  A 100 percent replacement of ethanol for the U.S. gasoline supply would require using the entire U.S. corn crop, in addition to the entire world’s grain supply.

Ethanol subsidies and mandates have led to more than 25 percent of the U.S. corn crop being diverted to ethanol production, which is driving up corn prices and making it harder for Americans to feed their families.  With government mandates forcing up corn prices, farmers are diverting acreage away from the production of soybeans, wheat and other grains, and putting it into corn production.  This has led to a 5 percent increase in food prices, double that of inflation.  In the last three years, the price of eggs has increased by 69 percent, bread by 35 percent, milk by 22 percent, chicken by 12 percent and ground beef by 10 percent.  Studies show that the ethanol mandates will increase overall food prices by 7 percent in 2008 and 8 percent in 2009.

Obviously, something needs to be done.  First, the renewable fuels mandate contained in last year’s energy bill should be immediately repealed or at least waived.  Second, ethanol subsidies should be rolled back dramatically.  Third, the ethanol import duty should be lifted.  Fourth, Conservation Reserve Program (CRP) acres should be released for the production of food.  Otherwise, ethanol subsidies and mandates will create an even more disastrous consequences throughout the U.S. and around the globe.