Commentary: More ethanol means higher prices — and not just for gasoline

Commentary: More ethanol means higher prices — and not just for gasoline

The Trump administration's proposal would force more biofuels into the market regardless of demand.

The Trump administration's proposal would force more biofuels into the market regardless of demand.(Dreamstime/TNS)

Over the summer, President Donald Trump tweeted that his administration was working on an ethanol package that would be "Great for all!" Now that we have the Environmental Protection Agency's draft proposal, we can see he was half right. It's great, all right - for the politically connected. It's costly for everyone else.

The Renewable Fuel Standard, commonly known as the ethanol mandate, forces suppliers to blend increasing amounts of renewable sources into domestic transportation fuel each year. In the United States, the most common form of ethanol is corn-based. Soybeans are another common input for biodiesel.

The Trump administration's proposal would force more biofuels into the market regardless of demand. Let's examine who that's not "great" for.

If you like paying less for food, the RFS is not great. The mandate diverts food for fuel, boosting crop and feedstock prices. Research from the University of California at Davis finds that increased demand for corn and soybeans due to the RFS drove up prices by 30% and 20%, respectively.

The mandate also increases other crop and food prices because it changes how farmers use their land. UC-Davis economist Aaron Smith estimates a roughly 20% rise in wheat prices because wheat acreage decreased as corn and soybean acreage increased.

Higher crop prices harm consumers multiple times over. Corn is a key ingredient for many foods and an important feedstock for animals. Consequently, families pay more for cereal, chicken, turkey, beef and all of the other food products that rely on corn as a staple input.

Even in the Farm Belt, the ethanol mandate hurts more than it helps, because that's where farmers who raise cattle, beef, turkey and other livestock pay more. For instance, four of the top six turkey-producing states are Minnesota, Arkansas, Indiana and Missouri. Iowa ranks No. 1 in egg production and processing where, according to the Iowa Poultry Association, the chickens consume "55 million bushels of corn and 504,500 tons of soybean meal yearly." Nebraska, Kansas, Oklahoma and Iowa are some of America's top beef-producing states.

The ethanol mandate's not great for drivers, either. Complying with the mandate is hugely expensive for American refiners as well, who naturally pass those costs to consumers. The Energy Policy Research Foundation and others estimate it has driven up gasoline prices 6 to 9 cents per gallon. A recent Government Accountability Office (GAO) study also concluded that most Americans pay more at the pump because of the RFS.

You know who else isn't too pleased about the administration's latest boost for ethanol? Unions. The United Steelworkers and other unions involved with refineries have voiced their frustration with the policy because compliance with the RFS has exceeded $1 billion in some years. For some small and mid-sized refineries, RFS compliance is one of the biggest expenses, threatening thousands of jobs.

Forcing ethanol into the transportation-fuels market hasn't been good for the environment, either. A team of economists recently published a paper for the National Wildlife Foundation and found that the RFS resulted in the "conversion of 1.6 million acres of grassland, shrubland, wetland and forestland into cropland between 2008 and 2016."

When it comes to climate policy, the RFS is very ineffective. Several studies have shown that land-use conversion and increased emissions from additional farming result in higher levels of carbon dioxide released into the atmosphere compared to regular gasoline. The aforementioned GAO report found little, if any, evidence of the mandate's impact on greenhouse gas emissions. The overall climate impact of biofuels policies measured in terms of abated warming and sea-level rise are negligible.

Lastly, the policy isn't great for consumer choice. A central problem of the RFS is not the use of biofuels themselves, but that regulators in Washington explicitly mandate them and attempt to project what current and future energy markets look like.

President George W. Bush signed the RFS into law more than 14 years ago when politicians and pundits had unsubstantiated fears of imminent resource exhaustion and increased dependence on foreign oil. Since then, the U.S. has become the world's largest oil producer and now exports more crude oil than many OPEC nations.

The reality is that energy markets are unpredictable and work best when the federal government intervenes least. As Austrian economist F. A. Hayek once said, "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design." No matter how brilliant or well-informed with data, Washington regulators cannot centrally plan energy markets.

Policymakers should put consumers ahead of special interests and repeal the Renewable Fuel Standard.



Nicolas Loris is The Heritage Foundation's Morgan Fellow in Energy and Environmental Policy and deputy director of its Roe Institute for Economic Policy Studies.


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