Published January 12, 2011, Los Angeles Daily Journal – The dawn of a new year brings with it many familiar events: cool evenings in front of a crackling fire, the sweet smell of pumpkin pie, and, of course, old acquaintances not being forgotten. But, with the turn of the calendar also come more practical traditions, the most notable of which is new legislation taking effect. On Dec. 17, 2010, President Barack Obama signed into law the Tax Cuts and Unemployment Extension Bill, which extends unemployment benefits and tax cuts for many through the end of 2011.
Officially called the “Middle Class Tax Relief Act of 2010,” HR4853 is sweeping legislation that contains many features of which you may be aware, and a few that you may not. For instance, one such aspect of the legislation that will end up impacting us all is the provision that extends the Volumetric Ethanol Excise Tax Credit to Dec. 31, 2011. The Ethanol Tax Credit provides a credit to gasoline blenders of 45 cents for every gallon of ethanol blended into gasoline, as well as imposing a tariff on imports of ethanol of 54 cents per gallon.
While providing tax credits and tariffs on ethanol may seem innocent enough, when the country is still reeling from the $700 billion bank bailout and states are teetering on the brink of financial collapse, one has to question whether we can afford the tax relief. And, a larger question looms: even if we could afford it, should we?
The Volumetric Ethanol Excise Tax Credit was enacted in 2004 to incentivize refineries to deploy resources to developing ethanol as a mainstream alternative to fossil fuel. Since that time, ethanol has begun to chip away as a mainstream fuel source, with auto manufacturers beginning to produce cars that are capable of consuming mostly ethanol. Known as “E85,” or fuel that is 85 percent ethanol, some 2,000 filling stations across America have gone green, catering to the new “flex fuel” vehicles.
While the need to reduce our dependency on foreign oil is paramount, is ethanol the solution to get us there? Given that we are providing what will likely be hundreds of millions of dollars in ethanol tax credits, the answer is not to be under-valued.
Derived from sugar cane, potatoes, and most notably corn, ethanol is actually the same type of alcohol found in ordinary alcoholic beverages. While it can be distilled from a variety of organic sources, corn appears to be the best suited donor – or at least the one that has become most widely adopted. And, that is where the controversy begins.
While perhaps seldom considered by those outside of the “corn-belt,” corn is a highly consumed commodity around the world. Aside from the obvious application as a direct consumable, corn is used in everything from soft drinks to baby food, and it is milled into countless industrial products, such as plastics, adhesives, paint and insulation. However, the largest use of corn is livestock feed, where cattle, poultry and hogs rely on it for daily consumption.
Because of the widespread use of corn, any change in the supply or demand of the commodity has a powerful impact on the prices of corn-derived products. When the price of corn rises, so does the price of processed foods, meat and poultry, and a variety of industrial products. What impact does the use of corn in ethanol have on all of this? It is difficult to measure with absolute certainty, but fundamentals of economics teach that increased demand necessarily increases price. This could be the case with corn, where the price per bushel (which is a little less than 10 gallons) has soared from $210 in 2004 (when the Volumetric Ethanol Excise Tax Credit was first enacted) to its current rate of $620 – an increase of about 300 percent.
Balanced against this is the benefit realized by ethanol use in fuel. After all, many would tolerate increased consumer prices if it resulted in a viable solution to the fuel consumption dilemma. With ethanol, however, it appears that this may not be the case. Ethanol as a fuel contains about 35 percent less energy per unit than ordinary gasoline, meaning that E85 will produce lower mileage than gasoline and will require more frequent refueling. Coupled with this is a significant limitation in capacity. If all corn grown in the U.S. were used for ethanol fuel, it would only displace about 12 percent of the current U.S. gasoline consumption, making ethanol, at best, a marginal clean energy solution.
And, then there is the matter of production. To convert corn into usable ethanol, the stock goes through a lengthy distillery process, where it is dried, fermented and burned, and then blended into ordinary gasoline to make E85. Each of these processes consume energy, and perhaps more importantly, emit greenhouse gases. To put this into perspective, National Geographic Magazine reports that it takes one unit of fossil fuel to produce 1.3 units of corn-based ethanol – certainly not a quantum leap in terms of energy conservation.
When the lower energy per unit of ethanol is considered, it is questionable whether corn ethanol provides any net benefit on energy consumption. While it may, many clean energy advocates are voicing concerns over the continued subsidy of corn ethanol, calling it an ineffective technology that will not reduce dependence on oil. Given this, and given ethanol’s impact on consumer prices, is it now time to stop subsidizing the ethanol industry, and instead allow market forces to dictate? Whatever your position, recognize that the stakes are high in this ever-changing game of trying to find the next viable clean fuel solution.