Last Friday the EPA announced a reduction in 2014 biofuel mandates from 18 billion to 15 billion gallons. This decision was made because gasoline consumption has fallen and fuel mixes made with over 10 percent biofuels can damage car engines. But there is more to the story.
Originating with the Energy Policy Act of 2005, the Renewable Fuel Standard (RFS) required that fuel sold in the United States contain biofuels. These are made from various plants, of which corn-based ethanol is the most common.
The rationale behind adding biofuels to gasoline was reducing dependence on foreign oil and protecting the environment. The first is no longer a major concern and biofuels failed in achieving the second. They instead harm the environment and increase costs for food and transportation.
More efficient technologies such as hydrofracturing (fracking), which has provided access to potentially 200 years of natural gas, have eased concerns over dependence on Middle Eastern oil. On top of this, North America will soon be the world’s top oil producer.
Though once supporters, many environmental groups are now opposed to biofuels. “Corn ethanol is extremely dirty,” says Michal Rosenoer, biofuels manager for Friends of the Earth, “It leads to more climate pollution than conventional gasoline, and it causes deforestation as well as agricultural runoff that pollutes our water.”
Why does the United States continue with this failed policy?
Two economists, retired George Mason professor Gordon Tullock and the late Nobel Laureate James Buchanan, suggest an answer. They were both pioneers in the public choice school of economics. By applying self-interest to the political realm, they explained seemingly inexplicable situations—including biofuel’s resilience.
From the 1980s until recently, domestic ethanol producers were protected by an import tariff of 54 cents per gallon. This insulated U.S. farmers from international competition, allowing them to charge higher prices and benefit from growing corn for fuel, not food.
In 2012, federal ethanol subsidies worth 45 cents a gallon expired, along with the protective tariff. But, the recently reduced mandate remained and it continues to provide farmers with benefits at the expense of American consumers.
About 40 percent of U.S. grown corn is used for ethanol, not food or livestock feed. When the Congressional Budget Office (CBO) examined the effect of ethanol subsidies on food prices, they found that 10 percent to 15 percent of price increases could be blamed on ethanol subsidies. Because food accounts for 16 percent of all expenditures for those in the lowest fifth of incomes, an increase in the cost of a meal causes significant hardship.
Since 1978, when the first subsidies for biofuels were enacted, tax credits have cost the Treasury over $40 billion. A 2010 study by the CBO found that biofuel tax credits reduced federal revenues by about $6 billion the year before.
At this point, Professors Buchanan and Tullock would point out that biofuel subsidies directly cost the millions of Americans who are harmed only about $20 each a year. While the actual costs are certainly higher (from secondary effects of subsidies on prices), the amount lost is not high enough to warrant significant backlash. If someone earns $10 an hour, it would not be rational for them to spend more than a few hours educating themselves about and fighting against the special treatment biofuels receive.
On the other hand, biofuels are a large portion of farm subsidies, which have many wealthy beneficiaries. The federal government paid out $11.3 million in taxpayer-funded farm subsidies to 50 billionaires on the Forbes 400 list of richest Americans between 1995 and 2012.
On a smaller scale, farmers whose livelihoods depend upon high crop prices will lose thousands of dollars annually if biofuel programs are terminated. It makes sense for them to spend more time lobbying legislators to keep subsidies in place.
On November 15, Iowa Republican Senator Chuck Grassley wrote an article attacking the “special interest” groups that support ending the ethanol mandate. He seemed to forget that the farm lobby is equally as guilty of pursuing its interests at the country’s expense.
The EPA lowered the 2014 requirement for ethanol purchases despite special interest pressure. Public choice economics teaches us small, concentrated interests are difficult to overcome—even when they advocate harmful policies. However, overcoming them is not impossible and this reduction offers an opportunity for discussing the failures of biofuel programs. When costs to consumers and the environment are considered, it becomes clear that reforming the biofuel mandate is necessary.
[Originally published on e21: The Manhattan Institute]
*Jared Meyer is a research associate at the Manhattan Institute for Policy Research. You can follow him on Twitter here.