Ethanol, And Its Varied Impacts

John brings up the subject of ethanol:

Ethanol has been a political football recently and I have wondered at times if federal subsidies make sense. But this farmer's point of view puts it in a very favorable light:

The big thing with ethanol from my perspective is it ate up the surplus that was a drag on the national commodity market.

It may be a $6 billion subsidy but it may also be protecting the agricultural economy of the midwest--which has been pretty marginal for some time. And in the grand scheme of things, does an arguably good subsidy of that size really matter when we are spending a couple billion every week in wars that tend to increase petroleum prices

That's an interesting blog post. "Ditch Manuals" indeed!

I have a problem with ethanol for several reasons.

First, there is a bit of deceit with regards to ethanol’s influence on air pollution. There is a campaign to make ethanol’s use seem green, or Earth-friendly, but it isn’t a complete blessing. Ethanol’s incorporation into fuel helps with carbon monoxide problems (because it introduces more oxygen into the fuel, which promotes more-complete combustion, which reduces carbon monoxide pollution). In addition, ethanol helps with greenhouse gases (since it’s not a fossil fuel). Still, ethanol increases the vapor pressure of the gasoline it is added to (specifically the Reid Vapor Pressure, or RVP), which promotes evaporative emissions of fuels, which, in turn, aggravates ozone air pollution, since the evaporated organics are ozone precursors. In California, on balance, ethanol in the fuel may be viewed as more harmful than helpful to human health, but the ethanol lobby will never tell you that.

Second, farming is hard on the land, particularly in regards to soil nutrients and soil stability. To the extent that ethanol promotes over-farming, ethanol shares in this impact.

Third, nutrients washing into the Gulf of Mexico from the Mississippi River helps create the anoxic zones they see down there every summer. To the extent that ethanol promotes the spread of dead zones in the sea, ethanol shares in this impact.

But there is no question the promotion of ethanol through federal subsidies is helping stabilizing the agricultural economy of the Midwest. The vast surplus of corn gets used, rather than tossed. The Midwest’s and Great Plains’ populations, which were decimated by mechanization and other related phenomena, are being stabilized by this subsidy. Land prices have been rising all through the Midwest, creating what may be a property value bubble.

We might decry the appearance of bubbles in the economy, and the long-term harm they cause, but they sure feel good at the moment (as people involved in California real estate from 1970-1978, 1983-1990, and 1995-2007 can attest). There was a recent news article describing how well certain Illinois farmers have been doing lately (through careful management of the bubble’s impacts):

A decade ago, they began seeing land values escalate as homebuilders needed raw land to satisfy demand. They sold land to homebuilders at high prices, took their profit and invested in land downstate that they leased to local farmers. Now they are back in Chicago's far-flung suburbs, spending a pittance of what land sold for five to 10 years ago, planting crops and profiting from surging commodity prices.

"Farmers have been the wisest investors, especially in the collar counties," said Mark Goodwin, president of Goodwin & Associates. "They were smart enough to hang on to their money and reinvest it in the land. It's like any other business: Invest in what you know."

So, whether you like ethanol, or hate it, depends a lot on where you are.

John replies further:

There are good scientific arguments concerning the negative effects of ethanol/gasoline blends, as you pointed out. There are also economic arguments against its use. The return on energy put into producing ethanol is only around 1.3 to 1 compared to, on average, 30 to 1 for oil. Whether or not the efficiency of ethanol production can be improved remains to be seen. The efficiecy of oil extraction is definitely declining, however, so the gap will tighten as oil reserves are depleted.

I disagree with your opinion that ethanol production is causing over-farming in the Midwest. The same acreage is being farmed now as was the case in 1950. In fact, it may be a bit less than when Earl Butts encouraged farmers to pull up fences to eke out more land for Russian grain sales in the 1970's. Midwestern soils have been depleted of nutrients continusously since the mid-19th century. From a conservation perspective it might make sense to return large areas of farm land to tall grass prairies, but from an economic perspective it would not be practical.

The Mississippi-Missouri-Ohio River system drains around 40% of the lower 48 states. It carries--and concentrates--huge amounts of pollutants form agricultural, industrial and urban sources. Topsoil erosion has actually been reduced significantly in the last 40 years as no-till agriculture (use of chisel plows rather than tradional deep plows) has become the norm. Again, I do not see that corm grown for ethanol production has exacerbated the problem.

The big question, of course, is whether it is appropriate for the federal government to be subsidizing ethanol production. Anti-government extremists say there should be no federal programs of this sort and that the private sector should be the only driving force in the economy. Some, such as Grover Norquist, would carry that to an absurd extreme. Last night on the Colbert Report, he said that there is "NEVER" an excuse for new taxes. One would suppose that, in 1941, he would say that the defeat of the Axis powers should be left to private sector organizations such as Blackwater and that the Manhattan Project was a huge boondoggle that would be a waste of tax dollars. But I digress. My point is, as was pointed out in the original piece by Frank James, that a program which has spurred production of more versatile and efficient engines, as well as stabilizing the economy of a large portion of the nation is probably a pretty good deal for the taxpayers. Even so, the economy of the upper Midwest is in very poor shape--I cannot imagine where it would be if corn prices collapsed. The program cost is a tiny fraction of the cost of the bailout of the mortgage industry, and the positive results are much more apparent. From a return on investment perspective, it clearly works better than military action or subsidies to oil companies. The Republican calls for "shared sacrifice" remind me of a movie scene where two individuals are pointing guns at each other and one tells the other, "I'll drop mine when you drop yours" in the hope that the other would be foolish enough to fall for that con.

A good book on the topic of reducing government spending and the sell off of government services to the private sector is "The Wrecking Crew" by Thomas Frank. It is probably the most damning indictment of the entire system of privatization ever written. (In fact, I would say that if you only read one book this year, it should be that one.) While ethanol production is not specifically mentioned in the book, it seems to me to be a program that the federal government has a right--even a duty--to pursue in order to promote betterment of the nation as a whole. Alternative sources of energy are no longer optional and government spending is the most viable way to pursue that goal. There will be dead ends in that pursuit--as there are in any other sort of scientific research--but such funding should, with some oversight, keep things moving in the right direction.