Misplaced Priorities; Ethanol Promotion and Its Unintended Consequences

Article excerpt

When the state of Iowa becomes a priority in the US presidential election, it is only a matter of time before agriculture dominates the discussion. Indeed, US presidential candidates Hillary Clinton, John McCain, and Barack Obama all brought out their metaphorical overalls to sing praises of corn farmers before the February caucuses. Such kowtowing to Iowa's farmers has become a quadrennial tradition in the United States, where federal corn subsidies totaled US$37.3 billion from 1995 to 2003. The United States' funding of corn farmers stems largely from precedent, a desire to keep the heartland happy, and perhaps even a romanticized conception of small farmers. However, the subsidies also have significant roots in one of the most confounding environmental programs of the past 30 years: ethanol fuel.

According to The Economist, over 200 distinct subsidy programs provide US$7 billion each year to participants in all levels of ethanol production and supply. Since the 1970s, untold billions in handouts have been given to corn farmers, "big ethanol" refining companies such as Archer Daniels Midland, and gas stations in an effort to boost ethanol's profile in the US market. And if federal subsidies to all parties involved in the production of ethanol were not enough, the US government currently places a US$0.54 per gallon tariff on imported ethanol. Several state governments have started subsidy programs as well. This amount of market protection is inordinate for a fuel whose true value--without government support--seems low.

While subsidies are often percieved to be good for US business, the magnitude of government handouts to corn farmers in the United States produces pernicious consequences around the world. Government actions have artificially increased US demand for corn, driving up the prevailing world price of corn by over 50 percent since 2006. While rising world food costs are not the fault of the US ethanol regime alone, support for ethanol does play a significant role in rising prices. This effect is especially dire for poor countries accustomed to years of falling food costs. In addition to its direct implications on the world food market, ethanol--touted by US policymakers as a solid source of renewable energy--may not be a viable alternate fuel. There remain practical concerns to its implementation, and there is no consensus on the fuel's environmental benefit.

After considering corn-derived ethanol's questionable status as an energy-efficient fuel, along with the unintended food price blowback of its subsidization, US government policies in support of ethanol look fundamentally unsound. while political realities may not allow for the removal of distorting subsidies, the US government may enentually realize that money should shift from the production of ethanol itself toward research being conducted to make the existing industry more efficient. If ethanol production technologies are streamlined, less corn would be needed to produce the same amount of product. This would eliminate the need for subsidies, which are in part causing rising food prices and nearly eliminating ethanol's environmental benefits.

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Hungry for Fuel, Hungry for Food

The hype surrounding ethanol raises concern about the dangerous and increasing integration between energy markets and agriculture. Demand for food products now depends not just on the literal hunger and nutritional consumption of humans, but also on a "hunger" for energy. This growing connection has an underlying moral dilemma; is it fair to produce fuel from food that otherwise could have been used for nourishment? The answer to this question is debatable, and largely unclear.

Some other, more pragmatic economic questions have empirical answers. Data shows that mixing energy and agriculture markets has severe policy blowback, affecting consumers at home to the developing world's poor. As prices of corn have risen from subsidies, so have the prices of its grain substitutes--wheat, barley, and others. …