This month, the Environmental Protection Agency announced a reduction in 2014 biofuel mandates from 18 billion gallons to 15 billion gallons. This decision was made because gasoline consumption has fallen, and fuel mixes made with more than 10 percent biofuels can damage car engines. But there is more to the story.
Since 2005, the Renewable Fuel Standard has required fuel sold in the United States to contain biofuels, 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 fracking have eased concerns over dependence on Middle Eastern oil. America will soon be the world's top oil producer.
Many environmental groups are now opposed to biofuels. "Corn ethanol is extremely dirty," says Friends of the Earth's Michal Rosenoer. "It leads to more climate pollution than conventional gasoline, and it causes deforestation as well as agricultural runoff that pollutes our water."
Why does America continue this failed policy?
Two economists, 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.
In 2012, federal ethanol subsidies worth 45 cents a gallon expired, along with a 54-cent-per-gallon 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 examined the effect of ethanol subsidies on food prices, they found 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, increases in the costs of meals causes significant hardship.
Since 1978, when the first subsidies for biofuels were enacted, tax credits have cost the Treasury over $40 billion. A 2010 CBO study 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 actual costs are certainly higher (from secondary effects of subsidies on prices), the amount lost is too low for significant backlash. It would not be rational for someone earning $10 an hour to spend much time educating themselves about and fighting against biofuels’ special treatment.
On the other hand, 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.
Iowa Republican Sen. Chuck Grassley attacks the “special interest” groups that support ending the ethanol mandate. He seems 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.Jared Meyer is a research associate at the Manhattan Institute for Policy Research. You can follow him on Twitter here.