Anyone looking at the ethanol subsidy program should be reminded of the childhood story of the emperor’s new clothes. While those who support the program put forth various reasons for their support — that ethanol will reduce greenhouse gases or curb our reliance on foreign oil — in reality, it is merely a wealth transfer program from the general taxpayer to corn producers.
If we admitted that, and just gave corn producers a check, we would be better off. We would avoid the misallocation of resources and the unintended consequences of the current program, such as higher food prices, that are a result of making the subsidy indirect rather than direct.
The ethanol subsidy costs the federal taxpayers about $6 billion per year. However, as professor Gordon Tullock pointed out in his classic paper, “The Welfare Costs of Tariffs, Monopolies, and Theft,” when special interests obtain transfers from the rest of society, it is not a simple transfer from one person to another.
Resources are used up in gaining the transfer. In some cases, attorneys, lobbyists and others use up time and resources seeking the transfer, and, as in the case with ethanol, the method of obtaining the transfer wastes resources.
The environmental reasons for using ethanol are at best controversial. Former Vice President Al Gore has recently said about the ethanol subsidy, “It is not good to have these massive subsidies.” Producing ethanol from corn and distributing it emits more greenhouse gases than producing gasoline from crude oil and distributing it.
Suppose that ethanol use as a fuel actually had environmental benefits to justify the 45-cent-per-gallon subsidy. Then how does one explain the 54-cent-per-gallon tax on ethanol made from sugar cane imported from Brazil?
It is clearly more efficient economically and environmentally to produce ethanol from sugar cane. The only explanation is public policy is meant to drive up corn prices, not to include ethanol in the fuel supply.
The subsidy for corn ethanol and the tax on competitive sources are still not enough to sustain the industry. The federal government has mandated use of biofuels, nearly entirely corn-based ethanol, in the fuel supply — 36 billion gallons by 2022.
If the use of corn ethanol were economically efficient, the ethanol industry would not need subsidies, taxes on the use of competitive fuels, and a government requirement that its product be used.
Ethanol is not likely to have anything more than a minor effect on our oil imports. If every acre of corn were used to produce ethanol, it would only supply 12 percent of our fuel needs. What’s more, Canada is our largest source of imports, and more than half of our imports are from the Western Hemisphere.
The ethanol program is efficient only at bidding up corn prices for U.S. farmers while it creates inefficiencies in the agricultural and energy markets that are likely many times larger than the subsidies given to corn farmers.
The time has come for someone to declare that the emperor has no clothes and end the ethanol program altogether.
Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College.
