BOHANON & STYRING: Ethanol has lost its glow, but subsidies live on

January 23, 2016

Economic AnalysisOnce upon a time, in a galaxy including Indiana, ethanol distilled from corn was going to be the wonder fuel. Renewable because we grow corn. Environmentally friendly because it pumps out less atmospheric bad stuff than fossil fuels. Immune from the whims of oil sheiks. What’s not to like?

Congress responded with tariffs and lush direct subsidies. Just to seal the deal, it added a renewable-fuels standard mandating blending 10 percent ethanol with gasoline. Every time we pulled up to the pump, we’d have to buy ethanol, like it or not.

With such a protected, subsidized, assured market, corn ethanol grew overnight from infancy to adulthood. Pretty soon, 40 percent of the corn crop was winding up in our gas tanks.

But a funny thing happened on the way to energy nirvana. It might be heresy to say this in corn-and-ethanol-heavy Indiana, but the wonder fuel turned out to be a wonder flop. Ethanol has only 75 percent of the energy content of straight gasoline, so gasohol gets worse fuel mileage. Plowing up more land releases carbon, and making ethanol uses lots of carbon-based energy. Greenhouse gas benefits are looking specious. Using a food crop for fuel makes food for the poor more expensive.

Green-lobby luminaries are abandoning the ethanol boat. Sierra Club “opposes further deployment of corn-based ethanol” due to “extremely dubious net carbon benefits.” In November 2010, green apostle Al Gore recanted his support: “It was not good policy to have those massive subsidies for first-generation [corn] ethanol.”

You’d think we’d be pulling back from our ethanol binge. Wrong. Something called “public choice economics” is in play. PCE observes that people, public or private, act according to incentives. Corn ethanol has powerful interests protecting the subsidy, such as corn farmers and ethanol companies. Those who bear the costs of the ethanol subsidy are the widely dispersed and disorganized members of the general public. It isn’t surprising that the narrow, special-interest group wins out in the political process.

Ethanol isn’t a wunderkind anymore, but it soldiers on. Don’t blame the ethanol lobby. In its place, we’d all be right in there defending ethanol investments. But the political lesson is clear: When we make a policy mistake, we have a devil’s time getting rid of it. Or, as our 40th president put it, “The nearest thing to eternal life we will ever see on this earth is a government program.”•


Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.


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