September 16, 2011
This second blogpost in the series, “Corn-Fed Cars: On the Road with Ethanol,” continues the conversation about ethanol and explores the forces that converged to get us to this critical—and contentious—moment in biofuels history.
Since 1826, when it was first used to power internal combustion engines (ethanol timeline), ethanol has been of interest to entrepreneurs and agriculturists as a possible alternate fuel. As early as 1862, it was heavily taxed to pay for the Civil War. In 1908, Henry Ford produced the flex-fuel Model T, although by then cheap oil took over the powering of the nation and ethanol languished.
Fast-forward to 1974, when Archer Daniels Midland (ADM), the main producer of high fructose corn syrup, found itself in a quandary. The wet milling process used to manufacture corn syrup from corn grain created, in excess, a by-product known as ethanol, and ADM launched a shrewd search to find or create a market for it. (See this paper on the “Ethanol Swindle.”) Capitalizing on the “Project Independence” initiative started by the Nixon administration to reach total independence from foreign energy sources, ADM began a political campaign promoting ethanol as an additive to gasoline—and the current ethanol industry was born. (Read this paper for more on the history.)
ADM’s first step was to organize and finance an extensive publicity campaign to promote ethanol (Read this Corporate Watch supplement, “Supermarkup to the World,” for more details.) The campaign promised four tantalizing outcomes: (1) energy independence , which would free the U.S. from relying on unfriendly countries of the world for oil; (2) putting the Midwest’s excess corn production capacity to good use; (3) promoting clean air (ethanol produces less carbon dioxide overall than gasoline) and; (4) adding income to rural America through jobs and markets for corn.
By working the system, ADM and its partners succeeded in their mission. They made allies of high-ranking politicians, supplied testimonials from recognized “experts,” organized and funded lobbying groups, and finally, crafted and supported legislation to promote ethanol.
Politicians who received donations from the lobbying groups included Bob Dole, President Clinton, President Bush, President Carter, Michael Dukakis, Jack Kemp, Tom Daschle, and others. (For more context about the Washington-ethanol connection, read this Frontline report on ADM chairman Dwayne Andreas.) These donations, much of it from ADM and Andreas, were key to winning the numerous subsidies and tax breaks ethanol has enjoyed over the years. To gain grass-roots lobbying support, the Renewable Fuels Association was formed. Existing lobbying organizations, including the National Corn Growers Association, were strengthened, and most agriculture trade and farm organizations rapidly came on board.
By 1975 the U.S. began to phase out lead (which had been used to boost octane) in gasoline—and ethyl tert-butyl ether (MTBE) replaced lead as an octane booster. Gasoline composed of 10% ethanol, aka “gasohol,” was given a 4 cents-per-gallon tax break, the first direct subsidy for ethanol use. The years 1980 to 1984 (Ronald Reagan was the U.S. president) were an active period for ethanol policies, including extension of the ethanol tax credit, an increase in the ethanol subsidy to 50 cents per gallon, insured loans for small ethanol producers, price guarantees, and purchase agreements for federal agency use of gasohol. In 1984, the subsidy was increased from 50 to 60 cents per gallon. Still, though, corn prices were high, and because of this many ethanol plants went out of business.
By 1988, states began to pass laws demanding that all gasoline contain some oxygenate during the winter to enhance burning of the fuel and to lower smog. MTBE was the chosen oxygenate until it was found to be toxic—and then ethanol was adopted as an octane booster. This created an immediate government-mandated demand for ethanol that spectacularly increased the market for ethanol. By 2003, very little MTBE was used.
But in January 2003 the ethanol subsidy was reduced to 52 cents per gallon (from 60 cents) and termed the Volumetric Ethanol Excise Tax Credit (VEETC). Importantly, in 2005 the Renewal Fuels Standard (RFS) was passed, requiring a minimum volume of “renewable fuel” (mostly defined as ethanol) be used. The law did not specify a minimum content, only a minimum amount for all blenders. In 2005, the minimum was set at 7.5 billion gallons/year (bgy) by 2012. It was soon raised to 9 bgy, then to 13 bgy of corn ethanol, and then raised to 36 bgy total by 2022, with all but 15 billion gallons coming from advanced (cellulosic) fuels.
The RFS was and still is critical to the industry. It ensures a market for ethanol, allowing construction of plants to go forward with adequate financing. But the spectacular ramp-up in the RFS created much push-back, as I’ve outlined here.
- There is an ethanol “blending wall,” which means that there is not enough gasoline consumed in the U.S. to use all of the 15 bgy mandated by the RFS. (More information on blending walls). In response, the industry has pushed for increased ethanol content in gasoline (E15, which is gasoline composed of 15% ethanol) and for more use of E85 (85% ethanol). While some cars are able to use E85, few gasoline stations dispense the fuel. Studies of gasoline engines show that many stationary engines and marine engines will not use E15, and the fuel is not permitted for use in 2000 and older cars. As a result of the blending wall, more and more ethanol is being exported to Brazil to help use the excess ethanol capacity in the U.S.
- Corn prices have risen spectacularly in response to increased demand for corn for many uses, including ethanol. While farmers have benefitted from greater incomes and the government from lower support prices for corn, now as much corn goes into ethanol in the U.S. as is used for feeding of livestock.
- The increase in corn prices has resulted in food shortages and increased food prices, creating a major groundswell of anti-ethanol sentiment worldwide. The margins for corn to ethanol profitability are shrinking, and the VEETC subsidy is almost certain not to be included in the next budget.
- The high prices for corn, largely driven up by ethanol, have caused a rapid increase in cropland acreage devoted to corn (and soybeans). (Read further in this USDA report, “The Ethanol Decade.”) Many feel this has increased the pollution load to the nation’s water bodies, including the Gulf of Mexico where hypoxia caused by nitrate pollution continues to increase.
The future of corn ethanol is cloudy. (Read more here about the connection between ethanol prices and crude oil prices.) It has existed, indeed thrived, on subsidies and mandates—but, both subsidies and mandates are political creatures, and they can go away as quickly as they came. Ethanol clearly is losing its political base in the Midwest, where defense of a mature industry becomes difficult when money is limited. Other biofuels, particularly ethanol from cellulose, could be competitive in the near future and displace corn as the primary feedstock, although this is doubtful given current cellulosic ethanol technologies and costs of production. One can hope for other high-tech solutions that greatly increase the efficiency of the auto.
But still, there are many ethanol plants in the U.S. The shut-down of a mature industry is difficult at best, and support at the federal level will likely grudgingly continue. We have jumped into the ethanol pool, and getting out will likely not occur in the foreseeable future. At a rural town hall meeting in August, President Obama was asked by an 11-year-old boy, whose grandfather is a farmer and owns part of a local ethanol plant, “What are you going to do to keep the ethanol plant running?” The President responded by touting the need for more efficient corn ethanol, and the need to research other forms of biofuel. “Hopefully,” he said to the boy, “your grandfather, with his ethanol plant, is starting to work with our Department of Agriculture to find new approaches to the biofuel industry.” We can only hope so.
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