Analysis on the

Ethanol Bubble

Alfred Rico
PID: A08704352
Class: Political Science 160aa
Instructor: Justin Levitt










In 2008, the New York Times published an article about Michael Bloombergs Windmill
Power Plan highlighting his participation in the very first installation of a wind turbine at a New
York City school on Manhattans Upper East Side. A Tuesday nights speech in Las Vegas, Mr.
Bloomberg outlines, When it comes to producing clean power, were determined to make
New York the No. 1 city in the nation (New York Times, Barbaro). Although the wind
powered turbine covers only a sliver of the schools incurred costs, Mr. Bloomberg posits
that it serves as a beacon of hope and progress for the rest of New York. Unfortunately,
decisions like Mr. Bloombergs, if not fully informed or practiced, often also contain indirect
costs that must be taken into consideration. The school may consider increasing wind
turbine numbers on their property in the hopes of benefiting more, however, will sacrifice
aesthetic integrity according to some parents. Furthermore, as energy efficient as the school
may become with one to many wind powered turbines, engineers would argue that the
structural integrity of the property may be compromised. In other words, the school
buildings would have to be renovated in such a way that ensures structural stability.
Examples of decisions made on behalf of energy independence like this show very subtle
lines between human flourishing, sustainability and efficiency that, if overlooked, can result
in inefficient and often distorted results. For some policies, especially more nationally
prioritized legislative laws, the overlooking of ripple effects and their inherent indirect costs
can often result in a dynamic process of dependence sensitivity upon onset. Altogether, such
decisions made in the name of energy independence albeit promising and viable, must also
be evaluated in terms of cost and benefit, identifying not only direct but, indirect potential
effects.
Similar to the Michael Bloomberg story, the United States is currently facing a
situation where political legislation concerning the supply of corn-based ethanol as well as
its consumption has had rippling effects in the economy that although some have predicted
others have only begun to feel. Wishful thinking does not provide adequate foundations for
public policy and so it must be noted that informed cost-benefit analysis on a decision must
be made before being put into effect. The Renewable Fuel Standard (RFS) originating from
the Energy Policy Act of 2005 later expanded and extended by the Energy Independence
and Security Act of 2007 (EISA) requires such sensitivity and stern understanding of its
scope if it is to avoid inefficient costs that can undermine energy security in electricity
systems. If any modifications are to be made whether in the addition or subtraction of
policy, congress will need to enforce a higher understanding of some facts before passing a
Renewable Portfolio Standard (RPS). In this way, a movement from traditional petroleum-
based energy production to more efficient fuel alternatives can be made both sustainable
and efficient.
Justified by both environmental and energy security concerns, political activity for
the movement of renewable energy promotion has provided the United States with a sense
of motivation. Policy activity for promoting renewable energy include increased incentives
and funding for renewable energy, such as the Energy Policy Act of 2005, and can often be
referred to as the nostrum for a variety of issues pertaining to fledgling green technologies
like the California Solar Initiative, which provides rebates for solar photovoltaic products.
The American Recovery and Reinvestment Act of 2009, for example, provided a stimulus
package of $6 billion dollars to be allocated across renewable energy and electric
transmission technology loan guarantees (US Congress, 2009). Other strong supporters for
renewable energy provide further arguments in justifying political action such as ending
foreign oil dependence, addressing changes in the global climate and increasing the United
States competitiveness. Although political activity promoting renewable energy can be a
strong and momentous sounding theory, it leaves open questions of articulation in regards
to whether or not they are sensible policies to reach our goals and whether or not they help
to meet those goals. Ultimately, it is up to policy makers to understand legal measures used
to mitigate deviations in order to improve net social welfare, as long as the cost of
incorporating the policy is less than the gains. Furthermore, intrinsic to political analysis is
the evaluation and identification of these deviations and the ability of those policy makers to
choose the appropriate policy instrument for each.
The edging out of traditional gasoline and diesel by newer products of biodiesel and
corn-based ethanol presents one of the major pushes for renewable energy policy, however,
also retains an intrinsic conflict between fundamental needs. An ethanol-induced frenzy has
led policy makers to push for its innovation allowing the subtle lines between human
flourishing, food, energy, and a sustainable environment and revealing the full cost and
benefit of biofuels. Well known is the ability of biofuels to provide climate-friendly energy,
however, analysts have long been concerned with the ability of the United States to allocate
the necessary land and apply efficient processes by which to grow corn. With most of our
fertile lands dedicated to food production it becomes a challenge when competition for
energy demands more land use for corn-based ethanol production. As demand for both food
and energy increases as it has, prices of food begin to reflect the competition pushing the
poorer third of the globe into malnourishment. Corn-based ethanol has the power to
provide cleaner more efficient energy, however, it is the tools by which we achieve the goal
of efficiency and sustainability that matter.
Currently, the Energy Independence and Security Act of 2007, serves as one tool the
government is using to provide targets. The stated purpose of the act is to move the United
States toward greater energy and security, to increase the production of clean renewable fuels
(Congress, 2007). The bill originally sought to promote petroleum independence by cutting
subsidies allocated to those refineries and push for different forms of alternative energy. As such,
many farmers have been hard hit over the past few years due in part to the federal Renewable
Fuel Standard. According to the standard, traditional gasoline is required to be composed of 15
percent corn ethanol, the very same corn used by farmers for the production of goods. Valley
dairies in California, for example, have been challenged with competing prices for corn and low
prices of milk. With increases in the prices of corn, used by farmers for cow feed, dairy
producers are decimated and closed out of business. Other businesses feel the ripple effects
including grain dealers, hay brokers, and veterinarians as these businesses are dependent, to
some degree, on the services of nearby dairies. Clearly, it is not the ideology of renewable fuels
that dictate a set of standards by which we must sacrifice basic food production in order to attain
them. It is clear that the biggest losers by far will be consumers, given that higher corn prices
reflect in a variety of other goods. Existing federal government policy does not take these
realities into consideration and instead looks onward to target mandate.
The environmental consequences along with those incurred by the economy due to this
rapid expansion have been a cause for concern. With the expansion and extension of the
EPAct2005 to EISAct2007 by congress, the RFS program has been modified in several ways.
The most notable being the federal mandate increase in required fuel blend. EISA increased the
volume of renewable fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022. The
difined mandatory annual targets were originally intended to increase the consumption of
advanced cellulosic biofuels until 2022 and, for the most part, have reached those goals
expecting to reach the target of 15 billion gallons of ethanol by 2015. Recently, state
governments have attempted to ameliorate the pressure by creating programs used to mitigate
market disruption. In this way, the production, distribution and use of corn-based ethanol can be
made more manageable within their borders. In general these programs include renewable fuel
mandates, benefits to ethanol producers, and infrastructure incentives for equipment used in the
dispersal of ethanol. States, like California that enact low carbon fuel standards, have passed
legislation to establish state-specific renewable fuel standards to provide further incentive for
ethanol producers without thereby feeling the full effect of EISA and ensuring infrastructure
development (Taheripour and Tyner 2012).
State- specific RFS may help spur development of necessary infrastructure that will
eventually be needed to meet the expectations of the sizable federal standard. One of the first
states to adopt state-specific RFS was Minnesota, declaring that if 20 percent of total state fuel
consumption did not comprise of ethanol by 2010, a mandate would be triggered to ensure this
result by 2013. As a result, biofuels have boosted Minnesotas economy, reduced dependence on
foreign oil, and produced fewer greenhouse gas emissions while saving consumers money at the
pump according to the executive director at the Minnesota Bio-Fuels Association, Tim Rudnicki.
According to the Minnesota Corn Growers Association, 2014 marks a record for corn production
where corn crop is projected to be a record 14 billion bushels. This, they add, is more than
enough to meet their food, fiber and fuel needs. Prices of corn are also falling and are currently
priced similarly to the prices seen when the RFS was implemented in 2007. Currently, Minnesota
is working to combat a rollback, proposed by the Environmental Protection Agency (EPA), on
the current RFS. The proposed rollback calls for a reduction in the statutory level requirement by
the RFS for 2014. Minnesota estimates a loss in $610 million due to decreased ethanol
production. The state is currently polling for amendment before the 27
th
of January to avoid the
trade-off.
Kansas and Louisana state legislators enacted incremental strategies to achieve the target
mandate. An incremental RFS began in Kansas with a 10 percent renewable fuel mandate in the
year 2009 which, at a slower pace, will essentially require fuel content to have 25 percent
renewable composition. The Ethanol Use Standard enacted by the state legislature of Louisiana
requires refineries to comprise 2 percent of the states total gasoline sales as ethanol within six
months of ethanol production before the mandate is to take effect. Similarly, Montanas Ethanol
Use Standard is determined to take effect once 40 million gallons of ethanol can be produced
annually within the state after three months. Ambitious as these goals may be, it sends out red
flags for farmers producing in these states. Louisiana for example, has also included in the
Ethanol Use Standard that fuel must also be produced from state-produced feedstock (Voegele,
2010). In 2005 the average corn price per bushel was $1.96 but for the first ten months of 2013,
it cost an average of $6.51 per bushel. With increasing pushes for ethanol production due to the
recently expanded EPAct2005 to EISAct2007 mandate in combination with competition between
feedstock, the United States is seeing increasing rates of losses in production. An estimated 387
dairies going out of business with over 100 lost in 2012 alone reflect an inefficiency and
distortion of market (Tilman and Hill, 2007).
Although corn-based ethanol production has led to a third-degree path dependency
it is not irremediable nor is it unsustainable (Liebowitz 1995). It becomes apparent that the
RFS enacted by the Energy Independence and Security Act of 2007 as an extension of the
Energy Policy Act of 2005 has paved sensitive dependence on initial conditions for ethanol
resource management and has led many to believe it has led to an outcome that proves
inefficient. Current ethanol mandate, now being considered for amendment lowering the
statutory level from 14.4 billion gallons by 2015 to 13.01 billion gallons, may for some be a
sign of relief from centralized government intervention but, for others a huge loss in profits.
To avoid unrealistic standards for some states where factors like geography are major
players in production, Congress must modify the Renewable Fuel Standard in such a way
that shifts authority to the Environmental Protection Agency. In this way, the EPA can
ensure efficient changes in policy. For example, the Renewable Fuel Standard volumetric
mandates can be modified in a way that reflects more on current biofuel production realities
such as geography and state average climate (Agri-Pulse 2013). Ultimately, the absolute goal
of the RFS should be to incentivize and commercialize the production of ethanol and other
biofuels but in a way that relieves dependence on food-related feedstock for their
production.
Senator Dianne Feinstein mentions in a collaborative Corn Ethanol Mandate
Elimination Act of 2013 claims that, Ethanol is the only industry that benefits from a triple
crown of government intervention: its use is mandated by law, it is protected by tariffs, and
companies are paid by the federal government to use it (Feinstein 2013) Bold as this
statement may be, it provides a perspective on the current market failure in Ethanol policy
that, as previously stated, fails to some degree in articulating appropriate measures for
growth. Corn-based ethanol serves as a beacon of hope for other more efficient means of
energy but, alone, is unsustainable by nature. Dependence on corn ethanol has recurrently
shown the United States that competition between two fundamental goals, sustainability
and efficiency, is by no means an easy feat. Whether or not governmental policy allows for a
natural market to develop for the ethanol industry, high prices of corn throughout the
United States may provide incentives for corrective action, rewarding supply expansion, a
shift to more efficient uses and develop alternatives that ultimately relieve corn as a
dependent factor in biofuel production.