Biofuels in the United States: Controversy, Money & Politics

Chris Ferguson-Martin ECON-333H April 4, 2008

The recently acknowledged onset of global warming has spurred an

unprecedented level of discussion and debate as to how such a menacing

foe can be combated. Considering the well-publicized findings endorsed by

the Intergovernmental Panel on Climate Change (IPCC) that place

anthropogenic activities at the forefront of the problem, government officials

have been intensely pressed to find alternative solutions before the world

succumbs to the potentially disastrous effects of climate change (IPCC,

2007). Energy policy has now appropriately found itself as the primary

target. Nearly 50% of the carbon emissions produced in developed countries

comes from large industrial energy plants, such as oil refineries and coal-

burning power plants (Cunningham et al, 2004). One of the most prominent

solutions touted in North America has become the development of corn-

based ethanol and biofuels. And why not? North America is highly abundant

in the agricultural sector and the United States is world renowned for its

production and use of corn. Nothing seems more appropriate in the North

American context. Oil prices are outrageously high and ethanol can be used

as a direct substitute quite easily. American farmers are more than happy to

grow the corn as governments in the United States are infamous for their

hefty subsidization of agriculture. This combination has effectively made

ethanol all the rage in North American circles as an alternative, clean and

renewable energy resource.

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 This interest has incited quite a spell of controversy. Numerous

pundits, environmentalists and development agencies have made it quite

clear that corn-based ethanol is the wrong way to go. Many of the

advantages orated by the enthusiastic proponents of ethanol are considered

to be overstated and ignorant of the outweighing costs that ethanol

production will have on both the environment and human well being. Issues

such as a decline in global food production, soil erosion and deforestation are

all predicted products of this push for ethanol and are only some of the

problems associated with ethanol development. Some scholars even argue

that ethanol production and adoption will actually increase greenhouse gas

emissions rather than offset them.

The purpose of this essay is to critically evaluate the arguments for

and against corn-based ethanol production in North America as an effective

barrier to climate change. If the risks truly outweigh the benefits, then why

have both U.S. and Canadian federal governments so enthusiastically

endorsed the idea? Why is it that President George W. Bush, a man so

inclined towards the oil industry, has so earnestly promoted an option that it

clearly a substitute to oil? As the essay will explore in greater detail, much

of this apparent contradiction is the product of political strategy and

economic convenience, in which the United States is using ethanol as a

means to a revived protectionism.

Corn-Based Ethanol Development: A Step in the Wrong Direction?

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 The push for ethanol development in North America is fraught with

dangers that have experts in many disciplines of the social sciences

concerned. Environmentalists claim that while a shift to biofuels will lessen

our dependence on the more-pollutant, petroleum-based oil, the

environmental detriment from corn-based ethanol production, such as soil

degradation and deforestation, is far more significant. Economists fear that

an agricultural specialization in corn will drive up the food prices and

subsequently drive up the cost of living, while development specialists

foresee a decrease in the food supply and the exploitation of developing

countries like Mexico through the governing rules of trade outlined by

NAFTA. The following section provides an analysis of the broad range of

disciplinary issues entailed in corn-based ethanol production.

Environmental Costs

Corn-based ethanol production will come much at the expense of the

quality of soil in North America. Of the major U.S. crops currently grown, corn

is by far one of the most detrimental to the quality of the soil, an essential

ingredient to our ability to grow food. Large corn-producing regions, like the

United States’ Corn Belt, have an average level of soil loss up to five times

higher than the North American average. Huge levels of pesticides are also

used in the agricultural growth of corn, inputting chemicals like nitrogen and

phosphorus. Pesticides and soil erosion is a lethal combination as soil is no

longer able to absorb the chemicals and much of it runs off into groundwater

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sources (Pimentel, 2003). Two primary effects come of this. The

groundwater, which accounts for much of North America’s drinking water,

can easily become contaminated and lead to water quality scares as well as

harm aquatic species that are no longer able to obtain oxygen as easily.

Such a case exists in the “dead zone” of the Gulf of Mexico, an area of water

the size of New Jersey. The other main danger with this is the potential to

contribute to global warming and ozone depletion. Nitrogen fertilizers have a

tendency to form nitrous-oxide when merged with groundwater. Nitrous-

oxide is a greenhouse gas and is also a main factor in the depletion of the

ozone layer. The soil quality will further degrade as a push for corn ethanol

will gradually eliminate the growth of soybean, which is often rotated with

corn because of its production of nitrogen into the soil. This will require

additional fertilizers and could add further detriment to the quality of the

run-off (Runge & Senauer, 2007).

Deforestation is another primary environmental concern voiced by

opponents of ethanol production. The push for corn-based ethanol will

undoubtedly attract more and more corn farmers into the fray. As soil

becomes increasingly eroded, the demand for more fertile soil will grow.

Unfortunately, the most fertile soil that has yet to be exploited for human

use in North America lies beneath the many vast forests. The environmental

damage caused by deforestation can be immense as forests provide a home

for a wealth of wildlife. The loss of these forests results in the loss of

biodiversity and can lead to the extinction of numerous species. Perhaps

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more relevant to this essay’s context is the role forests play in climate

change. Trees and plants act as carbon sinks and absorb carbon-dioxide, one

of the main greenhouse gases, effectively lessening the effect of global

warming. Deforestation is argued to be one of the main contributors to

global warming. Although numerous environmental laws exist that protect

much of the forests in Canada and the United States, much of it is still up for

grabs and could easily be removed to make room for corn farms (Pimentel,

2003). Such a conclusion has come out of Brazil where demand for sugar

cane-based ethanol has led to the deforestation of the Amazon Rainforest to

make room for sugar cane plants (MSNBC, 2007).

Numerous scholars have also noted the potential for ethanol

production to actually contribute more to global warming than it will offset it.

Cornell University’s David Pimental calculated that the energy required to

actually produce ethanol from corn exceeds the level of energy that the

ethanol itself produces (2007). Much of the energy going into this production

comes from fossil fuels, so in the end more gases are being added to the

atmosphere than originally planned. Other studies have disputed Pimental’s

conclusions, stating that modern processing plants lessen the energy

requirements needed to produce ethanol (Graboski & McClelland, 2002).

That being said, the fact that one of the main purposes of ethanol adoption

(greenhouse gas mitigation) is questionable is cause for concern.

Economic Costs

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 Many economists and policymakers have long argued that the

widespread adoption of new energy sources will greatly hinder the economy

because the economy is so reliant on oil. But even ethanol, a substance that

is so similar to conventional oil in many of its uses has a variety of economic

costs. One of the first factors that come to mind is the set up of a completely

new infrastructure for ethanol. According to the Renewable Fuels

Association, 62 plants are currently under construction in the United States

and the 139 that are in operation are being expanded (2008). As one can

imagine, this is quite the costly multi-billion dollar venture. Another addition

to this infrastructure is the need to transport the ethanol. Because of the

tendency for ethanol to form a watery byproduct when mixed with natural

gas, it would be impossible for both substances to use the same existing

pipelines (Pimentel, 2003). The options would be the construction of a brand

new pipeline or to set up a massive network of transport trucks and ships.

Both options would be very expensive.

Economic concern is also present when the issue of harvesting the

corn itself. The United States is notorious for providing its agricultural

industry with massive subsidies, arguing that the subsidies are required to

keep the farmers profitable in light of volatile food prices. Anyone who has

taken an introductory course in microeconomics would be able to tell you

how inefficient this practice is, as it creates a massive amount of deadweight

loss. Although the government won’t admit it, the subsidization programs are

widely considered to be a political tactic in order to please rural voters. If

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ethanol production were to increase as much as the government wishes (up

to 35 billion gallons annually by 2017), it would require even more farming

and in turn even more subsidies (White House, 2007). Although the level of

economic inefficiency is disputable, it will surely increase past current levels

and the subsidies will cost the government billions of dollars.

Costs will also present themselves in the realm of actual ethanol

prices. The expectations of ethanol’s success have led to severe hikes in the

price of corn in the United States, making it more expensive to produce

ethanol. With the Bush administration calling for a substantial increase in

ethanol production over the next decade, it will require a considerable

increase in supply in order to meet the demand. But as statistics show, even

if the United States were to convert all of its corn production towards

ethanol, the towering demand wouldn’t be satisfied (Runge & Senauer,

2007). This would require the government to import from foreign producers;

most likely Brazil where ethanol from sugarcane is produced. But this is

where things would get fairly dicey. Unlike its free trade policy on imported

oil, the United States imposes a stiff 52-cents-per-gallon tariff on imported

ethanol in order to protect American ethanol producers from the cheaper

Brazilian producers (Runge & Senauer, 2007). If the United States continues

with such high tariffs and wishes to maintain its high demand for ethanol, the

American economy will have to be prepared to deal with even higher ethanol

prices.

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 One of the most dangerous and sometimes overlooked costs of corn-

based ethanol development will be the overall effect on world food prices. It

is popularly acknowledged that corn-based ethanol production will divert

farmers away from growing for food purposes. The growing prices of corn are

attracting farmers away from less profitable crops and in turn raising the

prices of those crops. For example, as farmers move away from producing

hops, a key ingredient in beer, breweries have been forced to increase their

prices (Hagenbaugh, 2007). Independent pizza places are also feeling the

heat as wheat prices increase. This hike in overall food prices will

undoubtedly affect many areas of peoples’ cost of living. But the greatest

impact may not come from the price increase of other crops, but from the

price increase of corn itself.

A heralded 2007 documentary film entitled King Corn followed two

college friends as they explored the corn industry in the United States. They

discovered that corn in the United States seems to play a part in almost

every facet of the American food industry. The huge soft drinks industry,

which is dominated by Coke and Pepsi, uses corn syrup as a key ingredient in

its sodas. The infamous fast-food industry uses more corn than any other

industry. Deep-fried French fries are cooked in corn-based vegetable oils;

burgers are made from corn-fed beef and chicken; even the much loved

dessert donuts are crammed full of corn starch. Imagine the impact on

consumers if prices skyrocketed in these industries and the effect it could

have on the overall economy as the cost of living increased. The price

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increase of corn has already had devastating effects in Mexico thanks to the

ethanol rush. Thanks to the North American Free Trade Agreement (NAFTA),

Mexico has had the benefit of getting cheap corn imports from the United

States. As corn prices have increased, the supply to Mexico has lessened

resulting in tortilla prices rising by 400%. In a country where tortillas are a

staple and incomes are not very strong, tens of thousands took to the streets

calling for government intervention to lower the prices (BBC, 2007). The

likelihood of such an uprising in the United States is not as high, but the

American influence on other less affluent countries could produce a similar

effect in those regions.

Social Costs

The social costs that may arise out of an unprecedented push for

ethanol production in the United States could have a domestic effect as well

as an influence on an international scale. The rush for ethanol production in

the United States will put corn farming on centre stage in the American

agricultural industry. If corn prices and ethanol prices rise as they are

expected to, there will be increased pressure for ethanol producers to lower

costs. One of the more popular forms of cost-cutting in the agricultural

industry has been the onset of industrial farming. This may very well be the

economically viable option for ethanol and corn producers. Unfortunately,

this will put many farms out of business. Industrialization of the farming

industry has led to a loss of the family farm in rural North America. It has

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already had a negative effect in rural areas, and to further this discontent

could severely damage the identity of rural America, especially if indirectly

caused by the federal government (Boss, 2001).

The social costs of food price increases seem to be limitless. As the

cost of living increases it becomes harder for people to survive. The United

States’ poverty-stricken population could face deep detriment as a result of

hiking food prices, which could cost the government a great deal in social

welfare costs. The potential for food shortages is also a prominent problem.

Higher food prices in a world where billions of people already have limited

access to food could be devastating. Critical food shortages already exist

throughout the world that have led to famines most notably in sub-Saharan

Africa. An ethical question must be posed to the proponents of ethanol in the

United States: Is it right to use food to fuel an economy rather than fuel

human beings?

The View from Above: The United States federal government as

ethanol proponents

In light of the many controversial issues pertaining to ethanol

development in the United States, the federal government sees the issue in

quite a different light. The U.S. federal budget recently announced funding of

$1.4 billion towards ethanol development, while the Canadian federal

government is right behind, setting aside 75% of its $2 billion funding to

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renewable energy over seven years towards ethanol subsidies (U.S.

Department of Energy). Considering they’re willing to throw around that kind

of money, the U.S. government appears fully confident with their information

to do so. The following is a summary of the U.S. and Canadian federal

governments’ formal reasoning for the push for ethanol.

Environmental Benefits

According to the United States Department of Energy (USDOE), the

primary environmental advantage of ethanol will be its role in lessening the

impact of climate change by replacing more pollutant conventional oils

(2008). They also add that total greenhouse gas emissions may be reduced

by as much as 52% with a switch away from conventional oil. Furthermore,

this reduction could be as high as 86% if using cellulosic sources, which

involves non-agricultural inputs such as woodchips and switchgrass.

Unfortunately, cellulosic-based ethanol is far from economically viable and is

merely a faraway dream at this point. The USDOE also notes the “naturally

biodegrade[able]” quality of ethanol, stating that it leaves no harmful

residues in soil or water. Nothing is said to the role of pesticides used in the

production of inputs like corn. The USDOE makes numerous references to the

potential for cellulosic ethanol as “tomorrow’s ethanol”, but nowhere is

relevant dates or successful demonstrations given. Natural Resources

Canada also gives oddly similar reasoning as the USDOE for their

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endorsement of ethanol, as both seem to compare ethanol to conventional

oil, but make no comparisons to other renewable energy sources (2006).

Economic and Social Benefits

According to some prominent agri-food economists, ethanol production

in the United States will have an impressive foray of economic benefits

(Shapouri, 2004). The first benefit noted is the potential for generation of

new demand for agricultural commodities and other biomass-feedstock.

Increased demand means higher prices and a higher quantity demanded,

which inevitably leads to more money within the U.S. economy and more

money going to U.S. farmers. Another benefit is job creation. As ethanol

production facilities continue to sprout up throughout rural America, jobs in

construction and the plants themselves will be created. In a study of the

overall effect of ethanol development in Missouri, Pierce, Horner & Milhollin

calculated that the current construction of operating plants in Missouri had

created 8518 jobs directly and indirectly throughout Missouri, as well as

adding $637 million to the U.S. economy and $390 million to Missouri’s

economy (2006). The study also estimated the effects on the U.S. economy

to create 18628 jobs and add $1.5 billion to the economy once production

increased to the levels recommended by the federal government.

Unfortunately, this study only accounts for the positive elements of the ripple

effects and does not take into account the aggregate loss of jobs or

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economic output that could occur through ethanol production. The Canadian

federal government has also recognizes the economic benefits of ethanol:

The development of a substantial ethanol industry in Canada

would not only reduce our dependence on imported oil…New

technologies to produce ethanol from plant fibres could help to

make ethanol cost-competitive with conventional fuels, leading

to further industry expansion. In addition, promising Canadian

technologies could lead to further economic growth opportunities

in related biotechnology fields. (NRC, 2006)

The Canadian federal government also notes the improvement in air quality

that will come through ethanol production.

Protectionism Revived: The Truth Behind the U.S. Ethanol Push

The United States’ enthusiastic push for ethanol production is

somewhat puzzling. Their evidence for investing in such technology makes

sense, but fails to acknowledge any of the overwhelming evidence against it.

Even if one were to give the benefit of any doubt to the United States, the

costs of ethanol production easily trump the benefits, especially when

compared to cleaner and less agriculturally intrusive renewable energy

sources. So why is the United States federal government so eager to ensure

that this technology is successful in the United States? Much of the reasoning

lies within the renewal of protectionism within the U.S. energy industry in

order to protect both its economic and political interests.

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 Contrary to its dominant status in the global oil sector during the early

20th century, the United States has now dropped to only the third largest oil

producing country in the world and imports more oil than any other country

(Energy Information Administration, 2006). As the world’s biggest consumer

of oil, a dependence on foreign imports has left the United States

economically vulnerable; a position that the world’s superpower does not

look favorably upon. In addition, the economic troubles currently

experienced by the United States have partially been blamed on high oil

prices prompting many to call for an independent, domestic fuel source. In

this context, ethanol would be quite fitting as an alternative fuel source.

Much of the United States’ historical power has come as a result its control

over oil resources, be it through domestic production or American oil

companies controlling foreign oil (Yergin, 1992). But as this trend has

lessened over the century, the risks to the United States’ economic

superiority have grown. A transition to ethanol specialization in the United

States would be much more convenient than some alternative sources like

wind or geothermal power because of ethanol’s unique ability to easily

satisfy many of the demands set out by an oil-dependent economy. Massive

industries like transportation and manufacturing, staples of the United States

economy, would not be adversely impacted by ethanol to the same degree

that a transition to say, hydrogen or solar fuels.

Although thoughts are mixed on whether or not the United States

would be able to domestically meet the ambitious demand for corn-based

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ethanol set out by the federal government, its wealth of corn would certainly

suffice to at least make it an ethanol superpower in the short run. This is

something the United States is desperate to hold onto. While the economies

of China and India are expected to surpass the United States in economic

size within decades, having established itself as one of the world’s prominent

producers of ethanol may very well pay off as global warming pressures

increase and these booming economies begin to shift towards more “green”

energy technology. India recently released the world’s cheapest commercial

automobile, the $2500 Tato Nano, which is expected to sell by the millions

considering India’s growing middle class of over 100 million people

(Rabinowitz, 2008). Hypothetically, these vehicles may eventually require

ethanol-mixed fuel and they will be highly dependent on ethanol-rich

countries like the United States to supply them with ethanol. This future

sounds reminiscent of the United States’ dominance over oil nearly a century

ago. It is not difficult to picture American policymakers salivating over such a

scenario.

The development of corn-based ethanol could also pose several

advantages to the United States’ ailing auto-industry. The large American

automakers (Ford, General Motors, Daimler-Chrysler) have been the industry

leaders in adopting ethanol-fueled vehicles, such as General Motors’ fleet of

“Flex-Fuel” and “E85” cars. The widespread adoption of corn-based ethanol

in the United States could prove highly utilizable to the American

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automakers industry which is having trouble finding a niche among the more

“green” automakers coming out of Japan, South Korea and Europe.

The economic ambitions of the United States account for only half of

the story behind their rapid push for corn-based ethanol development. Much

of it can be explained by the political advantages of pursuing such a

strategy.

In the United States, rural regions with specializations in the

agricultural industry make up a serious proportion of the voting base and

keeping them happy appears to be a popular trend in federal politics.

Already, the government contributes billions of dollars a year in farming

subsidies as a means of keeping the industry profitable, but more notably as

a way to keep these voters happy. This practice has been severely criticized

by both observant economists and nearly every other member of the WTO

who feel the subsidization process in the U.S. severely undermines their

domestic agricultural industries (Hewitt, 2000). Despite this international

opposition, the U.S. continues to press on with its policies. The development

of the ethanol industry in the U.S. would seemingly strengthen the bond

between farmers and the federal government, but concurrently limit its

international openness. In a simple term: protectionism.

The United States already shows signs of protectionism within the

ethanol industry, as it places heavy 52-cents-per-gallon tariffs on imported

ethanol. To their credit, the U.S. is following strict economic theory to

16
develop their ethanol industries which states that infant industries need to

be heavily tariffed in order to develop and be protected from cheaper foreign

products. Both the United States and Canada adopted protectionist

development policies during the industrial revolution as they built up their

domestic industrial sectors, eventually reducing the tariffs once development

had occurred (Fox & Shwedel, n.d.). But this logic still fails to explain why

controversy-laden corn-based ethanol is the industry of choice. Any new

energy industry in an economy needs some protection to develop, be it

ethanol or one of its renewable competitors. Apart from its benefits in the

current economic situation and the close connection with rural voters, the

push for ethanol is also influenced by the increasingly protectionist political

climate enveloping the United States.

The three remaining candidates running in the bid for Presidency from

the Democratic and Republican parties of the United States have all outlined

the need to protect domestic jobs. In an era of globalization and free trade,

the once powerful manufacturing sector in the United States has fell victim

to outsourcing and resulted in massive American job loss. In order to revive

the strength of the sickly industry, American policymakers will be forced to

adopt protectionist policies. This along with the constant rhetoric relating to

homeland security and immigration has created a very internalized

atmosphere in the United States, making a domestic push for ethanol all the

more viable.

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 The political ease of emphasizing ethanol’s “green” qualities has also

contributed to its push. It is highly marketable in the American political arena

because of its potential to reduce greenhouse gases while also allowing for

the continuation of normal transportation uses. Since global warming is now

the main environmental issue on the political docket, other environmental

issues (such as the costs of ethanol use) fall by the way side; reducing

greenhouse gas emissions appears to be all policymakers need to hear in

order to give it their approval. This is not all that surprising. If the

government is willing to sacrifice economic efficiency in the name of voter

support, then why not do the same to the environment?

Conclusion

The United States’ choice to invest billions of dollars into corn-based

ethanol has stemmed up a wealth of controversy because of its potential

environmental, economic and social costs. For the most part, these costs

appear to supersede the benefits being touted by the U.S. federal

government. Despite the widespread outcries against corn-based ethanol

development, the federal government continues to commend the terrific

possibilities offered by ethanol. It seems strange that they would choose

such a controversial path, especially with the potential offered by alternative

renewable energy sources like wind and solar. But in the context of a very

politically influenced United States, the mystery can be solved. With its

prosperous level of corn resources and economically vulnerable oil sector,

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ethanol can stabilize the American economy. Furthermore, ethanol’s

convenient gift of being easily assimilated into the oil-driven economy is

attractive. Ethanol’s most impressive influence is its replacement of oil as a

means of the United States reassuring itself as an economic and energy

superpower. The political climate of protectionism that exists within the

United States also makes ethanol development particularly attractive to

policymakers, especially in its connection to rural-based voters.

Unfortunately, these underlying causes may very well propel corn-based

ethanol production to success, despite the numerous and overwhelming

consequences it may have. The situation in the United States is a key

representation of the conflicting relationships that exist between politics,

environmentalism and development and could prove remarkably detrimental

in the long run.

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