The politics of ethanol outshine its costs

Despite higher food prices and environmental damage, it's warmly embraced in Congress.

With gasoline near $3 a gallon, climate concerns rising, and an election season in full swing, politicians are eager to tell constituents that they're doing something to help at the gas pump.

Enter ethanol – or, more specifically, a plan in Congress to mandate that US gasoline refiners add a minimum of 36 billion gallons of ethanol to the nation's gasoline supply – up from the 7.5 billion gallons currently mandated by 2012.

Ethanol's popularity comes despite charges from environmentalists, livestock farmers, and opponents of subsidies that the move won't meet energy goals and may damage the environment as food prices soar. Energy-security experts say the measure also falls short on a key goal: weaning America off foreign oil.

Boosting ethanol production is the political equivalent of motherhood and apple pie these days. Politicians on both sides of the aisle as well as presidential candidates eager to do well in Iowa, the nation's No. 1 ethanol-producing state, are behind the measure, unglamorously named the "Renewable Fuels Standard." The RFS, part of the energy bill in the Senate, is so popular that it may be enough to ram through energy legislation this year, despite bitter disagreements over other parts of the bills.

"Quite a few folks around here think the biofuels title alone can carry the entire energy bill," says Bill Wicker, a Democratic staff aide for the Senate Committee on Energy and Natural Resources. "Biofuels are not a red-state, blue-state issue."

The energy bill faces the threat of a presidential veto, but if RFS does become law, it would provide a huge boost to the ethanol industry. The measure would create a demand for about 36 billion gallons of ethanol by 2022, or about 15 percent of US gasoline consumption, nearly a fivefold increase from the target under the current law. It could also save the industry from an acute glut.

Evidence of an ethanol glut had been growing this year with ethanol prices falling dramatically until they rebounded a bit last month. Several recently announced ethanol plants are on hold, experts say.

"This new RFS is simply vital for the industry," says Tom Koehler, vice president for public policy of Pacific Ethanol, Inc., a manufacturer in Sacramento, Calif.

Among its advantages: Ethanol fuel can create fewer greenhouse-gas emissions than gasoline and it's made from corn, a US-made renewable resource, instead of nonrenewable oil, which increasingly comes from abroad.

Nevertheless, many critics say that boosting corn-based ethanol alone is wrongheaded. For example, energy security is a key driver of the RFS. But the ethanol measure falls short, says Anne Korin, chairman of the Set America Free Coalition, a Washington-based energy security advocacy group.

"You're not going to get real change by specifying a fuel level in the market, as this energy bill does," she says. "We have to make sure cars in this country can burn a variety of fuels so oil has some competition."

Boosting corn-ethanol production "could change current irrigation practices and greatly increase pressure on water resources," the National Research Council concluded in a study released last month.

In a letter to Speaker of the House Nancy Pelosi last month, 28 environmental groups decried the RFS saying it would "lead to substantial environmental damage and a system of biofuels production that will not benefit family farmers ... will not promote sustainable agriculture and will not mitigate global climate change."

Much of the criticism targets today's corn-based variety. But if companies can figure out inexpensive ways to turn other biomass into ethanol, then the new fuel could create an environmentally friendlier alternative to fossil fuels. The new RFS would cap corn-based ethanol incentives at 15 billion gallons by 2015 – the remaining 21 billion gallons would be "advanced biofuels," primarily ethanol made from switch grass and other materials.

"It all depends on how you make it," says Nathanael Greene, a biofuels analyst at the Natural Resources Defense Council in New York. "We need tough performance standards in this bill – and I think we have a good chance of getting them."

Right now, he says, the primary RFS requirement is a 20 percent reduction in greenhouse emissions – not enough to curb climate change very much. But congressional leaders are said to be considering a required 50 percent cut in greenhouse emissions.

Such a reduction would not come cheaply. Already, the federal government pays 51 cents to oil companies for every gallon of ethanol they blend into gasoline at a cost of about $6 billion annually, according to a new study by Earth Track, a Boston-based energy-consulting firm. That cost will rise to $14 billion by 2014 under current law, the study says. With the new RFS, those costs would leap "tens of billions per year above these levels."

Industry experts dispute those amounts but say such a subsidy is necessary to unhook the US from imported oil. "If you compare the ethanol subsidy with current transportation and oil system subsidies it pales by comparison," says Mr. Koehler.

To get the energy bill passed, congressional leaders are trying to craft a bill attractive enough to farm-state Republicans to avoid a filibuster and perhaps override a presidential veto – while not losing support from those worried that ethanol is too costly given its limited environmental and energy security gains.

Despite its detractors, the political momentum of the biofuels provision may hold sway, some observers say.