Ethanol Standards: Why Federal Policy Is Crazy

by Harry de Gorter and David R. Just

Harry de Gorter and David R. Just, economists in the Department of Applied Economics and Management at Cornell University, are authors of an upcoming Cato Institute study on sustainability standards for biofuel production.

Added to cato.org on June 23, 2009

This article appeared on cato.org on June 23, 2009.

Farm state Democrats are threatening to vote against climate change legislation unless the EPA excludes emissions generated by the indirect changes in land-use that follow from ethanol subsidies in their calculation of a "sustainability standard." This standard requires ethanol to emit at least 20 percent less CO2 relative to gasoline as a condition for federal mandates and subsidies. While ethanol subsidies as a general matter are not a good idea, these legislators are right: The EPA standards at issue make no sense and should be scrapped.

Ethanol is sustainable by definition. The CO2 sequestered by growing corn is exactly offset by the CO2 emissions that follow from burning the fuel in a car. The same observation applies to, say, drinking bourbon made from corn.

Are CO2 emissions due to operating an automobile any worse than emissions due to digestion? The only difference is that ethanol can replace gasoline—bourbon cannot. Hence, a logical sustainability standard would be tougher on bourbon and all other products made from corn —products that can negatively impact health, like beef, bacon, butter, Buffalo wings etc. – and a lot easier on ethanol which is more greenhouse-friendly than other corn-based products and saves lives by powering ambulances to hospitals.

The EPA's sustainability standard is based on "life-cycle accounting" (LCA), a "well to wheel" measure of greenhouse gas emissions in the production of gasoline and a "field to fuel tank" measure for ethanol production. While attractive in theory, LCA fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas and land previously used for soybean cultivation), the "dirtier" inputs (e.g., coal and land previously dedicated to rainforests) that might otherwise have been used will simply be used by other producers to make products not covered by the sustainability standard.

In short, sustainability standards reshuffle who is using what inputs with no net reduction in national emissions. LCA measures are therefore misleading and may not measure the actual greenhouse gas emissions saved by ethanol production.

Rather than try to get LCA right, the entire exercise should be scuttled altogether. The difficulties associated with a sensible calculation are simply too great.

LCA assumes, for instance, that ethanol will replace gasoline, but it may actually replace coal or other energy sources, especially since oil supply is generally thought of as "finite" while coal is considered "unlimited in supply." This is not simply a matter of theory. In developing countries like Brazil, electricity is generated by harnessing leftover sugar cane, thereby potentially replacing coal-based electricity. It is also possible for biofuels to replace wood currently used for home cooking and heating, both of which impose huge health and environmental costs in developing countries. The upshot is that LCA will almost certainly undercount the greenhouse gas emissions that are "saved" by ethanol as well as other problematic air emissions.

Nor is LCA any easier when we apply it to the oil sector. The direct and indirect effects of oil pollution in the Ecuadorian jungle, for instance, would have to be measured, as would the environmental impacts of site specific drilling everywhere else on the globe.

To make matters worse, the argument over sustainability standards diverts attention from the contradictory and wasteful stew of federal ethanol policies – import tariffs, tax credits, mandates and production subsidies – which exist whether ethanol is sustainable or not. Our research shows that these policies generate tens of billions of dollars per annum of economic inefficiencies. Ensuring that ethanol is "sustainable" does not make those costs disappear. To just take one example, combining a tax credit for ethanol with a binding mandate requiring a minimum level of consumption will subsidize gasoline consumption instead of ethanol consumption, resulting in an increase in CO2 emissions, traffic congestion, and dependence on foreign oil.

Sustainability standards for ethanol make no sense. If we want to tackle greenhouse gas emissions, the most efficient means of doing so it to impose a carbon tax (explicitly through the tax code or implicitly with a cap & trade emissions program) on oil and natural gas at the refinery, coal at the plant using the coal, and land at time of conversion into the production of biofuels, bourbon, shopping malls, etc. That covers all of the relevant sectors of the economy in a fair and efficient manner. "Fair" and "efficient," however, are not words one would use to describe sustainability standards for ethanol.