Rethinking U.S. Biofuel Policy

Corn unloaded from truck to begin the process of converting into ethanol at the Lincoln Energy Plant in Iowa

Some policymakers praise biofuels as a way to reduce dependence on foreign oil and cut the greenhouse gases (GHGs) responsible for climate change. However, not all biofuels are able to accomplish these things: success ultimately depends on the choice of feedstocks to produce the biofuel.

In the United States, the dominant biofuel is ethanol made from corn. So far, corn-based ethanol has not moved the United States closer to using less foreign oil or reducing greenhouse gases¹—even though about half of the corn grown in the United States is now used to produce ethanol.²

A 2011 report by the International Energy Agency argues that by 2050, more than a quarter of the world’s transportation fuel could be biofuels.³ But realizing this potential will require much greater support for “advanced biofuels”—something altogether different than from the corn-based ethanol produced in the United States. Advanced biofuels can be made from many types of materials, such as wood chips, grasses, waste, and even algae. The United States has the potential to produce abundant quantities of advanced biofuels,⁴ but this potential won’t be realized as long as corn dominates the biofuel sector.

The greatest deterrent to the development of advanced biofuels in the United States is current biofuel policies, which are tilted so heavily toward ethanol that they discourage research and development of advanced biofuel options. From 2005-2011, taxpayers paid for more than $30 billion in subsidies for corn-based ethanol. Most of this came in the form of tax credits to the oil industry to blend ethanol with gasoline—a nearly incomprehensible use of public resources since blenders did not need an incentive to use ethanol. Ethanol was already in use as an additive to gasoline—and, in fact, the only possible alternative additive had been phased out by 2006.⁵

In addition, Congress set renewable fuel standards in 2005 and 2007 mandating aggressive increases in biofuel consumption. Because most biofuels produced in the United States are corn-based ethanol, the standards only reinforced ethanol’s domination of the renewable fuels market.

Finally, an import tariff on ethanol protects U.S. producers from foreign competitors—most notably Brazil, the other major ethanol producer. In Brazil, ethanol is produced with sugarcane.⁶ “The presence of the tariff,” writes Christopher Knittel of the Massachusetts Institute of Technology, “strongly suggest[s] that the main motivation behind ethanol-related policies is likely to protect farmer profits, rather than reduce GHGs or our dependence on foreign oil.”⁷ Thanks to the triple incentive of subsidies, a production mandate, and a protective tariff, the corn-based ethanol industry has grown so much that the United States is now a net exporter of ethanol.

How does ethanol affect hungry people? Corn-based ethanol is one factor in the sharp rise in global grain prices that plunged more than 100 million additional people into hunger in 2008 and tens of millions more in 2011. In an effort to rebut the argument that ethanol displaces corn that could be used for food,⁸ the ethanol industry frequently points out that it can produce ethanol and feed grain together in the same manufacturing process. This technology does exist, but ethanol is not off the hook as a contributor to global hunger. Since 2005, when the biofuel policies discussed above were adopted, the price of corn has been hitched to the price of crude oil. As crude prices rise, so does demand for ethanol. In other words, as world oil prices rise, so do corn prices. Figure 1.6 illustrates this relationship. Historically, oil has been a much more volatile commodity than grain.⁹ Not any longer, it appears.

One of the U.S. motivations for expanding corn-based ethanol was the hope that it would lead to energy independence and increase national security. But in light of ethanol’s contribution to food-price volatility, and to the political and economic instability that accompany it, efforts to replace oil with corn through biofuel policies threaten to replace one national security threat with another.