Ethanol's a Big Scam, and Bush Has Fallen for It

In his State of the Union address, George W. Bush called for an intense effort to develop more efficient alternative fuel sources.

"We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks or switch grass," the president said. "Our goal is to make this new kind of ethanol practical and competitive within six years."

Bush should have known better. In a capital city that is full of shameless political scams, ethanol is perhaps the most egregious. There has probably never been a specific topic around which so much disinformation is spread. Ethanol lowers our reliance on fossil fuels! Ethanol helps clean the environment! Ethanol will save the family farm!

Such sound bites work wonders when it comes to raising money. And the amount involved is mind-boggling. The federal government subsidizes ethanol producers with a tax credit of 51 cents per gallon of fuel ethanol; those subsidies will total about $1.4 billion this year.

Corn Money

The Energy Department and the Agriculture Department spend tens of millions of dollars every year on biomass-based energy research and development. This is in addition to the billions of dollars--more than $4 billion in 2004--the U.S. provides in subsidies for the production of corn, from which most domestically produced ethanol is derived.

If you look at the facts, the spending makes no sense whatsoever.

Consider how ethanol is produced. Corn is grown, harvested, and delivered to an ethanol plant. There the corn is finely ground and mixed with water. After fermentation, a mixture that is about 8 percent ethanol must be repeatedly distilled until it is 99.5 percent pure ethanol.

Growing and harvesting the corn, and heating and reheating the fermented corn to produce ethanol of a high enough quality to replace some of the gasoline in your car requires an enormous amount of energy. How much?

Adding It Up

A recent careful study by Cornell University's David Pimentel and the University of California at Berkeley's Tad Patzek added up all the energy consumption that goes into ethanol production. They took account of the energy it takes to build and run tractors. They added in the energy embodied in the other inputs and irrigation. They parsed out how much is used at the ethanol plant.

Putting it all together, they found that it takes 29 percent more energy to make ethanol from corn than is contained in the ethanol itself.

It's not that corn is a bad source for ethanol. The other sources mentioned by the president look even worse. Wood biomass takes 57 percent more energy to produce than it contains. Switch grass takes about 50 percent more.

Ethanol is just a highly uneconomical product. Some other authors have disputed these findings, but they invariably come up with more favorable calculations by excluding some of the costs.

Absurd Waste

Indeed, no matter how expensive fossil fuels become, ethanol will never be economical because it takes so much fossil fuel to produce. It might be possible that someday technological processes will emerge that make production of ethanol less reliant on fossil fuels, but the billions in subsidies to this point have left us with a process that is still a disgrace and an absurd waste of energy and taxpayers' money.

At least ethanol reduces pollution, right? Maybe the subsidies are worthwhile because they will buy us a cleaner environment.

Guess again. First, corn production, according to Pimentel and Patzek, "uses more herbicides and insecticides than any other crop produced in the U.S."

And the Environmental Protection Agency has cited ethanol plants themselves for air pollution. In a letter to the industry's trade group, the EPA noted that pollution was a problem in "most, if not all, ethanol facilities." These plants produce large quantities of waste water as well.

Ethanol Cash

Ethanol itself contributes to air pollution. Cars emit more air pollution when they run on gasoline containing ethanol than they do when running on gasoline alone. Our environment would be greener if we stopped relying on ethanol.

The arguments against ethanol are so persuasive you have to ask yourself: Why does Congress keep throwing money at it?

The answer appears to be that elected officials from corn- growing states such as Iowa and Illinois see it as a cash cow for their constituents.

The ethanol business is a pretty good source of cash for the lawmakers too. The political action committee of Archer Daniels Midland Co., the world's largest producer of corn-based ethanol fuel, gave $69,000 to federal candidates for the 2004 elections, according to the Center for Responsive Politics.

In 2002, before such unlimited "soft money" donations were outlawed, ADM gave $1.8 million to political parties. Its political action committee gave close to $200,000 to individual campaigns and committees.

ADM spread the money around wisely that year, to beneficiaries ranging from Republican House Speaker Dennis Hastert of Illinois to Democratic Senator Tom Harkin from Iowa. Beneficiaries in 2004 included Hastert as well as Democratic Senator Kent Conrad of North Dakota.

Where's the Race?

Let's summarize the economics this way. Exxon Mobil Corp. had $36 billion in net income last year. If an alternative fuel source could be developed that would compete for that business, the potential rewards would be enormous. There would be a race to get there first, and firms would be lining up to do ethanol research. We wouldn't need a subsidy.

But even with decades of federal subsidies, private companies still haven't developed an economical ethanol, and public sector progress is minimal.

Bush's speech holds out hope that finally, after all those wasted billions, we are just six years away from a quality product. But it seems unlikely that the magic formula will soon be discovered. Folks have been distilling things for years. How much technical progress could the process possibly undergo?

The fact is, ethanol is a scam that allows farm states to extract resources from everybody else and pretend to be virtuous while doing so. We would all be better off if Congress just wrote these states a check with no strings attached. At least then we wouldn't be wasting all that energy.

Kevin A. Hassett is a resident scholar and the director of economic policy studies at AEI.

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About the Author


Kevin A.
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.

    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

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