How to have fun with ethanol

When an American company processes Brazilian ethanol in an El Salvadoran plant, how many tax loopholes is it jumping through? And how many U.S. politicians are going to feign outrage?

Published September 23, 2004 7:30PM (EDT)

"I hate talking about ethanol," says the Sierra Club's Dan Becker, who makes his living talking about ethanol. It's not so much that he's appalled by the hypocrisy surrounding the "green fuel," although he is. It's that while the product's benefits are marginal, there are still just enough of them to make it difficult to persuade people that public resources might be better spent elsewhere.

Ethanol "saves energy, but it also takes an enormous amount of energy to produce it," says Becker, director of the environmental group's energy program. "And while it reduces some pollutants, such as carbon monoxide, it increases others, such as smog."

Nevertheless, to eke out those marginal benefits, federal and state governments have over the past couple of decades spent many billions of dollars to create, maintain and protect the growing ethanol industry, thus producing a new market for U.S. corn growers and their agribusiness benefactors. Midwestern legislators swear fealty to the ethanol industry every time they run for office. It's a great election-year issue for politicians of both parties -- including both presidential candidates -- who want to pick up votes in crucial corn-belt swing states. Partly because ethanol's benefits are just attractive enough to make it salable as an alternative energy source, it's the perfect boondoggle -- one with nearly zero political downside.

But a boondoggle it is. Just look at the most recent case: Agribusiness giant Cargill announces plans to open a tiny ethanol plant in El Salvador, and suddenly Midwestern lawmakers are scrambling to propose laws designed to stop the corporation in its tracks, citing the need to further protect the domestic ethanol market. Their frenzied reaction highlights once again how, when it comes to ethanol, lawmakers from both parties are eager to make nice with each other to keep federal dollars flowing to prop up a dubious product that few people want. The result of all this finagling is a whole network of conflicting and contradictory rules and incentives governing the ethanol market both domestically and internationally -- and oodles of special-interest campaign contributions for the politicians concerned. Many ethanol critics say that if the government is going to support energy alternatives and manipulate markets, its resources would be better spent on other, more worthy initiatives. Wind and solar power, say. Or conservation measures.

Cargill's plan could yield cheaper, more plentiful ethanol. So, by opposing it, lawmakers are tacitly admitting that they are less interested in ethanol's supposed benefits -- that it reduces greenhouse gases and curtails our dependence on Mideast oil -- than they are in preserving their favorite source of political pork.

Ethanol is a fuel additive derived from plants, most often in the form of alcohol distilled from corn. In other words, it is moonshine. Most ethanol is blended with gasoline to produce "gasohol," which is usually made up of 90 percent gasoline and 10 percent ethanol. Most of it is sold in states and cities where its use is mandated ostensibly to address pollution concerns, though more is being sold in coastal states that are switching away from water-polluting MTBE, an erstwhile ethanol rival. It is pricier than gasoline, so the only way most people will buy it is if they are forced to.

Since the energy crisis of the early 1970s, ethanol has been promoted as an alternative to petroleum and as a "green fuel." The industry has received billions of dollars in state and federal largesse over the years, in the form of subsidies, tax breaks, import barriers, and mandated production.

Besides playing up the product's energy-savings and environmental benefits, legislators have sold ethanol to the public as "helping America's farmers" by creating and protecting a huge new market for corn. But while farmers get higher prices for their corn, most of the direct government benefits don't go to them -- they go to the companies that convert corn into ethanol. Chief among them is Archer Daniels Midland, a company that nearly imploded in the '90s amid a price-fixing scandal. ADM gave $1.1 million in soft money donations to Republicans in the 2002 election cycle, according to the Center for Responsive Politics. Democrats got $624,000.

The irony in the Cargill case is that the government's own market manipulations are what motivated the company to go to El Salvador in the first place. El Salvador is part of the Caribbean Basin Initiative (CBI), a set of trade laws passed by Congress in the 1980s to help the struggling small economies of Central American countries. As a result, El Salvador is exempt from the 54-cent-per-gallon tariff that is slapped on most imported ethanol.

So, by building the plant there, Cargill will get not only the usual 52-cents-per-gallon break that domestic ethanol producers get on federal fuel taxes, but it also gets to skirt the import tariff that was sold as an "offset" to the tax break. To make matters even more confused, the ethanol Cargill will import from El Salvador is actually from Brazil, the world's largest ethanol producer, and thus would normally be subject to the import tariff. Cargill's plan is to ship about 60 million gallons of Brazilian ethanol a year to the El Salvador plant just to remove the water in a quick final step before shipment to U.S. and world markets. And in the final layer of irony, the plant itself will be tiny, employing only about 40 workers, so the original purpose of the CBI trade laws is being subverted as well.

Within weeks after a Reuters report revealed the plans of notoriously secretive Cargill in May, lawmakers signaled their intentions to legislate the plant away, or at least make things more difficult for Cargill, the largest private company in the world and the third-largest ethanol processor.

South Dakotan Senate Minority Leader Tom Daschle introduced a bill in August that would bar all imported ethanol from counting toward compliance with proposed nationwide ethanol mandates. Those mandates, it should be noted, are mostly Daschle's idea. As part of the seemingly endless debate over enacting a federal energy bill, Daschle and his allies want to force refiners to add enough ethanol and biodiesel fuel to their products to increase domestic production to 5 billion gallons a year by 2012. Production now is at 3.3 billion gallons, up from 2.81 billion last year. Republicans Richard Lugar of Indiana and Chuck Hagel of Nebraska joined Democrat Ben Nelson of Nebraska to sign on to the bill.

Not to be outdone, Republican Sen. Chuck Grassley of Iowa introduced his own bill, which would limit the amount of ethanol allowed to enter the country duty-free under the CBI unless it is made from scratch within CBI countries.

"We've fought hard to put in place federal incentives to boost domestic ethanol production," Daschle said in a statement. "And it is inconceivable to me that we would encourage ethanol imports, particularly at this time when our country most needs this domestic energy source." The flaw in this logic is that encouraging imports, or at least not discouraging them, would increase the amount, and lower the price, of ethanol -- at a time when he says our country "most needs" it. If we need it, what's the difference whether it's produced domestically or imported? It matters only to agribusiness and the farm lobby. A Daschle spokesman, employing the hot-button buzzword of the moment, characterized the bill as a way to prevent the "outsourcing" of ethanol production.

Undaunted by all of this legislative maneuvering, Cargill announced earlier this month that it will go ahead with the plant in partnership with two companies, one Brazilian and one Salvadoran.

Grassley's bill addresses a real concern, even if that concern is not the chief reason he introduced it. There's no question that Cargill's scheme is an end-around, a maneuver designed not only to let the company pass through a trade-law loophole, but to take full advantage of the spike in demand that will come should Daschle's mandates provision pass. Cargill spokesman Bill Brady admits as much. "The government makes the rules, and we play by the rules," he said. Employing a football analogy, he added, "If there were no rule against holding, would you hold?"

Grassley wants to push Cargill back half the distance to the goal line, and then some. His bill would apply the usual import duty to Cargill's plant, eliminating one of the chief benefits of building it, and others like it. "It doesn't make sense for us to subsidize the Brazilian ethanol industry," said a Grassley aide. Well, sure. Subsidizing the American ethanol industry is pricey enough.

Still, the CBI was not created to help giant American companies skirt import duties, but to encourage development in struggling Third World nations. "The core purpose of the CBI is to enable small economies to create employment they otherwise would not be able to create," said the Grassley aide, who asked not to be named. And while the few dozen workers at Cargill's plant will no doubt appreciate their jobs, it's not as if El Salvador is going emerge as a player in world energy markets thanks to Cargill.

Cargill -- a Minnesota company with interests at every level of agribusiness from the cornfields of Iowa to the corn pits of Chicago's futures exchanges, and from farm services to financial instruments -- is one of the biggest purchasers of American farm products. So it may seem surprising that the farm lobby and Midwestern legislators are so publicly direct and scathing in their attacks. Perhaps it has something to do with the fact that Cargill gave very little soft money -- just $600 total, in 2002 (all to the GOP) according to the Center for Responsive Politics. You seldom hear such criticism of Archer Daniels Midland, a Cargill rival, a huge political backer of both parties, and a big client of agribusiness lobbyists. Another reason is that -- partly because of its intense desire for secrecy, partly to distance itself from the rest of the scandal-plagued agribusiness industry -- Cargill often goes it alone, and plays by its own rules.

"Their support [of the industry] is often questioned," said one trade-group executive, who asked not to be named. When ethanol mandates came before Congress three years ago, "they gave us no support." And, perhaps worst of all in the eyes of the farm lobby, "cheap corn is all they're concerned about."

That a buyer of corn should be chastised for wanting corn prices to be low can only happen in an industry run not by private enterprise, but by a vast complex of lobbyists, legislators and trade groups -- where politics, not economics, determines how much of a product is produced and purchased. This state of affairs has long ruled American agriculture, of course. But it is particularly conspicuous in ethanol, where the politics of agriculture meet the politics of energy to create a vortex of competing interests and shifting alliances that have little to do with serving the public good.

According to several observers, neither Daschle's nor Grassley's bill seem to have much of a chance of passage this election year, though either or both could make it through in the next session. But both lawmakers -- and especially Daschle, who is facing a surprisingly tough Republican opponent -- are making as much political hay as they can out of Cargill's plant. The energy bill is also back before Congress, but it, too, will likely serve only as an excuse for speechifying this year.

Ethanol is playing a part in the presidential campaign, however. Both candidates make sure to mention it when they come to the corn belt. Bush has always supported it, which is not surprising given the $4.1 million in agribusiness money his campaign has collected over the past two years, according to the Center for Responsive Politics.

Kerry has collected $472,000 in agriculture money over the same period, and he says he favors ethanol. But his attitude is slightly more complicated. Some Republicans like to say Kerry "voted against ethanol five times," but a closer examination of their claims reveals that most of these votes were cast for procedural reasons, or on bills that had ethanol provisions as amendments. They weren't up or down votes on whether to subsidize ethanol -- except in one case. In 1994, Kerry voted against allowing the Environmental Protection Agency to require the use of ethanol in cities with polluted air. During the primaries this year, a Kerry spokesperson told a reporter that the only reason for the vote was that the provision favored ethanol over other fuel additives, chiefly MTBE.

Now that MTBE is being phased out, Kerry no longer has to worry about such complications. During a July visit to Minnesota, he declared that "we have the technology in the fields of Minnesota to make us energy independent of Mideast oil." Even the most stalwart proponents of ethanol don't usually go that far. Ethanol makes up about 1 percent of the motor fuel sold in the United States, and while the industry is growing fast, it is decades away from even appearing to compete head-to-head with fossil fuels. "We're not going to wean ourselves from oil anytime soon no matter how much ethanol we produce," says Pietro Nivola, director of governance studies for the Brookings Institution.

And while ethanol obviously brings some environmental benefits, its drawbacks make it hard to determine whether so much government support is worth the cost.

Ethanol reduces the amount of greenhouse gases in the atmosphere (the Argonne National Laboratory estimates that gasoline blended with 10 percent ethanol reduces greenhouse gases by 1 percent compared to pure gasoline), but because it evaporates so quickly, it also increases smog.

To grow the corn for ethanol, huge amounts of diesel fuel are used to cultivate cornfields, which are spread with polluting nitrogen fertilizer. And some critics point to what they say is a waste of good cropland. "The scarcest resource on the planet is land good enough to grow crops," says Dennis Avery of the Hudson Institute. "And the cropland it would take for ethanol to start to make a significant difference in energy consumption is just astronomical."

Lots of energy, mostly from fossil fuels, is needed to run ethanol processing plants. A 1995 study by the Agriculture Department concluded that ethanol yields 34 percent more energy than it takes to produce it. Other, smaller studies vary widely, from about a 10 percent gain to nearly 50 percent. It's difficult to come up with a solid number because of the wide variations in farming and production techniques. It's generally agreed, though, that production efficiency has been steadily improving.

Even so, given the billions of dollars of taxpayer money going to prop up ethanol, the money might be better spent elsewhere, says the Sierra Club's Becker. "If the American people were given a chance to decide how to spend that money," he said, "we'd have a much better environment and would have more energy independence." Many people would rather see money spent on wind and solar power, or on fuel-efficiency efforts, Becker said. "Making all our cars twice as energy efficient would take billions of dollars, but instead we're spending billions of dollars on ethanol."

By Dan Mitchell

Dan Mitchell is a Minneapolis journalist who writes about business, politics and culture.

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