By Stanford L. Levin
Farmers continue to be greatly harmed by the president’s ill-conceived trade war with China. To offset some of this damage, the administration first implemented direct subsidy payments to farmers. Following that, the administration has recently proposed boosting ethanol production from corn, which would boost corn prices and, presumably, aid corn farmers, but at the same time would increase gasoline prices.
This recent ethanol proposal would increase the amount of ethanol that refiners must blend into gasoline. Earlier this year the ban on E15 fuel use during the summer was lifted in spite of the adverse public health consequences of burning ethanol in sunny weather, the reason for the initial ban. The new ethanol target is 15 billion gallons for 2020.
This is bad policy, and it needs to be reversed.
The administration has made these proposals to try to offset some of the harm that has come to corn farmers as a result of President Donald Trump’s trade war with China. The link between the trade dispute, and particularly the drop in Chinese purchases of U.S. corn and soybeans, and the boost in ethanol production is clear.
What has not been made clear is that the rest of us would pay for this mandate through higher gasoline prices and higher prices for other goods and services in order to provide money to those farmers hurt by the trade war. We have already paid for the previous subsidy through our taxes. This new ethanol policy would raise prices and would also be costly.
While mandating an increase in ethanol production may channel more money to corn farmers through higher corn prices, ethanol is more expensive than oil for gasoline, and it imposes costs on refiners who must blend the ethanol into gasoline. Evidence of the higher cost is the number of waivers that have been granted to small refiners for which blending ethanol is prohibitively expensive.
As a result, everyone who uses gasoline would pay more, and this increased cost would ripple through the economy, particularly in industries for which gasoline is a major cost. Many goods and services are delivered by truck, for example, and higher gasoline prices would increase transportation costs and, in the end, the prices for the goods and services that are delivered. While some farmers may benefit, increased ethanol production would be partially or fully offset by declines in other parts of the economy due to higher prices and reduced purchases.
Boosting the amount of ethanol in gasoline is also bad for the environment. Corn production is energy intensive, and ethanol must be transported by truck. Ethanol contains less energy per gallon than does oil, so more fuel is used, resulting in higher emissions. When burned, ethanol — more so than oil — reacts with sunlight to produce smog that endangers the health of everyone, especially people with lung ailments and asthma.
The combination of these effects would most likely leave the environment in worse shape than would burning oil. Ironically, the extra greenhouse gases from burning ethanol would contribute to global warming, and, as a result, it is farmers themselves who would suffer from unstable weather, flooding and droughts.
Furthermore, ethanol production drives up U.S. corn prices, and those increases spread to other countries. In the past, higher corn prices have been problematic for Mexico and Central American countries where corn is a major component of the diet. More ethanol production would simply cause more problems for our southern neighbors and may contribute to worsening international relations.
Attempting to use an ethanol mandate to fix the consequences of the trade war on farmers is counterproductive and bad policy. It would simply harm the environment, raise costs and leave us all worse off. Two bad policies do not result in a good policy but only double the harm.
Stanford L. Levin is emeritus professor of economics at Southern Illinois University Edwardsville. He has published and consulted widely on energy issues.