Tuesday, March 11, 2008

Ethanol and subprime...

We're getting some strange arguments in the rising tide of resistance to food inflation and its perceived cause - soaring commodity prices.
WHAT DO ethanol and the subprime mortgage meltdown have in common? Each is a good reminder of that most powerful of unwritten decrees, the Law of Unintended Consequences - and of the all-too-frequent tendency of solutions imposed by the state to exacerbate the harms they were meant to solve.
more stories like this

* CEOs defend their high pay on Hill
* Banks face "systemic margin call," $325 billion hit: JPM
* AG charges mortgage broker with fraud
* College loans see subprime fallout
* Defaults soar on auto loans in pattern likened to mortgage crisis
* Take ethanol, the much-hyped biofuel made (primarily) from corn. Ethanol has been touted as a weapon in the fashionable crusade against climate change, because when mixed with gasoline, it modestly reduces emissions of carbon dioxide. Reasoning that if a little ethanol is good, a lot must be better, Congress and the Bush administration recently mandated a sextupling of ethanol production, from the 6 billion gallons produced last year to 36 billion by 2022.

But now comes word that expanding ethanol use is likely to mean not less CO2 in the atmosphere, but more. Instead of reducing greenhouse gas emissions from gasoline by 20 percent - the estimate Congress relied on in requiring the huge increase in production - ethanol use will cause such emissions to nearly double over the next 30 years.

The problem, laid out in two new studies in the journal Science, is that it takes a lot of land to grow biofuel feedstocks such as corn, and as forests or grasslands are cleared for crops, large amounts of CO2 are released. Diverting land in this fashion also eliminates "carbon sinks," which absorb atmospheric CO2. Bottom line: The government's ethanol mandate will generate a "carbon debt" that will take decades, maybe centuries, to pay off.

Actually, that's not quite the bottom line. Jacking up ethanol production causes other problems, too. Deforestation. Loss of biodiversity. Depletion of aquifers. More ethanol even means more hunger: As more of the US corn crop goes for ethanol, the price of corn has been soaring, a calamity for Third World countries in which corn is a major dietary staple.

Senator Charles Grassley of Iowa bloviates that "everything about ethanol is good, good, good," but it plainly isn't, isn't, isn't. The fate of ethanol, including how much of it is produced, should be determined by the decentralized process of free exchange - by the voluntary interactions of countless consumers and producers, buyers and sellers, each acting according to his best judgment and in his own best interest. Instead, Congress and the president, convinced as always that they know best, imposed a single, inflexible, ham-fisted directive from above. The result is that the carbon dioxide they aimed to reduce will be increased, and many people will suffer unnecessary misfortune. [More]
I am still relatively sanguine about the threat of rolling back mandates (all bets are off if we fumble around and grow a short crop, however). But expanding them to accommodate new plant output won't be a walk in the park like the last few times. And as the dollar spirals down, export demand will continue to keep corn prices close to "no-profit" territory for many ethanol producers.

I think the political push (and we all want a political - not economic - answer, don't we?) will be more successful to raise the blend ratio to E-20.


Anonymous said...

So John,

Will our old buggies be able to run efficiently on E-20 without any modification and will this reduce the price at the pump due to less gas usage?

Anonymous said...

Rich form Minnesota
yes and yes tests at Mankato Minnesota and North Dakota have acturally shown an increase in MPG at the 20%level. Damage no. Many of us in Minnesota have "blended" E 85 with our 10% MANDATE ethonal and have not had problems.From my experience a 20% to 30%level would be ideal.