ethanol

A good article by Philip Brasher on antibiotics in ethanol production ran in the Des Moines Register.  He notes that

Ethanol producers have long used antibiotics to control bacteria that can contaminate the fermentation process. 

Like the pervasive use of antibiotics in animal agriculture, this broad use is not such a good thing:

• Pencillan and viriginiamycin are used by many ethanol plants to prevent bacteria from contaminating fermentation tanks.  However, this is also a pathway for building drug-resistant bacteria -- especially when dried distillers grains from the process are sold as cattle feed, and those cattle then enter the human food chain.
• These two antibiotics are similar to drugs humans rely on to fight infectious disease. 
• Previous testing by FDA found antibiotics in more than half of the samples tested.

Some background on the issue of antibiotic resistence through the use in animals can be found here.  Replies by Dr. Tamar Barlam, as well as the Brasher article, note that there are generally readily available substitutes to the antibiotics currently being used.  These include other types of agents and better management of the production process and associated sanitation.  The challenge is that these alternatives may cost more, or require a higher level of worker training.  However, ignoring these issues and simply allowing ethanol producers to erode our commons of antibiotic resistance in return for a slightly lower production cost is a short-sighted subsidy indeed. 

Ag-system analyst and author Michael Pollen put it this way back in 2003:

Once-useful antibiotics are losing their power because we've squandered them, essentially, on animal agriculture. From an ecological point of view or biological point of view, it's absolute insanity. From an economic point of view, it's perfectly rational. Here's the cheap source of calories. We've got too many of them. Let's feed it to the cows.

Corn and ethanol markets may make little sense in terms of rationality, but they do provide never-ending entertainment in seeing the new ways people can exploit regulatory interventions for fun and profit.

Dried distillers' grains (DDGs) are a byproduct of US ethanol production increasingly used as a feed additive.  The product is the result of a tiered set of domestic subsidies -- to irrigation, corn production, and ethanol production.  There is lots of it looking for a home due to the subsidy-driven surge in US ethanol production.

One of these new homes is a growing export market in the Chinese livestock industry,  according to a recent article in BusinessWeek.  The main driver?  Not the inherent benefits of the product, but rather Chinese import quotas on US corn.  It would be interesting to know what federal trade program has made DDG export to Egyptian water buffalo economic as well.  E-mail me if you have the answer.

DDGs are not new to the world of subsidy arbitrage and public controversy.  Earlier sagas in the world of DDGs:

-In 2002, the IRS declared the stillage used to make DDGs a "solid waste" having no value, thereby allowing ethanol facilities galore to tap into hundreds of millions of dollars in lucrative tax-exempt bonds.

-In 2009, more evidence that everything goes somewhere pops up via antibiotic residues in the DDGs fed to cattle and (oops) ending up in the cows.  Not surprisingly, industry says they are safe.  FDA is doing more research; time will tell.

Subsidy recipients rarely admit their government largesse is a subsidy rather than some sort of altruistic investment they've reluctantly agreed to accept on behalf of their good work for the commonweal.  This natural spin tends to go into hyperdrive when the public affairs team of a trade association strays too far from the policy folk.

Nonetheless, Growth Energy, a recent entry to the growing array of lobby groups for the biofuels industry, does seem to have taken a brief respite from reality-based communications in a recent effort to defend the honor of the Volumetric Ethanol Excise Tax Credit, or VEETC.  The trigger for this particular e-mail campaign was a post in Forbes by Robert Rapier, in which he had the gall to claim that VEETC was a redundant policy in the presence of a mandate. 

For the record, I fully agree with Rapier and don't think he is making a particularly controversial point.  The mandate compliance comes in the form of tradable "Renewable Identification Numbers" or RINs.  RIN prices are, for the most part, residual impacts net of other subsidy policies.  This is because if you've already provided large tax breaks to the fuel, producers can sell the ethanol to meet the mandate at a lower subsidized price than if you didn't provide tax breaks.  Thus, assuming that RIN trading is a competitive market, the conventional ethanol RINs will trade at a lower price due to the other subsidies. 

The parity isn't perfect.  For example, both ethanol and biodiesel excise tax credits have no environmental eligibility criteria at all, while the mandate-eligible fuels -- at least in theory -- do.  This means that some pockets of dirty biofuels could still tap in to VEETC even if they failed the RFS screens.   (See the recommendations in this paper, starting on page 29, for more on how to make the biofuel subsidization policies of the US a bit less destructive).  Similarly, if there is a large glut of ethanol production, RIN values can't go negative so the tax breaks would continue to provide subsidies to producers even when a mandate-only system would not.  Overall though, the policies overlap a great deal.

But Growth Energy went even further in its attack of the Rapier piece.  Chris Thorne, their Director of Public Affairs, wrote:

"The VEETC is not a subsidy. It is a tax credit that provides incentives so petroleum companies blend their gasoline with ethanol. It leads to significant benefits to you, the taxpayer, including lower gas prices and reduced support payments for farmers."

Bad news for Thorne here.  Tax credits are subsidies.  OMB and JCT agree on this.  So does the OECD, the World Bank, the International Energy Agency, even the G20.  "Incentive" is a commonly used synonym for "subsidy" as well.  So too for "tax expenditure," "liability cap," "federally-guaranteed loan," and "government grant."  If you want to defend the subsidy on other grounds, fine.  But don't pretend its not a subsidy.

Thorne goes on to suggest the following argument to refute Rapier's posting:

"What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry. Does Forbes really endorse raising taxes in this tough economic climate? Does Rapier really think raising taxes on an emerging industry is smart?"

In case you are not following this nuanced nugget, let me rephrase Growth Energy's logic here:

1)  A multi-billion dollar per year tax credit, in the form of VEETC, is not a subsidy.

2)  Even though it is not a subsidy, removing that credit amounts to a tax increase. 

3)  It is a tax increase even though the presence of the mandate means that the total support to the ethanol sector is unlikely to change (as the lower tax break triggers higher market price support as RIN prices rise). 

4)  We don't want to increase taxes because it is anti-stimulus, anti-recovery, and anti-American.

Thorne's other claims are equally specious. 

It is true the initial incidence of blender's credits is at blending, and that petroleum companies often fill this niche in US ethanol markets.  However, the tax credit is what has historically made ethanol cheap enough for the petroleum blenders to want to blend it (though the mandate now plays a similar -- and overlapping -- role).  Clearly, if Thorne really felt all the benefits of VEETC went to petroleum companies, Growth Energy would be out there working to kill the program.  They are not.

What about the "significant benefits to you, the taxpayer" that Thorne refers to?  I like benefits, and I'm a taxpayer, so I guess he's talking about me.  Well, even if ethanol pump prices are a tad lower than what we'd pay for 100% gasoline, were just talking a shell game here because unsubsidized ethanol is not less expensive than gas.  If we see lower prices for ethanol blends at the pump (even after adjusting for its lower energy content) it is because we pay even more than that to the industry through tax breaks, grants, and market price support from the mandates.  Not such a great deal. 

And the big savings in farm subsidies?  The rational response to high farm subsidies should be to remove them as well, not to subsidize other uses of the feedstock in order to boost the market prices on the subsidized products so the payouts under the first program aren't quite so high anymore.  In fact, this whole shell game turns out to be a net loser as well according to papers by Du, Hayes, and Baker (2009) and Gardner (2007). 

See also Rapier's own response to these issues here.

Ethanol Producer Magazine notes that the "industry optimistically awaits E15 waiver decision."  Faced with market mandates that drive up demand for all the ethanol they produced, but technical constraints on how much they can stick in each gallon of gasoline we buy, the industry has one again worked the political angle on the problem.  The limits on blend rates incorrectly estimated the concentration that would damage vehicle fueling systems, the argument goes.  We can really stick in 50% more ethanol without doing damage.

Here's the rub:  the ethanol industry doesn't own our vehicles, and doesn't have to pay for vehicle damage if they are wrong about their fuel impacts. 

While I'm happy that the Renewable Fuels Association thinks this is the right move, its hard to say their incentives are aligned with that of fuel consumers.  So when even GM, a company that has long promoted high ethanol blends, has concerns about a rapid national roll-out, we ought to pay attention. The American Automobile Association has also come out in opposition, though unlike RFA they collect the same member dues regardless what ethanol blend I use in my car.  Impacts on vehicle warranties also remain unresolved, should the higher blends turn out to damage vehicle systems.  With the US backing warranties on some GM vehicles as part of its stabilization plan for the auto sector, this creates a further complication and potential subsidy to the sector.

If RFA's Bob Dineen and Matt Hartwig were willing to pledge their own houses and future salaries as collateral to pay for any damages to vehicle fueling or emissions control systems, I'd have a great deal more confidence in their support for rapid adoption of higher blending rates nationally.

As an aside, the article mentions 136,000 jobs created, apparently based on this paper.  It is a rare article on any form of energy now that doesn't make some claim about job creation -- good jobs, clean jobs, green jobs.  Maybe not net jobs, and maybe lower than average rates of job creation per million dollars in the US economy in general, but who's counting?  We need some central clearing house to fact check all of these job claims; there is no way they can all be right.  Some general principles on comparing created jobs are also needed: gross versus net; temporary versus permanent; domestic versus foreign; well distributed versus available only in a few parts of the country; rapid rampup versus years in the future.