This year, the Energy Policy Act of 2005 requires refiners to blend nearly 13 billion gallons of corn-based ethanol into gasoline.
With this past summer’s drought limiting corn supply and driving up prices, farmers and ranchers who feed corn to their livestock argue that the ethanol mandate is further distorting prices and pushing limited corn resources from food to fuel.
Whether we use corn for food or fuel should be for the market to determine. Whether the impact of the mandate has large or small impacts on prices is irrelevant, because the mandate is simply bad policy. Congress should make up for the EPA’s refusal to waive the mandate by repealing the Renewable Fuels Standard.
Originally championed as a way to reduce dependence on foreign oil and produce environmentally friendly fuels, the mandate has attracted a wide collection of opposition. Proponents of a free-market energy policy ask this simple question: If biofuels are competitive, why do they need a mandate that guarantees a share in the market?
Given the fact that the transportation fuel business is a multi-trillion-dollar one worldwide, biofuels have all the incentive they need to compete. Environmentalist groups that once supported the use of ethanol are now arguing that once accounting for land use conversion, the use of fertilizers, insecticides, and pesticides, as well as the fossil fuels used for production and distribution, biofuel production has had unforeseen environmental consequences.
World hunger organizations have been especially critical of the mandate, arguing that diverting food to fuel increases corn prices. Corn is a staple product for many developing countries and is feed for livestock, so price spikes can have dramatically rippling effects. Heritage senior research fellow David Kreutzer calculated:
As is typical with commodity markets, small changes in supply or demand can lead to large changes in price. The loss of 10.8 percent of the world’s corn to ethanol production leads to a 68 percent (about two-thirds) increase in corn prices.
However, these calculations do not measure the mandate’s impact on price. We do not know this impact because we do not know how much ethanol would be produced in the mandate’s absence. Nor have we calculated the impact of expanded corn production on reducing the acreage of other farm commodities and the subsequent price increases for those commodities.
Congress should repeal the ethanol mandate and eliminate all subsidies for transportation fuels and technologies. This would continue to drive America’s energy policy in the right direction.
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