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A Kernel Of Support For Ethanol?

Are subsidies for ethanol somehow different from other subsidies-in other words, not all that bad? One free market environmentalist, Joseph L. Bast, president of the Heartland Institute, ventures the thought that most subsidies for ethanol take the form of a tax cut for some people, although not the public at large. Removing the tax breaks would raise taxes, something that he as a libertarian opposes. Heartland’s science director, Jay Lehr, writes (page 9) that ethanol’s critics and supporters should agree that ethanol is here to stay . . . and no longer needs subsidies.

Other free market environmentalists are shocked at this way of framing the issue. The following comments, which come from an environmental list-serve, have been edited and are published with the participants- approval.

The participants in this dialogue are: Joseph L. Bast, president, Heartland Institute; Th omas Tanton, senior fellow, Institute for Energy Research; Jonathan Adler, associate professor, Case Western University Law School; Joel Schwartz, visiting fellow, American Enterprise Institute; Roy Cordato, vice president for research, John Locke Foundation; Fred L. Smith, Jr., president, Competitive Enterprise Institute; David Hogberg, research associate and director, GreenWatch, Capital Research Center; and Myron Ebell, director of global warming and international environmental policy, Competitive Enterprise Institute.


Ethanol is an issue that increasingly divides free market environmentalists. The original position-opposing ethanol-was easy to take. The market for ethanol was solely the result of government subsidies paid to a small number of special interests, and it had dubious or negative environmental effects. But changes during the past decade have led some of us to wonder if it isn’t time for a more nuanced approach.

In past discussions on ethanol, James Taylor (editor of Environment and Climate News) and I have discussed the following: Does ethanol benefit or harm air quality? (We think it’s probably a wash.) Are new, more efficient technologies and economies of scale making ethanol a better deal for consumers and the environment? (From what I read they definitely are.) Finally, because the “ethanol subsidy” is mostly a tax cut, is it something libertarians ought to object to? (I don’t.)

In January, a new partnership to spur greater use of ethanol was announced (see Jay Lehr’s article on page 9). It includes the construction of new ethanol plants in California, which will probably increase the efficiency of ethanol production by several percentage points. Although ethanol cannot now be sent through pipelines because it attracts water (it is hygroscopic), and must be trucked instead, that should not be a concern in a couple of years when these new plants come on line. At that time, combined with higher oil prices, ethanol may be price-competitive with oil even without the tax breaks. At least this is the current theory. I’d love to know if that’s true.


The ethanol tax credit shouldn’t be considered a tax cut but rather a tax transfer. The rest of us are paying for the taxes not paid by the ethanol producers.

The hygroscopic nature of ethanol will continue to be a problem, and perhaps more so with increased production and use because more reliance on pipelines will be necessary. Avoiding long distances is part of the reason that California is encouraging in-state production. We shouldn’t necessarily assume that oil prices will increase monotonically.

Technology in the production of gasoline (without ethanol) and combustion for automobiles continues to improve, and the environmental benefits of ethanol continue to diminish. The market for ethanol seems to be an artificial one brought about by poorly thought-out regulations.


I think that Joe is largely correct about ethanol. Future environmental effects are probably a wash, although increased ethanol use will have different effects in different places. I would suspect, for example, that the net benefits from increased ethanol use will be much greater in cooler parts of the country; in areas with hot summers and big ozone problems, ethanol may have net negative effects.

On the tax break, however, I oppose it. One, it is a market distortion that results in less efficient resource allocation. Two, it rewards rent-seeking and penalizes ethanol’s competitors. Three, insofar as gasoline taxes are proxies for user fees on roads, I see no basis for giving ethanol a special advantage.


Ethanol is a net loser for air quality in any area that reaches temperatures above about 90 degrees F during the summer, as Donald Stedman of the University of Denver and research supported by the California Air Resources Board have shown. With ethanol you’re increasing ozone-forming emissions from a large source of volatile organic compounds (VOCs) on days when ozone is already likely to be at its highest.

Free market environmentalists should not oppose ethanol. But they should oppose ethanol subsidies (along with petroleum subsidies!). If ethanol were worth producing and putting in gasoline on its own merits, subsidies would be unnecessary. The subsidies for ethanol are truly massive. It’s not just the federal gasoline tax subsidy for ethanol (51 cents per gallon of ethanol added to gasoline).

A few states add an additional per-gallon subsidy. Some states also have other tax subsidies for building ethanol plants. And of course there’s the farm subsidy for growing the corn. Add to this the fact that ethanol has about 30 percent less energy per gallon than gasoline, which makes the subsidy per unit of energy even worse. I don’t see why free market environmentalists would even consider supporting ethanol subsidies.


I am so opposed to subsidies of all kinds that I failed to explicitly state it in my original message. We all agree that free market environmentalists ought to oppose subsidies to ethanol and, as Joel says, to any other fuel.

But a tax break is, arguably, not a subsidy. And we should balance the cost against alleged benefits, not to justify the subsidies but to find out whether the net cost (or benefit) is big enough for this to be a major public policy issue, rather than just a theoretical concern.


This issue of “tax breaks as subsidy” is a thorny one for libertarians- one that I have had to come to grips with in dealing with so-called economic development policy at the state level. To attract businesses or promote specific industries, state governments offer huge tax incentives. While we may not want to call these “subsidies,” they can and should be opposed. They are an attempt to use the taxing power-in this case in a negative way-to generate a politically determined outcome.

Whatever they are called, the issue of whether they are harming people depends on whether others are being taxed more to make up for the lost revenue. In North Carolina our general assembly has passed very large tax increases for the last four years while doling out huge tax breaks, including record-breaking incentive packages to companies like Dell Computers. At the Locke Foundation we always advocate for lower across-the-board taxes on business in place of the targeted central planning embodied in the “tax incentive” approach.


The metric for freedom is not taxes but resource distortions. The impact of political interference in a free society is the extent to which resources are diverted to special interests from the uses that free people would prefer. How they are “paid for” is not of primary concern. They aren’t free and will be paid for via taxes, borrowing, or inflation. These distortions are not easily measured (especially for regulatory and subsidy interventions), but it is better to measure the right thing roughly than to measure the wrong thing exactly.

Obsession with taxes has been one of the problems that have made it so easy for the Republican Party to falter. Republicans regulate, distort the economy and spend taxpayer money, but as long as they can reduce at least some taxes, they seem to feel that everything is okay. Rethinking this issue is overdue. In principle all taxes are worrisome but increasingly I favor a flat tax with no deductions-not for housing, not for state taxes, and not even for charitable donations. In my view, a flat-tax world would provide far fewer opportunities for political intervention.

In brief, I do not think libertarianism has a clear answer on tax policy other than simpler is better than more complex, and less is better than more. The more relevant question for us is the extent to which policies interfere with our economic liberties.


The idea that tax breaks for some are better than no tax breaks for anyone may somehow be squareable with libertarianism but it is utterly repugnant to the broad idea of equality under the law. Its practical effects can only be to increase faction and to promote the interests of an elite against the people. Or to put it more bluntly, promoting tax breaks for special interests is un-American and unconstitutional. As John Adams said, ours is to be a government of laws and not of men. The chief example he gave of a government of men was one that bestowed favors on some citizens that were denied to others.


Jay Lehr says “ethanol could substantially reduce the nation’s oil consumption” (see page 9). I did a back-of-the-envelope estimate and it looks as though only about 17 percent of U.S. gasoline consumption could be replaced by ethanol if the entire 2004 U.S. corn crop were devoted to ethanol production. (It’s not clear what people and livestock would do for food if such a switch were to occur. Not to mention the run-up in commodity prices if large fractions of U.S. crop production were devoted to motor fuel.)

Even if ethanol could displace a substantial portion of gasoline, it doesn’t seem likely that this would increase our energy security. If ethanol displaces petroleum, it will displace petroleum from the highest- cost producers. Ethanol would displace U.S. petroleum production, rather than Middle East petroleum production.

Whether the net energy balance for ethanol production is negative or positive is still a matter of debate, although the energy balance is improving as technology advances. In any case, the issue is irrelevant if you believe that use of ethanol as a motor fuel should be determined by market forces without government intervention. All that matters is whether potential producers can deliver a gallon of ethanol at a price consumers are willing to pay. Net energy balance will influence this, but only as an input to producers’ market decisions.


Jay and I don’t “support ethanol mandates or subsidies”; we supmentalists port ending them. Jay’s piece falls short of calling for ending the mandates, although I think it is implied by his last sentence.

We call for removing the subsidies to ethanol producers because Jay’s analysis shows the product no longer needs them. But if the subsidy is 51 cents per gallon, that doesn’t mean I support a new 51-cent a gallon tax on ethanol. I don’t think libertarians ever ought to be talked into supporting higher taxes in the name of some mythical “level playing field” defined by incumbents. The very idea that taxes on you should be higher because otherwise I have to pay higher taxes is obnoxious and even ridiculous. It’s the rationale used to tax the Internet and the VoIP (Voice-over Internet Protocol).

Crops that are used to produce ethanol are still available as feed for livestock, and corn is probably only a transitional feedstock for ethanol, both points made in Jay’s piece. Ethanol will contribute more to the U.S. fuel supply than drilling in the Arctic National Wildlife Refuge, which many libertarians have become quite skilled at defending on national security and domestic supply grounds.


As Fred Smith indicated earlier, this is about the power, scope, and infl uence of government over private decision making. Government can and does increase its power and control by selectively invoking its authority to tax. This is why a Steve Forbes-type flat tax is a political impossibility. Politicians realize that the power not to tax-selectively-can be used to expand the size of government just as easily as the power to tax. That is how government works.


Roy’s point is that politicians pander to farmers and the growing ethanol industry by giving them subsidies that oil companies and refiners don’t get-it’s not in the interest of politicians to reduce taxes on both types of fuels. I think this supports my argument that taxes more often get cut when interest groups organize to demand preferential treatment on their products or industry, rather than from broad pressure to lower taxes on everyone. I’m not making a normative case for selective tax abatement, only observing the reality of how tax cuts and credits come about.


I don’t think that argument stands up empirically. The one example of substantive tax reform (the Tax Reform Act of 1986) started out as a typical “grease the squeaky wheel” effort catering to special interests, but somehow Congress eliminated many (not all, unfortunately) special provisions and also lowered rates. But nothing substantive has happened since-and this suggests that we should reconsider whether pragmatic approaches work. (Recall one of the many wonderful statements by Stan Evans: “The trouble with pragmatism in politics is that it doesn’t work!”).


When most libertarians argue that a particular tax credit should be removed, they follow that with the argument that there should be a reduction in overall taxes. Let’s get rid of the tax credit for ethanol and then reduce the federal tax for gas.

In theory, the gas tax is a great way to finance highways. Last time I checked, though, the gas tax brought in more revenue than was spent on highways-thus Congress spends the gas tax on things other than highways. Another great reason for reducing it.

And the government shouldn’t try to engineer the economy by playing favorites.


So your plan for reducing taxes, David, is removing a particular tax credit and following that with a reduction in overall taxes? The number of times this has happened is so few that some of us have the dates tattooed on our arms. Maybe Fred Smith is right: Libertarians and conservatives need to rethink how taxes rise and fall. Until then, I’ll stay in the “no new taxes” column. Starve the beast; don’t debate whose tax is more or less “fair” than someone else’s. No tax is fair.

The fact that motor fuel taxes are diverted to non-highway uses is an argument for ending our reliance on them. Starve the beast and force a switch to tolls and privatization.

Of course, government shouldn’t engineer the economy with tax credits-or taxes, regulations, direct subsidies, income redistribution, public ownership of assets, or public provision of services. Let’s try to reduce or eliminate all of them. So let’s not start with calls for raising taxes on ethanol! Finally, let’s stop bashing ethanol with whatever lame arguments and excuses we can find. It’s here to stay, and we just look foolish trying to deny its role in the country’s energy and agricultural policies.

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