Arnold Kling

Energy Economics and Politics

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Universal Savings Accounts... Political Beliefs and Self-Dec...

James Surowiecki writes,


Unfortunately, the ethanol produced in the U.S. comes from a less-than-ideal source: corn. Corn ethanol’s “net energy balance”—the amount of energy it yields in proportion to how much energy goes into its production—is significantly lower than that of other alternatives, and modern corn farming isn’t easy on the land. By contrast, ethanol distilled from sugarcane is much cheaper to produce and generates far more energy per unit of input—eight times more, by most estimates—than corn does.

...The favors granted to the sugar industry keep the price of domestic sugar so high that it’s not cost-effective to use it for ethanol. And the tariffs and quotas for imported sugar mean that no one can afford to import foreign sugar and turn it into ethanol, the way that oil refiners import crude from the Middle East to make gasoline. Americans now import eighty per cent less sugar than they did thirty years ago.


Theoretically, there is such a thing as market failure. In practice, political failure is much, much larger. See Clifford Winston's book.

Thanks to Lynne Kiesling for the pointer.

UPDATE: A commenter asks why we don't wind up just importing sugar-based ethanol. My guess is that it's harder to transport ethanol than sugar. But still, you would think that a tariff on raw sugar could be evaded by importing sugar-based products instead.


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COMMENTS (19 to date)
AJ writes:

This quote is indeed accurate. A good counter example is Brazil which has a thriving ethanol business but isn't wed to the corn source like we are. [I've spent an inordinate amount of my professional career on energy source markets]

dearieme writes:

bio-butanol, chaps: that's the coming thing.

Phil writes:

Wouldn't it be politically do-able to remove tariffs on only that sugar cane that is to be used for ethanol? That is, just offer a tariff refund to ethanol producers.

Or would the main source of opposition to this idea be from corn growers?

Brad Hutchings writes:

Arnold, You really need to write a TCS essay about this. We think about fuel for our automobiles much differently than we think about other goods. Right now, gasoline and diesel are ubiquitous and a near monopoly on fuel sources for vehicles. Ethanol is mostly an additive in most of the country. Alternative fuels all have their political proponents. There is a sense that as we move away from gasoline, we will converge on a different single standard. Ethanol, bio-diesel, hydrogen, etc.

What other markets work this way with time? As we moved away from dial-up, we moved to cable and DSL, with broadband over powerlines and WiFi now offering potential competition. As we moved away from over the air TV signals, we got cable, then satellite, and the option of TV over IP is coming online. We choose the system that best meets our needs. The old telephone has seen competition from cell phones, cable, and now VOIP. Pick what works for you...

The message of "alternative fuels" needs to be that there will be many alternative fuels, not that we are fighting out which one alternative will be the be all end all. To that end, perhaps a Pigou tax on gasoline in conjunction with a policy to remove barriers to entry for alternative fuel sources would be worth looking at. Add in a change in emission standards to just measure what comes out the tailpipe rather than mandate fuel formulas.

I still think gasoline will be a way better deal for decades to come, but if we're gonna go down this road of trying to replace it, at least make sure all alternatives have a fighting chance to carve out a portion of the market.

dave s writes:

I think Surowiecki has it sort of wrong in saying "...ethanol distilled from sugarcane is much cheaper to produce and generates far more energy per unit of input—eight times more, by most estimates—than corn does.." rather, what is the case is, the USA is not a very good place to grow sugar compared to more tropical areas. Sugar cane in Cuba and Brazil is more efficient even than sugar cane in Louisiana, and far, far more efficient than sugar beets in North Dakota. So, they put enough duty and restrictions on imports that it drives domestic prices high enough that you can make a buck on sugar beets at the edge of the tundra, and sugar at that price does not make competitive ethanol. We ought not have a domestic sugar industry, it exists because of subsidies and restrictions on imports.

mjh writes:

Something is amiss here. According to wikipedia, there are more sources of biomass for ethanol than just corn & sugar.

What caught my eye was switchgrass, which is grows in the US, grows fast and (also according to wikipedia) "for every unit of energy input, switchgrass yields four units out". This compares quite a bit better than corn which only yields 1.3 units.

It just seems to me that there's more to this story than just sugar. There are higher yielding biomass substances available and we're not choosing them. Why should I think that we'd choose sugar if it were less restricted?

Jeff Hallman writes:

So why not import sugar-produced ethanol?

Paul writes:

The reason that we don't import sugar based ethanol is not that it is hard to transport. It is that ADM managed to get Congress to close that route off too, by having a tariff on imported ethanol (54c per gallon apparently).

Kent Gatewood writes:

1. Do we import gasolene without a tariff?

2. Could we import a gasolene/ethanol blend as a way to avoid the tariff?

Steve writes:

Isn't there a tarriff of sweetened tea because it was cheaper to buy the tea, sans tarriff, and extract the sugar than it was to just import sugar?

I thought I heard this somewhere, but it may have been apocryphal.

aaron writes:

How come no one is using sugar to create ethanol and then importing the ethanol (other than the Rum)?

Don writes:

We import lots and lots of sugar-based ethanol. It's already in your neighborhood. Heck, it might already be in your house. Look for bottles labeled Bacardi, Mount Gay, Captain Morgan...

ivan writes:

But if you import sugar instead of using corn, doesn't that increase pollution? More transport is highly damaging for the environment. Are those costs factored in? And if they are is it still better to use sugar?

Ironman writes:

My guess is that it's harder to transport ethanol than sugar.

You are correct. Primarily, ethanol transport systems have to be water-tight since ethanol can absorb a great deal of water, greatly degrading its quality. It is also a corrosive agent - unless it is contained in chemically resistant vessels, it will eat away at them, eventually weakening them to the point of failure.

These two reasons explain why we can't use existing pipelines to transport ethanol manufactured in the U.S. from where it's made to where we have fuel refineries. This is a bad thing because pipelines are the most cost-effective means of transporting liquid products.

Oil pipelines are not designed to prevent water from entering the system (oil and water don't mix after all, so the product isn't degraded), and ethanol's corrosive nature can lead to stress corrosion cracking at the pipelines' welded joints. If you tried to use the existing systems to transport ethanol, you would eventually have a series of environmental "incidents."

It's possible to develop a pipeline system for ethanol, but that would come at a very high price tag. No one in the industry is really willing to go there since the costs are massive and the risk inherent in implementing a government mandated system (rather than a market demanded system.) Since the use of ethanol is dictated more by government subsidies and regulation than by sound engineering or economics, it's just not worth the investment (or risk).

Kent Gatewood writes:

Ironman--can any amount of ethanol be safely mixed with gasoline in a pipeline. Or is gasoline trucked not pipelined?

Ironman writes:

Kent,

With a lot of investment in upgrading the pipeline yes, but without such investment, no. Ethanol also has the characteristic of being able to absorb a great deal of other chemicals and substances (such as rust), which are often found in existing pipelines, and actually increase ethanol's inherently corrosive nature.

Gasoline is both transported by truck and by pipeline. Pipelines are extremely cost efficient over long distances, and are used to deliver very large volumes of liquid fuels to local depots. From there, fuel is trucked to local stations.

John Thacker writes:

Wouldn't it be politically do-able to remove tariffs on only that sugar cane that is to be used for ethanol? That is, just offer a tariff refund to ethanol producers. Or would the main source of opposition to this idea be from corn growers?

Yes, the corn growers and ethanol producers oppose the idea. President Bush proposed lifting the tariff on sugar-based ethanol; members of Congress bipartisanly opposed it. (Including media darling Sen. Obama, of course.)

Stephen Karlson writes:

"But still, you would think that a tariff on raw sugar could be evaded by importing sugar-based products instead."

Which pretty well summarizes what has happened to the candy factories of Chicago.

Paul writes:

There's a 54 cent per gallon tariff on ethanol imports. There's also 52.5 cent per barrel tariff on gasoline imports from some countries. The U.S. has entered into several trade agreements with countries that allow them to export gasoline to the U.S. duty-free. These agreements include the U.S. Generalized System of Preferences (136 developing countries and territories); the Caribbean Basin Initiative (23 countries); the African Growth and Opportunity Act (37 countries); Andean Trade Preference Act (4 countries); NAFTA (Canada and Mexico); the Dominican Republic-Central America-United States Free Trade Agreement (6 countries); as well as bilateral agreements with Australia, Chile, Israel, Jordan, Morocco, and Singapore.

Several countries that ship substantial amounts of gasoline to the U.S. are subject to the tariff, including France, Germany, Great Britain, Italy, Netherlands, Russia, and Spain.

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