News from the Tennessee Valley Business
SUNDAY, APRIL 15, 2007

Are ethanol subsidies answer to thirst for oil?

You don’t need to drive far to see the evidence: Alabama farmers are planting 50 percent more corn this year than last, much of it replacing King Cotton.

Why is corn the new cash crop of choice? Increased ethanol demand. Why increased ethanol demand? Governmental subsidies.

The granddaddy of all ethanol subsidies is the Volumetric Ethanol Excise Tax Credit, a federal tax credit that took effect in 2005. If you buy E10 at the pump (which is 10 percent ethanol), the company that blended the fuel is getting a tax credit of 5 cents for every gallon you buy.

Add all the corn and ethanol subsidies up, according to the International Institute for Sustainable Development, and you have subsidies approaching $1.40 per gallon of ethanol.

There are many reasons for finding a viable alternative to petroleum as the transportation fuel of choice.

Some, like Middle Eastern politics and the environment, have little to do with economics. A pure free-market approach may not, therefore, be ideal.


A problem with subsidies is they have unwanted ramifications. Corn prices have doubled because of the artificial jump in demand. That increase has trickled into meat prices because corn is a major component in feeding livestock.

Even the cost of tortillas has skyrocketed. The price of cotton (and fabric) and wheat (and bread) will go up as acreage previously devoted to those commodities switches to corn.

Subsidies tend to stifle innovation. Many studies suggest that the fuel-energy, largely from petroleum, that goes into producing a gallon of ethanol is considerably greater than the energy that the gallon produces.

Corn production (think fertilizer and pesticides) and ethanol distillation have different impacts upon the environment than gasoline, but not necessarily better ones. Several ethanol plants have targeted Decatur as a potential site, a fact that has some residents worried.

Subsidies remove the free market from something it’s good at: rewarding innovation.

Tax money now spent rewarding ethanol production could be consumer dollars spent toward other non-petroleum technologies, like cars that run on batteries or on hydrogen-based fuels.

Some economists say we should do away with the subsidies and instead impose a pump tax that pushes consumers to spend their dollars on non-petroleum technologies that they, not bureaucrats, select.

Expect the agricultural answer to come not from the sun or soil, but from Washington. Take a cruise through North Alabama next April. If you see cotton sprouts, the policy has changed.


Last week’s column focused on the problems and benefits of the certificate of need system. Many states have abandoned the system, concluding the free market does a better job at gauging the demand for healthcare services.

One reader, a doctor, complained that the CON system has devolved into a state-funded subsidy to protect hospitals.

“CON has also failed as a guardian of quality,” the reader said in an e-mail. “In fact, CON franchises discourage quality improvement, because the certificate insulates the hospital from competition and cannot be recalled for poor outcomes.”

A lawyer for a hospital, however, pointed out that while the free market might work fine in a health-care system dominated by self-paying consumers, Medicaid and Medicare are the main payers in the real-world system. Reform of the government-dominated payment system must come before certificate of need reform.

Eric Fleischauer can be contacted at eric@decaturdaily .com.

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