Special Report

Corny Capitalism

The great ethanol scam and how it threatens our cars.

By 8.27.10

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Earlier this year, the Environmental Protection Agency issued another one of those announcements read exclusively by government bureaucrats and green policy wonks. The EPA decided to delay a decision to increase the concentration of ethanol legal in gasoline from 10% to 15%. So-called E15 fuel would have to wait for approval until November.

It was a little-read regulatory decision that barely made a splash in the media. But it was also a rock thrown at Washington's hornets' nest of food and agricultural lobbyists. "We are disappointed," warned food giant Archer Daniels Midland. "We find this further delay unacceptable" and a "dereliction of duty," harrumphed ethanol lobbying group Growth Energy.

By delaying the decision, the EPA punted on a crucial decision. The pressure brought to bear against the agency by the agriculture industry has been incredible. It's also been applied well; the EPA will most likely still approve E15 fuel in the fall.

That's bad news for any American who likes to drive. In a country powered by the automobile, E15 is an enormous question mark. Since the 1970s when ethanol was first regulated by the feds, concentrations of alcohol in fuel above 10% have been illegal. But the government, lost in a dream world where cars can run on corn, has tied itself in regulatory knots trying to force ethanol into the fuel supply.

The history of ethanol is a sad torrid affair of crony capitalism and green fantasies. By jumping in bed with the agriculture industry and blindly slapping on new regulations, the government artificially propped up an industry and put itself in a bind from which there may be no return.

From Suing Toyota to Subsidizing E15

Across America, pumps at gas stations are emblazoned with the words, "Contains 10% Ethanol." That's no free market innovation. Since the 1970s, the federal government has heavily subsidized the production of "gasohol"--a blend of 90% gasoline and 10% ethanol that reduces tailpipe emissions. For decades, progressive politicians and environmental groups have revered ethanol as a miracle additive that will help purify America's air. "No country has ever gone to war over ethanol," reads one sign on the Washington, D.C. Metro subway.

There's just one problem: Ethanol fuel is wildly inefficient. The amount of corn required to soak the fuel supply is massive. To shift America's car culture entirely from gasoline to gasohol would require 700,000 square miles of land growing corn exclusively for ethanol production. That would mean converting one-fifth of the United States into a sprawling corn farm.

Then again, the government never found a green boondoggle it didn't love. For five years now, Congress has been mandating that the fuel supply be diluted with ethanol. The Energy Policy Act of 2005 required 7.5 billion gallons of ethanol in the fuel supply by 2012. A Democratic Congress went a step further in 2007, mandating 9 billion gallons by 2008, 15.2 billion by 2012, and 36 billion by 2022.

Unfortunately, that whole Economics 101, supply-and-demand thing got in the way. The maximum amount of ethanol that can be produced to meet demand, called the "blend wall," is expected to level out at 15 billion. That will make it impossible to meet the government's mandates.

The agriculture industry, represented primarily by Archer Daniels Midland and Growth Energy, spied an opportunity. Why not increase the legal gasohol concentration from 10% ethanol to 12% or even 15%? That would immediately ignite ethanol production and allow the government to meet its mandate. More importantly, it would make Big Agriculture some serious money.

The EPA looked ready to raise the limit until science finally intervened. A study surfaced by the National Renewable Energy Laboratory from 2008 that found E15 ethanol caused a raft of problems in cars, including a loss of fuel economy and spikes in exhaust temperatures. Meanwhile the higher concentration of ethanol did nothing to reduce tailpipe emissions. The study also found problems when E15 fuel was used in lawn trimmers.

The car industry exploded in outrage. Most car warranties only cover E10, which could leave customers stuck with hefty bills if their engines were damaged. A study done by the Alliance of Automobile Manufacturers found E15 "made engines run hot, compromised catalytic converters, and even damaged cylinder walls."

To its credit, the EPA ultimately delayed its decision in order to review the science. But in the meantime they'll have an army of powerful agricultural lobbyists leaning on them. Even supported by its scaffolding of government subsidies and mandates, the ethanol industry is collapsing. The recession shuttered several ethanol companies. Others were gobbled up by oil giants at bargain prices. Some estimates suggest ethanol producers are losing 10 cents on every gallon of gasoline. This is all despite the fact that 25% of corn grown in the United States goes towards ethanol production.

The agricultural industry needs E15. And if history is any indication, it'll probably get what it wants.

The Agricultural Mafia and Its Kingpin

It was 1978 and the Persian Gulf oil crisis was in full swing, with lines of cars snaking around fuel pumps and ghostly abandoned gas stations everywhere. President Jimmy Carter was in the midst of his own political crisis, seemingly unable to do anything except ask people to don sweaters.

That year, Carter was approached by Dwayne Andreas, CEO of Archer Daniels Midland, one of the nation's largest food companies. Standing diminutively at 5-foot-4, Andreas bore a strong resemblance to James Cagney. But he was also endlessly charismatic and took to the halls of Washington like a fish to water. He convinced the hapless Carter that there was only one way to strip OPEC of its power and make America energy independent: a miracle fuel called ethanol.

At Carter's urging, Congress passed ethanol's first big boon: a tax exemption for gasohol. But Andreas was far from done. Over the next 20 years, he would hopscotch across Washington, wooing politicians from both sides of the aisle. Almost singlehandedly, he would build Archer Daniels Midland into an ethanol powerhouse with a thicket of new legislation that benefitted his company.

But first, the competition had to go. Ethanol was more established overseas, particularly in Brazil which produced ethanol from sugar cane. America could import this fuel for cheaper prices than were available domestically. Andreas knew Jimmy Carter's presidential campaign was in trouble, so he struck a deal. If Congress would slap a tariff on foreign-produced ethanol, Andreas would open a new ethanol plant in Des Moines, boosting Carter's political fortunes in the Midwest. Carter agreed and the tariff was passed.

By then, Congress had caught ethanol fever. Liberal environmentalists talked up gasohol as a step towards cleaner skies. Midwestern politicians from rural states waxed poetically about the American corn farmer. In 1980, the government passed an income tax credit for companies that produced gasohol. The credit would be increased in 1990 and again in 2004.

With business booming, Andreas extended his outsize personality across the ocean to the Soviet Union. Crippled by poverty, the USSR was searching for a way to modernize food distribution. Andreas quickly won over Mikhail Gorbachev, secured more business for ADM, and became America's most visible businessman in Moscow.

Then disaster almost struck. In 1991, the EPA implemented a new set of rules in the Clean Air Act. The regulations imposed a strict cap on volatility, the amount of smog-producing hydrocarbons in an emission. Despite being revered as a miracle fuel, E10 gasohol actually produces more hydrocarbons than standard gasoline. Under the new Clean Air Act, ethanol fuel would have been outlawed.

Andreas quickly swooped in with a $400,000 donation to George Bush's presidential campaign. The money worked its magic and Bush announced an exemption for ethanol in the Clean Air Act. After Bush lost reelection, Andreas suddenly popped up at Bill Clinton's inauguration, which he heavily financed. Clinton paid Andreas back handsomely, repealing Bush's exemption and instead putting in place America's first ethanol mandate. The mandate was later stricken down in court.

All this didn't sit well with Clinton's secretary of transportation, Federico Peña. Peña fired off a letter to the White House worrying that continuing to promote ethanol would impoverish the Highway Trust Fund, since gasohol was tax-exempt. A few days later, the Department of Transportation retracted Pena's letter, hastily claiming that Peña's autopen had signed it without his approval.

By then, nobody was crossing Andreas, whose ethanol empire seemed unstoppable. "There is an agricultural mafia in this town, and Dwayne Andreas is its kingpin," wrote Frederick Potter, a Washington consultant. A few years later, Potter was singing a different tune. Andreas had become his client. By 1995, ADM was producing about 60% of America's ethanol.

One of Andreas' most valuable allies was Republican Sen. Robert Dole, then Senate majority leader. Representing corn-dependent Kansas, Dole had a reason to support ethanol legislation. But Andreas sweetened the pot significantly. In addition to campaign contributions, Andreas sold Dole and his wife Elizabeth a three-room apartment at the picturesque Sea View Hotel on the oceanfront in Bal Harbor, Fla. According to a New York Times exposé, the Doles received preferential treatment for the apartment and paid only $150,000 for it. The actual value was estimated to be around $190,000.

Bob Dole wasn't the only power broker vacationing at Sea View. Former Speaker of the House Tip O'Neill owned a Sea View apartment and was a close friend of Andreas's. Republican Senate leader Howard Baker and veteran journalist David Brinkley vacationed at Sea View. Hubert Humphrey was also a frequent guest.

Andreas used Sea View as his Camp David to entertain guests and solidify his influence with powerful people. As one of Andreas' associates recalled to Fortune magazine in 1990, "There was Dwayne in his cabana, holding court. Surrounding him were David Brinkley [whose Sunday-morning TV show ADM regularly sponsors] and Mrs. Brinkley, Ambassador [Robert] Strauss and Mrs. Strauss, Ambassador [Allan] Gotlieb [former Canadian envoy to Washington] and Mrs. Gotlieb, Speaker O'Neill and Mrs. O'Neill, and Senator Dole and Mrs. Dole."

Andreas plucked his friends from the trees of power, regardless of ideology or political party. All that mattered was making a fortune off of taxpayer-funded ethanol. Veteran Democratic strategist Bob Beckel called Andreas "the shrewdest guy I've ever met at playing both sides."

Andreas stepped down as CEO of ADM in 1997 at the ripe age of 79. By then, his power had weakened slightly. Some executives and investors were wary of their flamboyant leader. Andreas' loyal son and heir apparent, Michael, was charged in a price-fixing scandal that cost ADM $200 million to settle. (Nephew Allen Andreas took over the company instead.)

But the world that Dwayne Andreas created lived on. Congress continued to promote gasohol as a feel-good way to save the earth, mandating ethanol in the fuel supply twice during the Bush Administration. Soon after assuming office, Barack Obama created the federal government's Biofuels Interagency Working Group, the express purpose of which was to assist the ethanol industry.

Faking Green Emissions, Running Red Ink

It's time to put an end to this crony capitalism. Ethanol may be beneficial for greedy CEOs and craven politicians, but it's a miserable idea for almost everyone else involved. It's a deeply inferior fuel that can't survive on the free market and doesn't deserve another dime in taxpayer funding.

Those who try to justify the government's relentless ethanol promotion usually make two arguments.

The first is that ethanol production helps the all-American corn farmer. This is impossible to deny. More than 25% of corn in the United States is used for ethanol production in what has become a multi-billion dollar industry.

But what about actual food consumers? In 2007, the world was rocked by a sudden spike in food prices that caused massive rioting in Africa and Asia. A subsequent study by the World Bank attributed the crisis primarily to biofuel subsidies in America and Europe, arguing that subsidies had raised the cost of food by 70-75%. Other research, including a study by the Department of Agriculture, came to similar conclusions. When we divert corn to ethanol, we're letting demand for food go unmet.

The second argument for ethanol is that it's a green fuel. But this simply doesn't pass the laugh test anymore. Gasohol produces more smog-causing hydrocarbons and nitrogen oxide than gasoline. It also belches out carbon dioxide, the bane of Greenpeace clipboard-carriers and Al Gore groupies everywhere.

The Competitive Enterprise Institute's Tim Carney dug up a study by scientist Marcelo Dias de Oliveira. Oliveira looked at ethanol's broader environmental picture -- its ecological footprint, if you will. Between the land destroyed by crop planting, the water consumed, and the resultant air pollution, Oliveira found that ethanol does more damage than good to the environment.

This is the sort of cockamamie policy that crony capitalism produces. Currently the government spends $6 billion per year on subsidies for a fuel that isn't environmentally friendly and caused a global spasm of starvation.

Pull out just one subsidy block and the entire Jenga tower that is the ethanol industry will come tumbling down. Congress has indicated in recent days that it's growing tired of subsidizing ethanol and is thinking about slashing the industry's tax credit. Unfortunately the EPA will probably still wilt under pressure and legalize E15. And thus will the same administration that crusaded against Toyota make all our cars less safe and Dwayne Andreas's business will keep booming.

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About the Author

Matt Purple is an editor at Rare.us.