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A(n Ethanol) Subsidy By Any Other Name?

A(n Ethanol) Subsidy By Any Other Name? published on No Comments on A(n Ethanol) Subsidy By Any Other Name?

’Tis but thy name that is my enemy; Thou art thyself though, not a Montague.
What’s Montague? it is nor hand, nor foot, nor arm, nor face, nor any other part
Belonging to a man. O! be some other name: What’s in a name? that which we call a rose
By any other name would smell as sweet; So Romeo would, were he not Romeo call’d,
Retain that dear perfection which he owes without that title.
~ Juliet, “Romeo & Juliet,” Act II, Scene II
William Shakespeare

It seems ethanol interests have a similar attitude toward the word “subsidy” as did Juliet toward Romeo.

Growth Energy, a biofuels lobbying organization, is currently holding its 2018 Executive Leadership Conference. The opening panel was titled “Up The Road: Does Ag Need Biofuels.” Not too surprisingly, the overwhelming conclusion was “Yes!”, as reported by the Iowa Renewable Fuels Association (RFA). And it’s true that biofuels are important for the corn and soy belt. According to the USDA’s Economic Research Service, 37% of corn (see Table 5) and 27% of soybeans (see Table 6) were used to make ethanol and biodiesel, respectively, in the 2016/17 marketing year. Of course, that use of biofuels is almost entirely the result of artificial demand created by government regulations that mandate use of ethanol, in particular, and biofuels more generally, in automobile fuel supplies. So when leaders in the ag industry affirm the importance of biofuels to the ag sector, they are essentially confessing the industry is dependent on an implicit subsidy in the form of consumer mandates.

That was the point I made in retweeting Iowa RFA’s tweet above.
By declaring a dependence on government mandates, these leaders in agriculture are effectively saying they cannot thrive in a competitive market and need government assistance. And these regulations do have the effect of thwarting innovation to the detriment of all fuel consumers. The rationale for incorporating ethanol in gasoline is to serve as an oxygenate to help the fuel burn cleaner, thereby reducing engine emissions. The Clean Air Act requires oxygenates be added to fuel to reduce air pollution. The Energy Policy Act of 2005 (Title XV) introduced the Renewable Fuels Standard that specifically mandates ethanol as the oxygenate that must be used, thereby discouraging research and development of alternate, potentially more cost efficient or environmentally beneficial, oxygenates.

The Iowa RFA was quick to reply, pointing out that biofuels “do not currently receive federal tax subsidies.” And that’s technically true–but it’s also disingenuous. As Juliet might say, a subsidy by any other name (like a renewable fuel standard) is no less a subsidy. It’s just a different channel of subsidy than direct tax dollar payments. But judging by the responses from other beneficiaries, it seems an important distinction. Kind of like a Capulet’s attitude about a Montague.

Some may think of subsidies as involving a direct payment to producers–like direct income payments to farmers or cost underwriting for crop insurance. But subsidies can also take the form of artificially inflating demand to increase the price and quantity demanded of the subsidized good. This is the tool the US government used to subsidize farms prior to the late 1980s; implementing commodity price supports by buying up the excess supply. It’s the same basic tool that is currently used to subsidize the electric car industry (via tax credits to car buyers; you’re welcome, Elon Musk). And, until the recent tax reform bill, it was one of the ways to help subsidize health insurance companies by mandating that individuals–particularly healthy individuals who are less costly to insure–purchase health insurance. In each case, the government subsidizes producers either directly, by giving them payments to cover costs, or indirectly, by bolstering demand (or in the case of health insurance, both).

It’s difficult when the things we love carry names, labels, or associations that are more convenient to ignore or deny than to embrace. It helps to call them something else, whether to deceive others or ourselves. But when it comes to consumer mandates, like the Renewable Fuels Standard, a subsidy by any other name is still a subsidy.

 

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