Is Renewable Fuel Too Expensive?

Conventional wisdom in the United States seems to favor the continued quest for "renewable" fuels. Of these, ethanol, which is alcohol derived from plants (predominantly corn), has risen to the top of the list. In fact, motorists in several states, mostly notably in the Midwest, current fill up their vehicles with a combination of gasoline and ethanol commonly called "gasohol." But now a fight is brewing between proponents of ethanol and proponents of methanol, another alcohol derived primarily from natural gas, over how much Americans should spend to subsidize the use of ethanol.

Congressional leaders are considering a renewable fuel standard mandating the increased use of ethanol in gasoline, which could have an enormous price tag. According to the Methanol Institute, one legislative proposal would cost over $63 billion, with half the cost coming from increased pump prices for gasoline and half from federal excise tax subsidies for ethanol.

One of the proposals being considered is the "Renewable Fuels for Energy Security Act of 2001," introduced by Senators Chuck Hagel (R-NE) and Tim Johnson (D-SD) (S. 1006), and Rep. John Thune (R-SD) (H.R. 2423). The bill would mandate that the content of ethanol in gasoline rise from 0.8 percent of the gasoline pool in 2002, to five percent by 2016. Under this proposal, the amount of ethanol required to be used in the gasoline supply would increase from about one billion gallons in 2002 to nearly nine billion gallons in 2016. This might be good news for corn farmers, but bad news to most consumers.

Based on economic forecasts by the State of California, the Northeast States for Coordinated Air Use Management and others, the use of 10 percent ethanol blended gasoline may increase pump prices by $0.05 per gallon. Based on this estimate, the annual cost to consumers of the renewable fuel standard would reach nearly $4.5 billion by 2016, or a cumulative cost of $31.5 billion between 2002 and 2016.

In fact, an increase in the use of ethanol could be costly in another way as well. Most of the gasohol sold in the Midwest is a blend of 10 percent ethanol and 90 percent gasoline. When blended at this level, each gallon of ethanol sold qualifies for the full federal excise tax subsidy of $0.53 per gallon. So, assuming that ethanol refiners and gasoline distributors will maximize their use of the excise tax subsidy by blending at this level, the renewable fuel standard could result in lost revenues to the federal Highway Trust Fund of as much as $4.5 billion annually by 2016, or over $32 billion between 2002 and 2016 if the excise tax rule is not changed.

"We are concerned that the laudable goal of increasing the use of renewable fuels in gasoline may come at too high a price," said Methanol Institute President and CEO John Lynn. "Congress needs to consider whether the nation's 185 million licensed drivers should be forced to pay billions of dollars more at the pump, and the impact on driver safety this loss of federal highway funds will have on the country's roads and bridges."

According to the U.S. Department of Transportation, 28 percent of all arterial road miles in the U.S. are in "poor" or "mediocre" condition, and 30 percent of the 172,572 U.S. bridges are either "structurally deficient" or "functionally obsolete." In addition, 53 percent of urban interstate highways are congested during peak travel hours, at a cost to the economy of $78 billion each year. With our roads in this condition, a loss in Highway Trust Fund money would be especially difficult.

Since 1979, the Highway Trust Fund has lost about $10 billion from the ethanol tax subsidy. Today, the ethanol tax subsidy costs nearly $900 million per year. The Texas Department of Transportation has estimated that its share of the revenue loss to the Trust Fund was about $64 million in 2000.

Ironically, states that sell ethanol-based gasoline are at a disadvantage to states that do not use ethanol in receiving Highway Trust Fund allocations, so farmers in those states who grow corn for ethanol are being subsidized at the expense the friends and neighbors. Testifying before a Senate Committee in June 2000, Gordon Proctor, director of the Ohio Department of Transportation, said that Ohio's federal formula funds are reduced by $185 million annually because the state is the third largest purchaser of ethanol-based fuels. In light of the international situation, it seems prudent to have the ability to lessen America's reliance on foreign fuels, but the question must be asked: at what price?


Cleveland-based auto writer Luigi Fraschini is a fan of ethanol, but he thinks it should always be mixed with a soft drink or fruit juice and never mixed with driving.