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Article Excerpt
I. INTRODUCTION TO AMERICA'S OBSESSION WITH CORN
II. THE SCIENCE OF ETHANOL III. HISTORY AND OVERVIEW OF ETHANOL PROGRAMS IN THE UNITED STATES AND BRAZIL A. U.S. Ethanol Program B. Brazilian Ethanol Program 1. History 2. Lessons Learned from the Brazilian Experience. IV. UNDERSTANDING THE FEDERAL SUBSIDIES IN THEIR VARIOUS FORMS--THE KEY TO MEANINGFUL REFORM A. Federal Support--No Subsidy Left Behind 1. Price Support By Way of the VEETC 2. Feedstock Subsidies--Corn Growers and the Right to Farm 3.Tariffs--The Indirect Subsidy B. The Unintended Consequences of Ethanol 1. Not as "Green" As It Looks: The Environmental Effects of Ethanol 2. Increases in Food Prices: Tolerable in the United States but Potentially Catastrophic for Poor Nations V. ECONOMIC QUAGMIRE: A WAY OUT If they saw dry grains of maize scattered on the ground, they quickly gathered them up, saying "Our Sustenance suffereth, it lieth weeping. If we should not gather it up, it would accuse us before our Lord. It would say, 'O, Our Lord, this vassal picked me up not when I lay scattered upon the ground. Punish him!' Or perhaps we should starve." (1)
I. INTRODUCTION TO AMERICA'S OBSESSION WITH CORN
The sixteenth century Aztecs worshipped corn as a source of life. (2) Similarly, America's reverence for corn in the twenty-first century has reached idolatrous levels. In various forms, corn finds its way into nearly everything Americans eat. (3) Moreover, corn, in the form of ethanol, is filling the tanks of more and more American vehicles due to burgeoning American policy regarding the production of renewable fuels aimed at reducing American dependence on foreign oil, thereby increasing energy security. (4)
While the full-blown ethanol program is in its fledgling stages, ethanol is hardly new--it has been used as a gasoline additive since the 1970s. (5) Furthermore, the United States is not the first to implement such a program. Brazil has been producing ethanol since the 1970s, driven by a national program known as "Proalcool." (6) Today, Brazil is the leading producer and consumer of ethanol made from sugarcane. (7) It is nearly self-sufficient with regard to energy because of its oil and gas reserves, nuclear energy program, and alternative energy program. (8)
While there is much to be learned from the Brazilian example, what works in Brazil is not necessarily what will work in America. (9) U.S. policymakers must provide clear guidance on an integrated program. First, policymakers must reexamine the articulated goals of the ethanol program. Second, policymakers must seriously consider whether the current scheme of subsidies that includes direct income tax credits to farmers and ethanol producers and production mandates is the most efficient way to achieve those goals. Policymakers must also consider the substantial negative effects that massive federal spending has had on the federal treasury, the environment, and the world economy to determine whether the purported benefits outweigh the costs of proceeding on course. Substantial subsidy reform is necessary to curb wasteful spending and achieve the purported goals of the ethanol program, namely, energy independence and reduced carbon emissions.
This Comment will explore the U.S. ethanol program in detail. First, it will explore the science of ethanol. Understanding how ethanol is produced (albeit on an elementary level) is necessary to comprehending how the government funds the program. After introducing the process of ethanol distillation, Part III of the Comment will address the history of the ethanol program both in the United States and in Brazil, including a synopsis of the current ethanol legislation in the United States. Part III will also examine whether the success of the Brazilian ethanol program could be translated to the United States. Part IV of the Comment will address the problems riddling the ethanol program in some detail regarding the current system of subsidies in their various forms. These subsidies cost the public billions of dollars every year and are set to increase dramatically in the coming years. (10) It is not unreasonable to ask if there might be a more cost-efficient method of achieving the goals articulated by Congress in recent legislation. Part IV of the paper will also explore the unintended consequences of federal funding of the ethanol program, both in the United States and abroad. The ethanol program is purportedly committed to liberating the United States from foreign oil, stimulating the agricultural market, and improving the environment. (11) Appropriate guidance is crucial to developing successful alternative sources of fuel. The U.S. government should set appropriate goals such as diversifying the energy supply and establishing a level playing field on which players can compete for the best alternative fuel sources by removing market distortions.
II. THE SCIENCE OF ETHANOL
Biofuels are made by distilling agricultural commodities or other biological materials. (12) Ethanol is the most common biofuel and is produced by fermenting and distilling sugary or starchy materials like sugarcane and corn. (13) In the United States, the most popular feedstock in the ethanol process is corn. (14) By most accounts, corn ethanol production is an efficient process, meaning that its energy yield is greater than the energy required to produce it. (15) By comparison, producing ethanol from sugarcane is even more efficient than producing it from corn. (16) In addition, ethanol can be produced from biomasses containing large amounts of cellulose such as trees and grass, but large scale production using this method is currently infeasible. (17)
Ethanol used as fuel needs to be free of water. (18) It tends to absorb water and other impurities in most conventional pipelines, so dedicated pipelines are necessary to transport anhydrous or waterless ethanol. (19) In the United States, the most commonly used method to transport ethanol is not by dedicated pipeline but by tanker truck or rail tank car. (20) The necessity of transporting ethanol in this manner has important implications for its energy efficiency. Some calculations factor in the energy cost of transporting ethanol, lowering the overall efficiency rating of ethanol, while others do not. (21)
III. HISTORY AND OVERVIEW OF ETHANOL PROGRAMS IN THE UNITED STATES AND BRAZIL
A. U.S. Ethanol Program
The U.S. ethanol program, like Brazil's, began in the 1970s in response to the Organization of Petroleum Exporting Countries ("OPEC") oil embargoes of 1973 and 1979. (22) Federal tax incentives for blended fuel encouraged adding ethanol to gasoline. (23) Additionally, the Clean Air Act Amendments of 1990 required putting additives like ethanol into gas to reduce harmful emissions. (24) The Energy Policy Act of 2005 (P.L. 109-58) established renewable fuel standards, mandating the use of ethanol in gasoline and establishing ethanol production goals of 4.0 billion gallons of renewable fuels in 2006 and 7.5 billion gallons in 2012. (25) Purportedly, corn ethanol will be used to meet these goals. (26) Ethanol is relatively expensive compared to conventional fuel. In order to make it attractive for corn farmers to divert their crop to ethanol production, Congress implemented an income tax credit of $0.51 per gallon for ethanol used for blending in gasoline. (27)
The Senate and House have both approved bills implementing the renewable fuels standard, House Bill 6 and House Bill 3221, respectively. (28) Both bills include provisions establishing funds for research and development of biofuels and providing grants for biofuel production and research in the amount of $25 million for fiscal years 2008 through 2010. (29) The bills also include a provision that would encourage studying the efficiency of flexible-fuel vehicles. (30) Perhaps in an effort to diversify biofuels production, the House bill would provide construction grants for cellulosic biofuels facilities established by Public Law 109-58 in the amount of $25 million for fiscal years 2008 through 2010. (31)
On December 19, 2007, President Bush approved House Bill 6, known as the Energy Independence and Security Act of 2007 (EISA). (32) Most notably, the bill increases domestic production of renewable fuels by raising the renewable fuels standard every year until it reaches 36 billion gallons of ethanol in 2022. (33)
B. Brazilian Ethanol Program
1. History
As previously noted, Brazil's ethanol program has been in place since the 1970s. (34) Initially designed as a program to protect the Brazilian sugarcane industry from collapsing prices, it was later modified to respond to the OPEC oil embargo. (35) The government nurtured the program by implementing subsidies and tax breaks to encourage sugarcane farmers to plant more sugarcane and financed a large distribution network to transport ethanol to fueling stations. (36) This system kept ethanol prices artificially low to induce people to choose ethanol over conventional gasoline. (37) The government also required Petrobras, the state-owned oil company, to buy a fixed amount of ethanol. (38)
The numbers suggest that the Brazilian program is a success. (39) Currently, sugarcane ethanol represents 40% of the country's gasoline demand. (40) Indeed, Brazil produced 4.4 billion gallons of ethanol in 2006. (41) This ethanol fuel is not sitting idly by; sales of flexible-fuel vehicles that can run on E85 ethanol represent about 90% of new car sales. (42) The proliferation of flexible-fuel vehicles has prompted the construction of more plants that can produce ethanol or sugarcane, depending on current demand levels. (43) Investors responded to the regulations by building distilleries to convert sugarcane into ethanol, and automakers built flexible-fuel cars. (44)
Success has not always been forthcoming. Brazil's ethanol program required large government subsidies for many years before it was able to stand on its own. (45) In the late 1980s, huge deficits and inflation caused the Brazilian government to scale back ethanol production subsidies. (46) Moreover, ethanol was unable to compete with cheap gasoline in the late 1990s. (47) Today, the ethanol market remains volatile, costing Brazilians money at the pump despite the high price of gasoline. (48) Nevertheless, the increase in flexible-fuel vehicles has triggered the industry's expansion, ensuring its position as the largest producer and consumer of ethanol in the transportation sector. (49)
2. Lessons Learned from the Brazilian Experience
The success of the Brazilian program has elicited positive attention from the U.S. media. During a recent CNN broadcast, special correspondent Frank Sesno queried as to why America's ethanol program lags behind Brazil's: "I'm driving a Chevrolet in the middle of Brazil on ethanol. Pure ethanol. Not a drop of oil, imported oil, in this tank ... I'm thinking, why can't I do this in America?" (50) Is Brazil's success translatable to U.S. soil? To answer that question, it is necessary to examine why the Brazilian ethanol program has been successful.
The success of the Brazilian ethanol program is attributable to many factors, including low production costs of sugarcane and a mature infrastructure built over the course of three decades. (51) Brazil is able to produce large amounts of ethanol because it is the lowest cost producer of sugarcane in the world. (52) Efficient manufacture of sugarcane ethanol is possible because: 1) sugarcane is a water-intensive (and therefore costly) crop to grow, but Brazilian cane fields are rain-fed and do not require costly irrigation; 2) sugarcane does not compete for land in Brazil with food crops because there is still plenty of local land not used for agriculture; 3) decades of research in Brazil have resulted in discovering and using sugarcane that is resistant to crop diseases in the region; and 4) Brazilian distilleries are capable of producing either ethanol or sugarcane, enabling owners to take advantage of rising prices for either product. (53) In addition to the suitability of ethanol production by reason of Brazil's unique environment, Brazil consumes a significantly lower amount of fuel than the United States, making it substantially more difficult for ethanol to make a dent in domestic consumption of conventional fuel as it has done in Brazil. (54) Brazil's per capita oil consumption is a mere 4.2 barrels per person compared to 27 barrels per person in the United States. (55) Additionally, the U.S. population far outnumbers Brazil's population. (56)
Raising corn and turning it into ethanol requires more input and yields less energy than its Brazilian counterpart. (57) Also, the United States consumes substantially more fuel than Brazil does due to its greater energy needs and larger population. For these reasons, it is unlikely that Brazil's success is directly translatable to the United States. However, there are some valuable lessons to be learned from the Brazilian experience.
First, the Brazilian ethanol program receives no government price support in the form of subsidy payments or indirect costs assumed by other sectors. (58) The government provides support by mandating a certain percentage of sugarcane ethanol to be included in gasoline. (59) U.S. policymakers should consider this fact in shaping the course of the U.S. ethanol program, especially with regard to building an effective infrastructure and phasing out government price support. Brazil's successful ethanol program is closely tied to the efficient nature of the production process. U.S. policymakers must seriously consider whether producing ethanol from corn will ever be a cost-effective means of displacing conventional fuel consumption as it is in Brazil. All costs associated with corn ethanol production, including direct costs such as the Volumetric Ethanol Excise Tax Credit ("VEETC") and indirect costs like rising food costs and harm to the environment, are relevant in the calculus of efficiency and should guide the decision making process.
IV. UNDERSTANDING THE FEDERAL SUBSIDIES IN THEIR VARIOUS FORMS--THE KEY TO MEANINGFUL REFORM
The U.S. ethanol program receives a substantial amount of support from a diverse group of constituents. (60) In fact, support for the ethanol program has been described as the "perfect storm," comprising agricultural, environmental, and national...
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