Editorial: Time to take stock of ethanol subsidies

Rapid investment may have triggered a glut.

Last update: October 3, 2007 - 6:55 PM

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AHEAD OF TARGET

In 2005 Congress passed a law requiring gasoline refiners to use 7.5 billion gallons of renewable fuels annually by the year 2012. But the ethanol industry has grown so fast that it is expected to produce that much ethanol by the end of this year.

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In an effort to develop home-grown energy and support rural America, the government has showered favors on the ethanol industry for the last few years -- a federal mandate supporting renewables, a federal tax credit to fuel blenders, a tariff on imported ethanol and, in Minnesota, a generous per-gallon subsidy.

So it had to happen: The New York Times reported Sunday that the Midwest now has an ethanol glut. The real story is a little more complicated than that, but there's enough truth in it that Minnesota lawmakers, regulators and investors should slow down, take stock of the ethanol industry and see if they have the right mix of public subsidies to serve the long-term public interest.

When ethanol was an infant, there were good arguments for public support. Biofuels could help wean the United States from imported oil while producing cleaner-burning gasoline. In addition, ethanol could provide a new market for Midwestern farmers, diversifying their incomes and stabilizing the rural economy.

Only in the last year or two have Minnesotans begun to realize that ethanol has disadvantages too. Last year farmers converted 12 million acres to corn, including some land that should have been left in soybeans or pasture had market signals prevailed, and intensified the application of chemical fertilizers that in themselves pose environmental hazards. Even so, demand from ethanol distillers has pushed up the price of corn, putting a squeeze on livestock farmers who buy animal feed, raising food prices and even triggering tortilla riots in Mexico. "This may have been an infant industry once, but it's now a strapping teenager with a huge appetite for corn," says University of Minnesota economist C. Ford Runge.

Now there's a new risk: That subsidies might have created an investment bubble. Ethanol prices have dropped by about one-third in the last five months, presenting the possibility that some rural investors will not get the returns they expected and that some farmers will have placed the wrong bet at planting time.

Meanwhile, Congress is considering an even higher federal renewables mandate to increase demand for ethanol. That's a bad idea -- investment in this industry already depends too heavily on public subsidy.

It's quite possible that the ethanol glut, such as it is, will disappear as soon as there are enough rail cars and tanker trucks to ship ethanol from Midwestern production hubs to coastal refineries, and when gasoline refineries reconcile themselves to a new source of fuel, and when consumers fully get on board with the renewables movement.

But these are all signs that the infant ethanol industry has come of age, that the rest of the fuels market needs a period to adjust and that public subsidies may have reached the point of diminishing returns.

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