Corn ethanol: the rise and fall of a political force

The 2016 primary race is defying conventional wisdom, with erstwhile fringe candidates competitive in the polls despite their unorthodox policy positions. The Iowa Republican Caucus provided additional material for this storyline as Senator Ted Cruz defied projections and won the state.

His victory came despite his opposition to subsidies for one of the state’s biggest industries: the production of corn ethanol.

Monday night’s result would have been unthinkable just a decade ago when American policymakers wanted to see as much corn ethanol consumed as rapidly as possible.

Now, however, more politicians – and voters – question or openly criticize corn ethanol, saying it’s been a boon to Iowa but has provided little in the way of environmental benefits or energy security.

Fueling the ethanol boom

Iowa achieves the highest corn yields in the world and, following the passage of an energy law in 2005, quickly became the center of a multi-billion dollar industry.

A full 30 percent of American ethanol production came from the state in 2014. If it were a country, Iowa would be the third-largest ethanol producer in the world, surpassing all but the rest of the United States and Brazil.

But the roots of corn ethanol’s political clout reach back farther than the George W. Bush presidency. The modern corn ethanol industry first came of age in the 1970s. That decade saw U.S. policymakers focus on energy security as the country was hit by oil embargoes even as its domestic crude production was entering a lengthy decline.

Federal tax breaks were implemented in 1978 on gasoline blended to contain 10 percent ethanol by volume – a fuel then called gasohol. A large tariff was also imposed on ethanol made from sugarcane imported from Brazil. U.S. ethanol production grew rapidly in response but from a small base, and ethanol’s impact on overall gasoline consumption remained low.

This situation changed drastically after the turn of the 21st century.

In August 2001 Saudi Arabia became America’s largest source of foreign oil. The discovery that the majority of the 9/11 hijackers were citizens of that country once again made energy security a national priority. The Bush administration unveiled several domestic energy initiatives in response, including a hydrogen vehicle program and tax credits for electricity made from renewable sources, such as solar and wind.

A larger tax credit for gasohol, which was restyled “E10,” had the most immediate impact of the new initiatives. This credit allowed companies that blend ethanol with gasoline to receive a payment from the IRS for every gallon they blended.

The combination of the tax credit and tariff caused ethanol production to increase by 700 percent between 2001 and 2010.

Ethanol production was so profitable that the country’s first ethanol mandate saw its target for 2012 reached four years early.

Around that time, there was growing concern that the fuel additive MTBE, which was designed to improve gasoline’s fuel performance but can cause health problems, was leaking from storage tanks and contaminating groundwater. That left corn ethanol, which also improves gasoline’s performance but does not persist in the environment as much as MTBE, as the only remaining fuel additive on the market.

Even as corn ethanol spread into more and more filling stations, scientists and watchdog groups questioned its environmental benefits, noting that carbon emissions are not necessary lower than those of gasoline alone and pointing out the significant amount of water and land required for corn ethanol production.

Enter the Tea Party

After the ethanol industry achieved its first mandated level of production, Congress quickly began work on an expanded mandate. But ultimately, corn ethanol’s rapid success led to its fall from political favor.

The year 2007 witnessed three major events that drastically changed the nature of the new biofuel mandate.

Democrats took control of Congress in early 2007 after campaigning on a platform that included environmental security. Shortly afterward, an article argued that diverting corn’s calories from stomachs to cars would cause widespread hunger among the world’s poor.

That article’s publication coincided with a sharp increase in the prices of corn and other grains, which prompted one UN official to label biofuels “a crime against humanity.” Another analysis conducted during the year concluded that corn ethanol wouldn’t drive food prices permanently higher. However, it also calculated that emissions from biofuels were higher than thought because farmers in the Amazon responded to higher ethanol prices by converting rainforest to farmland.

Let it rain corn: Corn being unloaded from a truck for conversion into ethanol at the Lincoln Energy Plant in Iowa.breadfortheworld/flickr, CC BY-NC-ND

As opposition to corn ethanol grew, Congressional Democrats put a cap on how much corn ethanol could be blended with gasoline, at roughly 10 percent of gasoline consumption under the expanded mandate.

To meet higher volumes of ethanol production, the revised rules called for production of biofuels from non-food sources, such as wood chips or corn stalks and husks. The mandate called for these advanced biofuels to fulfill higher production targets by 2022 despite the fact the industry was non-existent in 2007.

Then grain prices collapsed in 2008 and subsequent research has determined that Brazilian deforestation fell by 83 percent after 2004 even as corn ethanol production quadrupled, countering the argument that biofuels in the U.S. would lead to higher deforestation globally. The expanded mandate was already law when these findings became known, however.

Ethanol’s political problems were just beginning, though. With the rise of the Republican Party’s pro-austerity Tea Party wing, the blenders' tax credit and ethanol import tariff were both being discarded by 2011. Tea Party opposition to the Affordable Care Act’s insurance mandate also led to the movement’s opposition to the blending mandate, most recently manifested by Cruz.

In 2013 the Tea Party gained a powerful ally in the form of the U.S. refining industry.

American refiners, the companies that turn petroleum into gasoline, diesel and other products, are tasked with implementing the mandate’s blending requirements. Their collective compliance costs exceeded $1 billion in 2013 and remained high in 2014.

A large lobbying effort by the refining industry that began in 2013 called the mandate’s political future into question. This uncertainty was not dispelled until late 2015. In that year the EPA established future blending volumes that were higher than the refining industry had wanted but lower than had been originally expected.

A no-show for advanced biofuels

Despite the political push-back the U.S. corn ethanol industry is in no danger of disappearing. Yet its future is still be limited by political and technology constraints.

The advanced biofuel from non-food biomass that was to surpass corn ethanol has mostly been a no-show, reaching just 4 percent of its original blending target in 2015 because of insufficient production. Efficiency gains mean that corn ethanol now achieves fewer greenhouse gas emissions than domestic gasoline.

Congressional opposition is too weak to exclude corn ethanol from the country’s biofuel mandate. On the other hand, it is strong enough to prevent corn ethanol’s mandate to expand to fill the place of the missing advanced biofuels.

Finally, ethanol’s tendency to damage older engines when used in blends exceeding 10 percent has constrained its ability to surpass current consumption volumes.

All of these factors have deflated ethanol’s stature from a decade ago. One need only look at the results of the Iowa Republican Caucus to understand just how much the fuel’s political fortunes have faded.

Tristan R. Brown owns a diverse stock portfolio that includes producers of both fossil fuels and renewable energy.