Congress Must Address Ethanol Mandates in Farm Bill

Lawmakers returning to Washington next month should reject the bloated farm bill and work on something that could have a beneficial impact.

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A modified John Deere combine collects a mix of corn kernels and cobs on a farm near Hurley, S.D., Tuesday, Oct. 30, 2007. Poet is testing various corn cob gathering methods as part of the company's effort to make cellulosic ethanol out of corn waste.

Pete Sepp is executive vice president of the National Taxpayers Union.

Taxpayers already have many reasons to oppose farm program reauthorization legislation currently worming its way through Congress. Actually, close to a trillion reasons: the multi-year price tags of both the House and Senate versions (including their provisions for entitlement programs like food stamps) approach one trillion dollars each. Yet there are other grounds for objection to these bills, owing to their close connection with energy policy. That link, unfortunately, leaves taxpayers, consumers, and food providers in an increasingly difficult bind due to drought conditions across a wide swath of America.

Largely at the insistence of farm-state lawmakers from both parties, government has showered preferences on various schemes that convert crops to fuel, the biggest of which is ethanol. Due to a plethora of policies such as tax credits, loan guarantees, tariffs, and crop subsidies, ethanol and its main raw material (in the United States, corn) have enjoyed a long run of support from Washington.

[ See a collection of political cartoons on energy policy.]

On Dec. 31, 2011, the Volumetric Ethanol Excise Tax Credit expired. Unlike some of the widely-available write-offs such as the Section 199 deduction that oil industry critics seek to selectively repeal, the tax credit was specifically created to provide a tax break for one narrow activity.

Yet, the ethanol favor factory has not closed its doors entirely. Still standing is the federal Renewable Fuels Standard, which decrees production of several biofuels each year. For 2012, this includes 13.2 billion gallons of ethanol. Though technically an energy and environmental policy, Renewable Fuels Standard is in reality also an agricultural policy—one that is bolstered by the very subsidies the House and Senate farm bills would perpetuate. Currently as much as 40 percent of the U.S. corn crop is poured into ethanol production. And though the tax credit, which assisted blenders, is gone, in 2011 corn received by far the largest share of government farm assistance: more than $4.6 billion.

[ Rick Newman: More Evidence That It's Time to Dump Ethanol]

Thus the most immediate way the bureaucrats' ever-tougher Renewable Fuels Standard quotas could be met without huge disruptions was with rising corn yields. But Mother Nature has foiled the plan with a drought that's projected to result in the worst corn yield in six years. The math is fairly straightforward: growing ethanol mandate plus dwindling ethanol crop equals shortage of whatever's left over. And those "left overs" are important to consumers, not only because of the corn humans eat, but the feed animals require. The bottom line is potentially major price hikes on everything from tortilla chips to turkeys. In fact, a study from three Purdue University economists suggests that cutting back on the fuel mandates could reduce food prices by as much as 20 percent in the year 2013.

With a serious, corn crop-destroying drought in the mix, will the entity that administers Renewable Fuels Standard, the Environmental  Protection Agency, known as the EPA, finally issue a waiver for the mandate and help to mitigate a price spiral that could further harm our fragile economy? Apparently 156 House members and 26 senators hope so. Recently they sent letters to the EPA asking for a temporary suspension. Governors of several states have made similar requests. On August 21 the EPA announced it was seeking public comment on such a waiver, though the agency has until mid-November to announce any kind of decision.

[ Wind Energy Tax Credit: More Hot Air or Key Job Creator?]

Given such evident concern over the issue from a sizeable number of lawmakers, Congress could act on its own when it comes back into session in early September. Repealing Renewable Fuels Standard outright would be the best free-market policy solution, but other legislative options are ready and waiting for action. One example is Texas Republican Rep. Michael Burgess's " Leave Ethanol Volumes at Existing Levels Act," which would ratchet down the percentage of renewable fuel required to be sold in gasoline and suspend the Renewable Fuels Standard between 2013 and 2022.

Instead of using the drought as a lame excuse for proceeding with bloated Farm Bills, lawmakers returning to Washington next month should reject these monstrosities and work on something that could have a beneficial impact. Addressing Renewable Fuels Standard is a good place to start. As my colleague Nan Swift recently noted:

Waiving, reforming, or repealing the ethanol mandate is not just one immediate step that Congress can take to help alleviate the terrible effects of the drought on livestock producers and consumers, one that would save taxpayers money … – it is also a perfect, though depressing, example of how government meddling affects markets and leads to unfortunate unintended consequences.

By reversing this "depressing example" from past energy policy, perhaps Congress can set a more positive example for the future.