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Ethanol: Boon or boondoggle?

Is ethanol a boon or boondoggle? Touted by industry proponents as a solution to dependence on foreign oil, this corn-based fuel has been attacked by critics as a waste of both money and energy.
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Of the many battles waged behind the scenes of the energy bill before Congress, the provision to nearly double ethanol production by 2012 has generated the most heat. Touted by industry proponents as a solution to dependence on foreign oil, this corn-based fuel has been attacked by critics as a waste of both money and energy. And over the past 25 years, the issue has been so politicized that impartial research or neutral opinions on the alternative fuel have all but evaporated.

You don't have to convince Darrell Downs of the promise of ethanol. As mayor of Marcus, Iowa, population 1,139, Downs helped raise the $20 million needed to build the ethanol plant that opened there about 6 months ago. Since then, the economic benefits to this struggling farm-belt town have been obvious, he said.

“We’re just darned glad to have the plant here,” Downs said. “It just changes the attitude of the people.”

The added demand for corn has pushed up prices in the area by 10 to 12 cents a bushel, he noted.

But travel outside the corn belt, and attitudes toward the wisdom of boosting ethanol production split dramatically. Critics say that after 25 years of hefty government subsidies, ethanol has not demonstrated that it can stand on its own as a profitable alternative to fossil fuels.

“If the ethanol producers and the corn growers weren’t benefiting from this, we wouldn’t be doing it,” said Sen. Charles Schumer, D-N.Y., last week. “There’s no policy reason to do this.”

Ethanol, which is essentially grain alcohol, has been used as a fuel for nearly two centuries, and was one of the first used to power automobiles at the dawn of the 20th century. But due in part to a $2 a gallon ethanol tax levied by Congress in the late 19th century — and Prohibition in the 1920s — gasoline became the motor fuel of choice.

Ethanol’s more recent history can be traced to the 1970s, when the soaring price of oil combined with the Soviet grain embargo sent the farm lobby to Capitol Hill to convince Congress of the wisdom of boosting ethanol demand. The result was the Energy Tax Act of 1978, which provided tax breaks and subsides that eventually rose to 60 cents a gallon in the 1980s.

Simple questions
From the start, the debate over ethanol has centered on a few simple questions: Is it cheaper to produce than fuels made from fossil fuels? And does it create more energy than it takes to produce it? But despite decades of research, the debate continues over the wisdom of pouring billions of dollars into ethanol production.

One of ethanol’s most prolific critics is David Pimental, a Cornell University scientist whose research is often cited by those who believe ethanol is nothing more than a boondoggle to the farm lobby. Among his findings are that ethanol costs some $1.74 a gallon to produce, compared to less than a dollar for a gallon of gasoline. He also maintains that ethanol production is a waste of energy, consuming 70 percent more energy to produce than it generates when used as a fuel.

Not surprisingly, ethanol proponents dispute those findings. Monte Shaw, a spokesman for the Renewable Fuels Association, the ethanol trade group, calls Pimental’s work “completely and utterly baseless and inaccurate.”

“Every gallon of ethanol we use displaces foreign oil,” said Shaw. “It’s not going to get the job done by itself, by it’s a step in the right direction.”

Ethanol proponents also counter that oil producers enjoy subsidies of their own. The “true cost” of a gallon of gasoline, says Shaw, “is more like $5” — if you include things like the military cost of protecting Middle Eastern oil supplies.

And right about here is where the cost-benefit analysis begins to get bogged down, according to Harold Schobert, director of The Energy Institute at Penn State University

“The chemistry is very clear cut,” he said in a recent e-mail. “But, just like the economics, the question (of true cost) becomes where you draw the ‘box.’ Do you include the energy for making the fertilizer, for plowing, etc., and for the farm vehicles? Do you start ‘counting’ energy at the front door of the ethanol plant, so you don’t worry about energy in producing and transporting the corn itself?”

Transporting ethanol, it turns out, is one of its major drawbacks: It just doesn’t flow very well through pipelines, according to Dr. Darren Hudson, a professor of agricultural economics at Mississippi State University.

“Corn is in the center of the country and gasoline consumers are on the coasts,” he said. “So transportation costs can be quite high — roughly double the cost of shipping gasoline” or about $1.20 per gallon of ethanol.

Ethanol critics also counter proponents’ claims that ethanol is a completely clean-burning fuel. While it does reduce many harmful emissions, it can increase nitrous oxides, especially if it doesn’t burn properly, said Hudson.

Staying alive
But despite the drawbacks, proponents of ethanol have succeeded in keeping the industry alive — even through several brushes with extinction. Falling oil prices in the 1980s, for example, knocked the economic legs out from under ethanol producers — even with generous subsidies. By 1985, only 74 of the 163 ethanol plants in the U.S. remained operating, producing just under 600 million gallons that year. (Total production this year is expected to hit 3 billion gallons.)

Demand for ethanol was later revived as an additive in so-called reformulated gasoline, which was required to meet tougher clean air standards. But a jump in corn prices in the mid-1990s brought competition from a cheaper, petroleum-based additive, MBTE, which crowded out ethanol. Some states passed additional subsidies to keep the ethanol industry going.

The latest revival came in the late 1990s, when MTBE began showing up in drinking water, and some states moved to ban it. By 2000, the EPA recommended that MTBE be phased out nationally.

All of which set the stage for the massive buyout of MTBE producers in this year’s energy bill, which will pay oil companies and refiners some $1.75 billion to phase out production. They also won protection from product liability lawsuits by people who claim to have been hurt by MTBE, which some studies have shown to cause cancer.

The elimination of MTBE is critical because it clears the way for ethanol to emerge as the main additive in reformulated gasoline. Cleaner-burning reformulated gasoline is required in nine major metropolitan areas with the worst ozone air pollution problems and in other areas that have voluntarily chosen to use the fuel.

Politics are clear
While the economics and science behind the ethanol debate may be murky, the politics are crystal clear. Today, about a third of all ethanol in the U.S. is produced by agricultural giant Archer Daniels Midland.

ADM has been the major champion of the fuel for decades and one of the most generous political contributors on Capitol Hill. Since 1999, ADM has given $2.4 million in unregulated donations to political parties, $1.5 million to Republicans and $874,000 to Democrats. Such soft money donations were outlawed by the campaign finance law that took effect last year. The company also has contributed $371,450 directly to federal candidates since 1999, including more than $200,000 to Republicans.

It’s true that ADM, a major food producer and agricultural services provider, gets no direct subsidies from the ethanol provisions of the energy bill — those are paid to refiners to use ethanol. But it’s clear that the company is a big beneficiary of a pro-ethanol policy, according to commodities analyst Philip Gotthelf.

“ADM wants rich farmers,” he said. “The richer the farmer, the more they are able to buy the stuff that ADM puts out.”

So it’s no surprise that the bipartisan support for the expansion of ethanol production came from farm-state lawmakers, including Sen. Charles Grassley, R-Iowa, the lead Senate negotiator, and Minority Leader Tom Daschle, whose home state of South Dakota has nine ethanol plants.

Despite sharp divisions over the economics and science of ethanol, everyone seems to understand the politics.

“It’s the only thing in the universe that President Bush and Howard Dean agree on,” said Keith Ashdown, a spokesman for Taxpayers for Common Sense. “If you want to win in Iowa, you’ve got to worship the corn gods.”

Politics also played a major role in the MTBE phase-out that cleared the way for ethanol to become the main additive in reformulated gasoline. About three-fourths of MTBE producers are based in Texas and Louisiana, and the liability protection in the energy bill was championed by three Republicans from those states: House Majority Leader Tom DeLay of Texas, Rep. Billy Tauzin of Louisiana, the lead House negotiator, and Rep. Joe Barton of Texas. Major MTBE producers including Lyondell Petrochemicals of Houston, and Koch Industries of Wichita, Kan., were heavy contributors to Congressmen shepherding the bill.

Detroit also began to warm up to the idea of boosting ethanol production ever since it began introducing so-called “flexible fuel” vehicles that can burn various mixtures of gasoline and ethanol — despite the limited availability of ethanol as a primary fuel. Even if drivers eventually fill their tanks entirely with gasoline, the government allows car manufacturers to count those flexible-fuel vehicles toward fuel-efficiency standards.

But no matter how much of a boost ethanol gets through subsidies, it also seems clear that it will never be more than a “bridge” fuel — especially now that other solutions are showing up like hybrid cars, fuel cells, and other biomass fuel alternatives. And even without those advances, there simply isn’t enough corn to get the job done.

“If we planted fence row to fence row — the entire U.S. — we couldn’t produce enough ethanol to supply consumption,” said Hudson.

The Associated Press contributed to this report.