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Monday, Nov 9, 2009
When an American company processes Brazilian ethanol in an El Salvadoran plant, how many tax loopholes is it jumping through? And how many U.S. politicians are going to feign outrage?
Sep 23, 2004 | "I hate talking about ethanol," says the Sierra Club's Dan Becker, who makes his living talking about ethanol. It's not so much that he's appalled by the hypocrisy surrounding the "green fuel," although he is. It's that while the product's benefits are marginal, there are still just enough of them to make it difficult to persuade people that public resources might be better spent elsewhere.
Ethanol "saves energy, but it also takes an enormous amount of energy to produce it," says Becker, director of the environmental group's energy program. "And while it reduces some pollutants, such as carbon monoxide, it increases others, such as smog."
Nevertheless, to eke out those marginal benefits, federal and state governments have over the past couple of decades spent many billions of dollars to create, maintain and protect the growing ethanol industry, thus producing a new market for U.S. corn growers and their agribusiness benefactors. Midwestern legislators swear fealty to the ethanol industry every time they run for office. It's a great election-year issue for politicians of both parties -- including both presidential candidates -- who want to pick up votes in crucial corn-belt swing states. Partly because ethanol's benefits are just attractive enough to make it salable as an alternative energy source, it's the perfect boondoggle -- one with nearly zero political downside.
But a boondoggle it is. Just look at the most recent case: Agribusiness giant Cargill announces plans to open a tiny ethanol plant in El Salvador, and suddenly Midwestern lawmakers are scrambling to propose laws designed to stop the corporation in its tracks, citing the need to further protect the domestic ethanol market. Their frenzied reaction highlights once again how, when it comes to ethanol, lawmakers from both parties are eager to make nice with each other to keep federal dollars flowing to prop up a dubious product that few people want. The result of all this finagling is a whole network of conflicting and contradictory rules and incentives governing the ethanol market both domestically and internationally -- and oodles of special-interest campaign contributions for the politicians concerned. Many ethanol critics say that if the government is going to support energy alternatives and manipulate markets, its resources would be better spent on other, more worthy initiatives. Wind and solar power, say. Or conservation measures.
Cargill's plan could yield cheaper, more plentiful ethanol. So, by opposing it, lawmakers are tacitly admitting that they are less interested in ethanol's supposed benefits -- that it reduces greenhouse gases and curtails our dependence on Mideast oil -- than they are in preserving their favorite source of political pork.
Ethanol is a fuel additive derived from plants, most often in the form of alcohol distilled from corn. In other words, it is moonshine. Most ethanol is blended with gasoline to produce "gasohol," which is usually made up of 90 percent gasoline and 10 percent ethanol. Most of it is sold in states and cities where its use is mandated ostensibly to address pollution concerns, though more is being sold in coastal states that are switching away from water-polluting MTBE, an erstwhile ethanol rival. It is pricier than gasoline, so the only way most people will buy it is if they are forced to.
Since the energy crisis of the early 1970s, ethanol has been promoted as an alternative to petroleum and as a "green fuel." The industry has received billions of dollars in state and federal largesse over the years, in the form of subsidies, tax breaks, import barriers, and mandated production.
Besides playing up the product's energy-savings and environmental benefits, legislators have sold ethanol to the public as "helping America's farmers" by creating and protecting a huge new market for corn. But while farmers get higher prices for their corn, most of the direct government benefits don't go to them -- they go to the companies that convert corn into ethanol. Chief among them is Archer Daniels Midland, a company that nearly imploded in the '90s amid a price-fixing scandal. ADM gave $1.1 million in soft money donations to Republicans in the 2002 election cycle, according to the Center for Responsive Politics. Democrats got $624,000.
The irony in the Cargill case is that the government's own market manipulations are what motivated the company to go to El Salvador in the first place. El Salvador is part of the Caribbean Basin Initiative (CBI), a set of trade laws passed by Congress in the 1980s to help the struggling small economies of Central American countries. As a result, El Salvador is exempt from the 54-cent-per-gallon tariff that is slapped on most imported ethanol.
So, by building the plant there, Cargill will get not only the usual 52-cents-per-gallon break that domestic ethanol producers get on federal fuel taxes, but it also gets to skirt the import tariff that was sold as an "offset" to the tax break. To make matters even more confused, the ethanol Cargill will import from El Salvador is actually from Brazil, the world's largest ethanol producer, and thus would normally be subject to the import tariff. Cargill's plan is to ship about 60 million gallons of Brazilian ethanol a year to the El Salvador plant just to remove the water in a quick final step before shipment to U.S. and world markets. And in the final layer of irony, the plant itself will be tiny, employing only about 40 workers, so the original purpose of the CBI trade laws is being subverted as well.
