The Poverty-Fighting Power of Ethanol

By lycobob, Unfiltered 5-23-07

Ethanol holds great promise as an automotive fuel. According to the Department of Energy’s Energy Information Administration (EIA), automakers produced nearly 750,000 vehicles in 2005 that run on 85% ethanol fuel (E85). Much of the interest in ethanol has come from its properties as a clean burning, renewable alternative to imported petroleum. With minor changes in U.S. trade policy, ethanol could become a powerful tool for fighting worldwide poverty.
According to the Washington Post, the United States produced about 5 billion gallons of ethanol in 2006, and imported another 1.7 billion gallons. Imported ethanol is subject to a 54 cent per gallon tariff. This distorts the market in ways that are unfortunate for the poor and bad for the environment.
According to the EIA, about 90% of domestic ethanol production comes from corn. Surging demand for ethanol has led to a run up in corn prices. This hurts everyone who consumes corn. While this impacts everyone from cattle ranchers to, ironically, ethanol producers, those most hurt by these price increases are the world’s poor. Mexico has recently experienced political instability because of high corn prices.
Brazil is the world’s second largest producer of ethanol. Since the 1970s, Brazil has made ethanol production a priority. The majority of cars in Brazil run on either pure ethanol or ethanol/gasoline mixtures. Overall, ethanol has displaced about 40% of Brazil’s gasoline consumption. As a result, Brazil exports refined gasoline even though it is a small net importer of crude oil. Brazil has two distinct advantages over the United States in ethanol production.
Brazil’s first advantage is geographic. Brazil lies almost entirely in the tropics. As a result, it receives far more solar radiation per acre than the United States. Ethanol is produced from chemical energy stored in plants. This chemical energy is produced using sunlight as a primary energy source. Ethanol production in Brazil is more efficient than ethanol production in the United States because Brazil gets more sun.
The majority of Brazil’s ethanol comes from sugar cane. Sugar cane is significantly more efficient than corn as a source for ethanol. Brazil’s sugar cane industry also produces electricity from the crop by-products of ethanol production. Efficient ethanol production reduces environmental impact on many levels. These include, but are not limited to, less inputs of natural resources per gallon of ethanol, and less land under cultivation per gallon of fuel.
Expanding worldwide demand for ethanol has caused Brazil to rapidly increase ethanol production. Land previously used for coffee and other crops has been transferred to sugar cane to meet ethanol demand. As any socially conscious coffee drinker knows, coffee growers are often confined to poverty because of low coffee prices. The Economist has frequently pointed out that coffee prices are low because of a worldwide glut of coffee beans. Reduction in coffee bean supply in Brazil, which is the world’s largest coffee producer, would improve worldwide coffee prices, and with it, the lot of coffee growers.
Expanding ethanol supplies would impact worldwide petroleum prices. The Brazilian Government estimates that it could produce ethanol equivalent to about 10% of worldwide petroleum consumption. To put this in perspective, about 5% of the world’s petroleum comes from Iran. Oil and gasoline prices are profoundly sensitive to changes in supply and demand. This is why cartels from Standard Oil to OPEC and the Texas Railroad Commission have worked hard to limit worldwide oil production. A surge in worldwide fuel supply would likely reduce gas prices in the United States. High energy prices disproportionally hurt the poor, and lower in gasoline prices would be most helpful to the poor. This is true in the United States and other countries. The vast majority of the world’s poor countries are net oil importers. Money spent on oil is unavailable for food and other necessities.
Brazil is not the only Latin American country with the potential to produce ethanol. The vast majority of Latin America is in the tropics, and countries from Peru to Mexico could eventually be major ethanol producers. The most painless and least controversial way to reduce illegal immigration is the creation of jobs in Latin America. In Brazil alone, it is estimated that 1 million people work in the ethanol industry.
The best explanation for the persistence of the ethanol tariff is that Iowa is a very important state in Presidential politics. Iowa receives more farm subsidies per capita than any other state. Conveniently, the Iowa State Caucus is the first binding contest in the race for the Presidential nomination. Iowa is also one of the tightest swing states in the general presidential election. In 2000, Al Gore carried Iowa. With the help of generous expansions in farm subsidies, George Bush carried Iowa in 2004. In each of these contests, the margin of victory was well under 1%. Anyone aspiring to become or be re-elected as President would be unwise to upset Iowans.
Lifting tariffs on Latin American ethanol would offer a broad range of benefits. The poor in the U.S. and Latin America would benefit from lower corn prices, jobs, cheaper fuel and higher cash crop prices. Energy security would improve if fuel came from friendly countries like Colombia and Brazil instead of the Middle East, Russia and Venezuela. Lower oil prices would weaken defiant anti-American leaders in Iran, Venezuela and elsewhere.
This is not to say that ethanol production in Brazil is without problems. Sugar cane cutters are only required for a few months out of the year. Increased ethanol production may speed deforestation. However, the best defense against deforestation is prosperity. According to a Finnish study described in the Economist and published in the Proceedings of the National Academy of Sciences, forest density is increasing in every country with a gross domestic product per capita of over 4,600 dollars per year.
Tariff-free access to the U.S. market could be a carrot for reform throughout Latin America. Basic poverty-fighting measures like women’s rights, property rights for the poor and transparent, democratic government could all be prerequisites to dropping the current ethanol tariff. In Europe, the hope of access to the common market of the European Union helped democratic, transparent governments spread throughout former Communist states. Ethanol markets could have a similar impact on Latin America.
Brazil is a good neighbor. Brazil’s center-left President, Lula da Silva has committed to paying Brazil’s international debt, helping the poor and being a responsible member of the international community. Brazil has contributed thousands of soldiers to the U.N. stabilization mission in Haiti. Other Latin American countries, including Colombia, Honduras, and El Salvador have been staunch U.S. allies in recent years. Granting these countries tariff-free access to the U.S. ethanol market would reduce illegal immigration, benefit the environment, help the poor and reduce our dependence on imported oil. President Bush will never face another Presidential election or Iowa Caucus. For all of these reasons, it is time to begin phasing out ethanol tariffs.

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