Ethanol mandates rip off consumers, enrich Wall Street speculators through ethanol credits

Ethanol mandates rip off consumers, enrich Wall Street speculators through ethanol credits

ethanolThe New York Times ran a front page story Sunday about ethanol mandates, which rip off American consumers and enrich Wall Street profiteers. The story, “Wall St. Exploits Ethanol Credits, and Prices Spike,” focuses on “the rapidly growing role of Wall Street banks in gaming the ethanol credits market.”

As the Times notes, ethanol credits

were created by the Environmental Protection Agency and Congress as a way to assure the inclusion of ethanol in gasoline as an energy-saving measure. But gasoline producers who couldn’t or didn’t want to include ethanol could buy credits from those who did. . . In stepped the speculators, amassing millions of credits and making a killing on the wide spread between the bid and ask prices of the credits. Predictably, this drove the price through the roof: the credits, which cost 7 cents each in January, peaked at $1.43 in July and now are trading for 60 cents.

The net result is that consumers will pay more at the pump, notes investment adviser David Kotok of Cumberland Advisors. As he observes, ethanol mandates are having very negative “geopolitical effects” as well. He agrees that “Ethanol was a bad policy, primarily to buy and reward grain-state votes. It spurred grain planting to meet the mandate, but not fast enough, so prices called out for more. The poor were hurt overseas,” and unrest in the Middle East ensued. As Kotok points out, ethanol is

a massive scam. Our national policy diverts 40% of the U.S. corn crop (14% of the global corn crop) in order to produce a fuel that requires almost as much energy to produce as it supplies. Our ethanol mandate has starved millions of people; I’ve watched it with my own eyes in many countries in my travels. A 2011 study by the National Academy of Sciences estimates that, since 2007, the expanding U.S. biofuels subsidy has fueled 20%-40% of the increase the world has seen in the prices for agricultural commodities. In a country like Guatemala, that means that tortilla prices double and egg prices triple. (Source: [New York Times]). Ethanol damages engines, too — ask any user; I’ve seen it myself throughout the US, and Popular Mechanics concurs [Link]. Corn ethanol has poisoned our planet while it has lined certain private and politically connected pockets with billions. It has succeeded in raising our costs, for minimal net energy gains. . . .Global urban dwellers at the low end suffered again. . . .The spike in prices this year was a reaction to the shortage in corn caused by the drought last year. Rather than pay high prices for corn, blenders bought stockpiled RINs. The real story of the market was the explosion from $0.02 per RIN, when nobody wanted them, to $0.07 in August 2012 when the short corn crop became clear. This surge attracted the Wall Street players. They benefited when corn prices spiked again in Jan-Feb on the perception that South America crops would not clear the market before US crops came in in August-September. . . .Please remember that this all starts in the corn-farmed, politically charged Iowa caucuses. Which means, it is our sick and rotten political system that produces these behaviors. That will likely continue until we repeatedly and mercilessly pound the politicians who have sold our nation down a river of ethanol.

At Hot Air, Erika Johnsen observes that it is the government that created the “stupid ethanol-credit system.” She says that while ethanol mandates are indeed harmful, the New York Times places too much of the blame on Wall Street, and too little on the federal ethanol mandates that spawned trafficking in ethanol by speculators. She points out that the profiteering and price increases the Times decries are an entirely predictable result of the

Renewable Fuel Standard, the regulation that requires U.S. refiners to increase an ever-increasing volume of certain biofuels into the nation’s gasoline supply. . . . the Obama administration has done everything they can to bolster and expand the RFS, and refiners must either comply with the RFS or else purchase credits known as renewable identification numbers (RINs) to effectively purchase an exemption. The ongoing political biofuels-battle was ramped up a notch this summer as energy companies have been cautioning that we’re running up against the “blend wall,” the 10 percent threshold beyond which they warn the blended fuels will no longer be acceptable for most cars and trucks, which means demand for the credits have been spiking and prices have been rising (also perhaps exacerbated by the fact the the EPA has been trying to force companies to include a certain type of cellulosic ethanol that isn’t actually commercially available in the necessary quantities. . .

She notes that “the solution for this absolutely not-clean, not-green, corporate-pork-tossing government program, complete with plenty of unintended consequences (like, say, rising food prices . . . )” is ”to repeal the mandate and hence stop creating an artificial market that forces U.S. consumers to purchase something they obviously don’t want to buy,” not to complain about the inevitable and “perfectly legal” trading by Wall Street speculators in response to these ethanol mandates.

The Obama Administration clings to ethanol mandates, backing them despite growing evidence that they increase world hunger and mortality, and harm the environment. As the Wall Street Journal noted, in October 2011,

the Competitive Enterprise Institute and Action Aid petitioned the EPA to review the so-called renewable fuel standard that mandates that 13.8 billion gallons of corn ethanol be blended into the gasoline supply next year. The free-market think tank and global hunger charity argued that the EPA’s technical regulations implementing the mandate did not meet “basic standards of quality” [since] EPA failed to consider multiple peer-reviewed studies documenting the link between ethanol and world hunger in its public health literature review, as required by law. That includes one paper that concludes that biofuel mandates are responsible for at least 192,000 premature deaths every year. Overall more people die from chronic hunger world-wide than malaria, tuberculosis and AIDS combined.

The EPA cavalierly disregarded this evidence, and denied the petition after a fourteenth-month delay.

In 2008, a Washington Post editorial by two prominent environmentalists described how ethanol mandates have harmed the environment and spawned hunger across the world. In “Ethanol’s Failed Promise,” Lester Pearson and Jonathan Lewis observed that “Turning one-fourth of our corn into fuel is affecting global food prices. U.S. food prices are rising at twice the rate of inflation, hitting the pocketbooks of lower-income Americans and people living on fixed incomes. . .Deadly food riots have broken out in dozens of nations in the past few months, most recently in Haiti and Egypt. World Bank President Robert Zoellick warns of a global food emergency.”

Moreover, they noted,

food-to-fuel mandates are leading to increased environmental damage. First, producing ethanol requires huge amounts of energy — most of which comes from coal. Second, the production process creates a number of hazardous byproducts. . .Third, food-to-fuel mandates are helping drive up the price of agricultural staples, leading to significant changes in land use with major environmental harm. Here in the United States, farmers are pulling land out of the federal conservation program, threatening fragile habitats. . .Most troubling, though, is that the higher food prices caused in large part by food-to-fuel mandates create incentives for global deforestation, including in the Amazon basin. As Time Magazine reported this month, huge swaths of forest are being cleared for agricultural development. The result is devastating: We lose an ecological treasure and critical habitat for endangered species, as well as the world’s largest ‘carbon sink.’ And when the forests are cleared and the land plowed for farming, the carbon that had been sequestered in the plants and soil is released. Princeton scholar Tim Searchinger has modeled this impact and reports in Science magazine that the net impact of the food-to-fuel push will be an increase in global carbon emissions — and thus a catalyst for climate change.

In Human Events, Deroy Murdock chronicled how rising food prices resulting from ethanol forced starving Haitians to literally eat dirt (dirt cookies made of vegetable oil, salt, and dirt), and fueled violent protests in unstable “powder kegs” like Pakistan and Egypt. More recently, biofuel mandates have fueled hunger and malnutrition in Guatemala.

The Obama Administration has forced up the ethanol content of gasoline, heedless of the fact that ethanol makes gas costlier and dirtier, increases ozone pollution, and increases the death toll from smog and air pollution. Ethanol mandates also result in deforestation, soil erosion, and water pollution. By driving up food prices, they have fueled Islamic extremism in Afghanistan, Egypt, Yemen and other poor countries in the Middle East. The Obama Administration persists in supporting ethanol mandates despite widespread criticism from experts across the political spectrum.

Hans Bader

Hans Bader

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department. Hans writes for and has appeared on C-SPAN’s “Washington Journal.” Contact him at


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