By MICHELE F. MIHALJEVICH
Indiana Correspondent

WASHINGTON, D.C. — Ethanol subsidies and the federal Renewable Fuel Standard (RFS) are expensive ways to meet the goals of the nation’s biofuel policy, according to a professor of energy economics at the Massachusetts Institute of Technology.

Those goals – to protect farmer wealth, reduce the nation’s dependency on foreign oil and lower greenhouse gases – may be met in other ways, Christopher R. Knittel said last week. “We know how to efficiently meet the stated goals of the policies, and these aren’t the ways to go about it,” he explained.

For example, the RFS eliminates the need for subsidies. “Once you have an RFS in place, you don’t need the subsidies because they don’t add any more ethanol to the market. If a RFS is our goal, we don’t really need subsidies to meet those goals,” he said.

The federal RFS requires 36 billion gallons of renewable fuels to be blended into gasoline by 2022. Knittel spoke in a July 11 teleconference on the farm bill, organized by the American Enterprise Institute for Public Policy Research (AEI). Based in Washington, D.C., AEI sponsors worldwide and domestic research, including on U.S. political and social issues, according to its website. In addition to the teleconference, 12 papers were presented last week covering such farm bill-related topics as insurance, conservation and disaster aid.
An RFS isn’t necessarily the best solution for America to reach the goals of its biofuel policy, Knittel noted. The social costs of an RFS or the Volumetric Ethanol Excise Tax Credit (VEETC) represent a drain of more than $6 million a year on the U.S. economy, relative to the same reductions from more cost-effective policies, he wrote.

Simple economics say they are an inefficient way to redistribute wealth to farmers, he said. Renewable fuel organizations, however, believe a federal RFS is necessary to attract and maintain private investment in the development of advanced biofuel, said Jim Greenwood, president and CEO of the Biotechnology Industry Organization (BIO). In May, BIO, along with the Renewable Fuels Assoc., the Advanced Ethanol Council and other biofuel organizations, sent a letter to U.S. House and Senate leaders urging them to protect the federal RFS.

“The RFS is an effective mechanism for incentivizing innovation within the biofuels industry,” Greenwood said. “With this policy in place, industrial biotechnology companies already have made significant investments in research and development, producing successes at each stage.

“Access to capital remains the biggest challenge for the industry, especially as high oil prices threaten to plunge the country into another recession.”
Programs included in past farm bills have been wasteful for many years, AEI Vice President Henry Olsen said. Given the country’s debt and deficit situations, the time is right to look at agriculture and related programs, he added.

“America has to get its fiscal house in order. This is forcing politicians to look at sacred cows they wouldn’t have looked at before,” he said.

Congress and political leaders may be looking at farm programs because they’re trying to determine what would do the least political damage if spending were cut, he said. In 1933, one in five people worked on a farm, but today that number is one in 50, Olsen said. Fewer than 2 percent of Americans work in any sort of farming.

Rather than cutting Medicare, Medicaid, Social Security or defense spending, “the bang for the buck is highest in (cutting) farm programs,” he said.
Olsen stated some programs, such as crop insurance, are unlikely to go away. “Crop insurance has public appeal because it appears to give farmers money when they need it most.”

A primary concern about farm programs is that most subsidies go to the largest and wealthiest farmers, with very few going to the smallest and poorest, said Vincent H. Smith, a professor in the Department of Agricultural Economics at Montana State University.

Farming also isn’t the risky business it’s often characterized as being, Smith opined. For example, one in 200 farms fail each year, but one in seven “Main Street” businesses close annually, he said. Those who receive subsidies are about 3.5 times wealthier than the average household, he noted.