The Ethanol Enigma

Ethanol is the homegrown, renewable fuel both conservatives and liberals love to hate. They might change their minds if they better understood its remarkable history.

Before the Civil War ethanol, derived from corn or molasses, was one of the nation’s best-selling chemicals. It was used primarily as an industrial solvent and illuminant.

To finance the war, President Lincoln imposed a Spirits Tax of $2.08 a gallon. Ethanol had to pay the tax because it is liquor, although at 200 proof it makes for a very potent drink. Other poisonous illuminants, like the newly introduced kerosene, were taxed 10 cents a gallon.

The Spirits Tax wasn’t lifted until 1906, after the oil trust was formed and the automobile industry was born. Nevertheless, ethanol made a modest comeback. By the end of World War II ethanol production had returned to pre-Civil War levels.

Then, in 1919 disaster struck again, this time in the form of the 18th Amendment. Prohibition didn’t actually prohibit the manufacture of fuel ethanol, but the Treasury Department issued very few production permits for fear that the ethanol would be diverted into the illegal alcohol market. To this day, the ethanol we put in our gas tanks bears a legacy from that era. Just before it leaves the refinery ethanol must be poisoned to make it undrinkable.

In the early 1920s, ethanol suffered still another setback. Oil and car companies desperately sought an additive that would permit gasoline to burn uniformly in powerful engines. Ethanol was an attractive candidate. But to do its job well it needed 5 to 10 percent of the gas tank.

Oil companies were not about to relinquish that share of the transportation market to farmers, even though American agriculture had just plunged into a severe economic depression that would last two decades. Instead, the companies chose lead.

In 1924, despite the protests of many in the public health community, Ethyl Corporation, a partnership of Standard Oil and General Motors offered leaded gasoline. By 1940, 70 percent of all gasoline contained lead.

With the end of Prohibition in 1933 ethanol production slowly revived. Then Japan cut off America’s supplies of natural rubber. The nation’s breweries were drafted into service to manufacture ethanol to make synthetic rubber. By 1944 ethanol production had reached 600 million gallons.

After World War II the market and political constituency for ethanol disappeared. The price of oil plummeted. The Marshall Plan generated an export market for American crops. Once again bioethanol vanished from the market.

Thirty years later twin oil shocks and the realization that leaded gasoline was a public health hazard combined to give ethanol another lease on life. Congress gave ethanol a handsome tax incentive, although not nearly as handsome as the incentives given for the gasification of coal or the production of nuclear power.

The incentive made the price of ethanol competitive with unleaded gasoline but the major oil companies still refused to give up a share of the gas tank.

The ethanol industry reemerged primarily by selling its product through independently owned and cooperatively owned gas stations, almost all of them in the Midwest.

The phase-out of leaded gasoline furnished ethanol another opportunity to become the octane-enhancing additive of choice. Instead, oil companies chose to increase octane by increasing the portion of light aromatics like benzene, toluene and xylene in their gasoline. By 1990 as much as 40 percent of gasoline was comprised of these highly toxic chemicals.

When it was discovered that benzene caused cancer, the 1990 Clean Air Act required oil refineries to minimize its use. The same act also required them to add oxygen to gasoline sold in highly polluted areas of the country.

Ethanol, an oxygen-containing octane enhancer, was ready. Instead, the oil companies embraced another 100 percent fossil fuel-derived product: MTBE. In l996, the country began using massive amounts of MTBE. Within months communities discovered MTBE in their ground water. By 2000 14 states, led by California, had passed legislation to phase out MTBE.

With the phaseout of MTBE, the ethanol industry geared up for a major expansion. Much of that expansion has occurred in farmer-owned facilities. In Minnesota, for example, 10 of the 14 biorefineries are farmer-owned.

By the end of this year, nine of the 11 ethanol facilities in Iowa will be farmer-owned. Farmer ownership gives taxpayers the biggest bang for their buck. Ethanol incentives overall increase corn prices about 10 cents a bushel, but when the farmer owns the biorefinery he may receive an additional $1 a bushel.

In 2000, California asked permission to allow oil companies to abandon oxygenates and reformulate gasoline once more, this time to increase the proportion of chemicals called alkylates. Last year President Bush denied its request.

Which brings us to this week’s vote in Congress.

Over the past few months a compromise has been fashioned between the oil and ethanol industries. A provision of the energy bill would allow California and other states, to rely on 100 percent gasoline. In return the nation as a whole would have to meet a modest renewable fuel standard.

Is it a perfect solution? No. Nothing coming out of Washington ever is. Will it be a boon to midwestern corn farmers? Yes, in the short term. But in the long term ethanol will be made from rice and wheat straw, municipal garbage, grasses and many other raw materials.

We should strive to have a biorefinery in every rural county, not only in Minnesota and Iowa, but in Massachusetts and California and New York. Will a renewable fuel standard benefit Archer Daniels Midland? Yes. But if the nation designs incentives that encourage modestly-sized, farmer-owned facilities, competition will fluorish and local economies will prosper.

And after 150 years of struggle, a renewable fuels standard would mark a true coming-of-age of biofuels in America.

David Morris is Vice President of the Minneapolis and Washington, D.C. based Institute for Local Self-Reliance. He has written one book and many reports on ethanol and currently serves on a federal advisory council to the United States Departments of Energy and Agriculture.