Big Ethanol Profits at Big Three’s Expense

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Fuel Economy: Big Ethanol Profits at Big Three’s Expense

Timothy P. Allen: Big Ethanol wins big on CAFE
The Examiner

While U.S. automakers have attracted media attention this summer with their furious campaign to block stricter federal requirements on fuel efficiency, the businesses that stand to gain from heightened federal regulation have stayed below the radar.

Primarily, the ethanol industry — already profiting from a smorgasbord of federal and state subsidies and mandates — will likely find riches in the more stringent Corporate Average Fuel Economy (CAFE) standards being adopted in Congress.

In 1975, following the Arab oil embargo, Congress created CAFE standards to force automakers and car buyers toward more fuel-efficient cars. An automaker’s “CAFE” is the average miles per gallon of its entire fleet (weighted by number of sales per model) for a given year.

Current law requires all automakers to have a CAFE of 27.5 mpg for cars and 22.2 mpg for light trucks. Failure to comply results in fines, of which the U.S. government has collected more than $500 million.

In 1988, however, Congress passed the Alternative Motor Fuels Act, carving out an exception to CAFE standards. If you made a “flex-fuel” car — a car that could run on a blend of 85 percent ethanol (any car can run on 10 percent ethanol, but most cannot handle a fuel blend of mostly ethanol) as well as gasoline — that car would give you huge credits toward your CAFE requirements.

The federal government would multiply ethanol’s mileage by 6.6 and assume all flex-fuel cars would use ethanol half the time. This means a car that gets 20 mpg on gasoline and 15 mpg on ethanol would be treated for CAFE purposes as if it got 60 mpg.

This summer, congressional Democrats are pushing for higher CAFE standards, with the 35-mpg average just adopted by the Senate seen by many as likely to be adopted by the House as well.

Currently, most compact cars do not get 35 mpg, and it is doubtful that automakers could bring their whole fleet up to that average. Even Toyota, whose massive sales of the hybrid Prius give the company a leg up, said a 35-mpg CAFE would be “difficult to meet.”

Proponents dismiss automaker grumbling about stricter CAFE standards as foot-dragging and argue that heightened mileage requirements would benefit consumers and the environment, but the verdict on that argument is still out.

For one thing, nothing currently keeps consumers from buying cars that get better gas mileage — mandating improved fleet mileage actually reduces consumer choice. Secondly, greater fuel efficiency may not result in less fuel use — it encourages drivers to drive more, possibly making no impact on oil dependency and certainly increasing traffic congestion.

Most importantly, stricter CAFE rules cost lives. CAFE pushes consumers to buy smaller cars, which are less safe in case of accidents. The National Academy of Sciences in 2002 released a paper that showed that CAFE results in an additional 2,000 highway deaths per year.

While ratcheting up CAFE won’t result in miraculously more fuel-efficient cars, it also won’t drive automakers out of business. Instead, it will likely drive them toward the loophole in CAFE — the renewable fuel credit.

To have any chance of meeting the 35-mpg average, carmakers will need to start selling flex-fuel cars that have inflated mpg ratings for CAFE purposes. This will spur consumption of ethanol.

While raising the CAFE requirements would be a stick in the eye of the Big Three (whose political action committees [PACs] in 2006 gave about $1.3 million to federal candidates), it would clearly be a gift to the ethanol industry, whose strong connections to lawmakers are legendary. Ethanol, an alcohol fuel made from grain, usually corn, benefits from special tax breaks, protective tariffs, and federal and state handouts, as well as government mandates.

In the 2006 election cycle, the PAC for Archer Daniels Midland (ADM), the nation’s top ethanol maker, gave $120,000 to federal candidates while fellow agribusiness giant Cargill, No. 2 in ethanol, gave $223,000 to House and Senate candidates.

Also pulling for ethanol — and thus benefiting from stricter CAFE standards — is Goldman Sachs, the Wall Street investment firm that has invested $30 million in a Canadian ethanol maker.

Silicon Valley billionaire Vinod Khosla, who recently penned a New York Times op-ed along with former Senate Majority Leader Tom Daschle, D-S.D., calling for even more ethanol mandates, is also heavily invested in ethanol.

Yes, the automakers see their profits and their business models at risk in the debate over CAFE, but, as in every Washington battle over increasing regulation, there’s somebody standing nearby ready to profit on both sides.

Examiner columnist Timothy P. Carney is author of “The Big Ripoff: How big government and big business steal your money.”


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