Taking a close look at the ethanol market


Sweeter Alternative/flickr

Over the weekend, the New York Times ran a story about alleged manipulation of ethanol credits by Wall Street banks. Big financial traders are not very popular, and their collective track record doesn’t inspire confidence, so when prices spike—or there are other fishy signs—it’s right to ask what is going on.

The Times piece raises three distinct questions for those concerned about energy policy and renewable fuels. First, can markets be a fair and efficient way to achieve the goals we want in this program – more low carbon fuels, less imported oil and reasonable energy prices? Second, does the current system have rules that make sense? Third, is ethanol a useful part of our energy mix? I think the answers are: yes, no and it’s complicated.

On markets, it seems clear that a well-designed market almost always distributes goods more efficiently than the alternatives. It’s not popular to defend Wall Street trading these days, yet a fair and open market allows flexibility for businesses, accurate pricing and incentives for efficiently meeting public demand. But a “free market” doesn’t mean a market with no rules. Without rules — or with bad ones — you get manipulation, inflated prices and even fraud.

Current rules are clearly not strong enough to keep the market in ethanol credits operating smoothly and fairly. Markets operate best when everyone has enough information and deals are made in public. Ethanol credit markets simply don’t have the kind of openness and transparency necessary to prevent manipulation. That needs to change.

There are several examples of well-functioning markets created to support a public policy goal. The trading system established in a 1990 Clean Air Act Amendments, for instance, has helped America reduce acid rain pollution faster and cheaper than anyone thought possible. The California cap-and-trade system for greenhouse gas pollution is helping the eighth largest economy in the world meets its ambitious emissions reductions goals, in a well-functioning and well-governed market.

The reported problems with the ethanol credits market doesn’t mean the federal renewable fuels program is a bad thing. That should be judged on its own merits – whether what we gain in domestic energy production is worth the cost, and whether the policy generates a net environmental benefit based on its impact on natural resources and greenhouse gas emissions. That’s a very complicated question over which we should have a rational national debate.

In the meantime, let’s get the rules for the market right. History has repeatedly shown that fair and well regulated markets promote prosperity, while secrecy and under-regulation leads to bad outcomes. Markets can’t solve every problem, but they be a powerful and effective tool, so policymakers have a responsibility to make changes to get this one right.

You might also enjoy:
Keith Gaby

Keith Gaby

Explores the intersection of politics and climate change.

Get new posts by email

We'll deliver a daily digest to your inbox.

RSS RSS feed


How can we resolve the issue of the use of food products for fuel when so many in the world are still hungry? I recently read an article pointing to the use of large tracts of farmland in Africa are being used exclusively for fuel in Europe while the people in the region are starving. Isn't it time to pushback on the huge subsidies paid to ethanol producers and instead use the funding to increase e-vehicle fueling stations and NGV use?

Bob - "Isn't it time to pushback on the huge subsidies paid to ethanol producers and instead use the funding to increase e-vehicle fueling stations and NGV use?" Is this a trick question? There are NO subsidies paid to ethanol producers. Your view of the world is highly distorted from reality. World hlunger is not caused by a lack of food but by distribution ans spoilage problems and social upheaveal. Most issues of land title and individual ownership arrise from projects for exporting food, not biofuels. This is not a biofuels isssue, it is a land ownership issue. The worlds poor must be helped to feed themselves, not given a handout of a 'food' otherwise rebuked as 'junk food'. Corn is a 'junk food' food for animals as well as humans. DDGs from ethanol production can be controlled for content and quality to produce a feed that is a much better diet than corn. By the way, CNG vehicles emit a great deal of methane due to poor combustion resulting in greater GHG emissions than any other fuel.

Bill - According to the EIA, in 2007 ethanol producers received $3.25 billion in subsidies compared to $1.92 billion to the oil & gas industry. The increasingly heavy use of fertilizers is creating a "dead zone" in the Gulf of Mexico from the flushing of fertilizers down the Mississippi. Ethanol produces only 2/3 the energy of gasoline and is documented to be causing damage to engines. Google "African farmland for biofuels" and you will find a number of blogs and scientific articles that more fully explain my original comment. There is no real need for biofuels when we can easily use fossil fuels or electricity to power cars. It is an economic shell game being played by ethanol producers that is causing even more poor people to go hungry. They may not want to eat corn but they certainly could grow other crops on these lands that are feeding the EU's biofuel markets. I am proposing shipping food to the hungry but allowing them to own land where they live to grow their own food. Your stance on this is indefensible and the EDF needs to use its influence to bring this issue into a fuller light.