The unbearable price of ethanol
Ontario has announced plans to double the required content of ethanol in our gasoline, from five per cent to 10 per cent. This regrett able decision will have harmful effects on everyone. It will worsen the mileage of gasoline, raise food and fuel costs and yield minuscule environmental gains at best.
Ratcheting up the ethanol mandate also defeats the purpose of Ontario’s new cap- and- trade system. The logic of carbon pricing through permit trading is that it leads the market to i dentify and i mplement the lowest- cost ways of reducing greenhouse gas ( GHG) emissions. If ethanol blending was cost- effective then, under cap and trade, fuel producers would do it automatically. The fact that they have to be coerced means it fails a cost- benefit test, making it precisely the kind of inefficient option the trading system is supposed to guard against. Forcing firms to do it anyway means Ontario has jettisoned any pretence of economic logic in its climate policy mix.
In earlier research we f ound t hat ethanol- subsidy programs during the 2008–12 interval cost Canadians over three dollars for every one dollar in social and environmental benefits achieved. The overt subsidy programs have largely been scaled back, but the blending mandates amount to a hidden subsidy, where the costs are transferred away from taxpayers onto industry and consumers.
It is highly misleading for the province to promote its policy as being equivalent to “taking up to 130,000 cars off the road.” Such state- ments only remind us how clean our cars have become. The policy itself yields tiny overall emission reductions, but since modern cars are so clean and efficient that translates into a lot of vehicles as an equivalent. By way of illustration, it would translate into taking an infinite number of bicycles off the road, since they emit nothing at all, but that is an equally uninformative comparison.
The fact that modern cars are so clean actually signals how little an ethanol mandate will accomplish. It was shown over a decade ago that ethanol blending did nothing to reduce tailpipe emissions of carbon monoxide and hydrocarbons from cars built after 1988.
The only environmental benefit that proponents can point to is a potential reduction in greenhouse gas ( GHG) emissions. We say “potential” because corngrowing and ethanol manu- facturing both take energy, and on a life- cycle basis, ethanol GHGs can be higher than those from regular fuels, particularly in the U. S. where electricity production is still coal- intensive. Even assuming we get a net reduction in GHG emissions per litre from domestic production, the need for the mandate in the presence of carbon pricing shows that it is not enough to justify the additional manufacturing costs.
On t he c onsumption si de, ethanol producers claim that their product cuts GHG emissions by 62 per cent compared to gasoline. This is an almost impossible optimistic upper bound based on, among other things, using 100- percent ethanol. By contrast, Natural Resources Canada ( NRCan) says a 10- per- cent corn- ethanol blend only c uts GHG emissions by three to four per cent.
Also according to NRCan, burning a litre of gasoline releases about 2.3 kilograms of carbon dioxide. A fourper- cent reduction is 0.09 kilogram per litre ( 0.00009 tonnes). At a value of $ 20 per tonne of carbon ($ 5.45 per tonne of carbon dioxide), the current social benefit of the emission reduction works out to five one- hundredths of a cent per litre.
In 2016, Ontarians used 16 billion litres of gasoline, so the GHG emission reductions from blending ethanol are worth, optimistically, about $8 million annually.
This is the number that needs to be c o mpared against the social costs of increased fuel and food prices. As a point of comparison, one of the two Ontario ethanol plants has already spent $ 200 million to expand its production c apabilities in anticipation of the new blending rule, indicating that it expects to take at least that much out of consumer pockets in the coming years. The other plant is also spending money to expand, and once we add in the increased food costs and the costs for refineries to accommodate the new rules we will likely find, as we did previously, that the costs are several times larger than the benefits.
The federal government is apparently also considering a higher national ethanol blending mandate. We hope that it will assess the costs and benefits more carefully than Queen’s Park did. If it does, it will find that such a move would be unjustified in the absence of its carbon- pricing policy, and completely irrational under it.
Ross McKitrick is a professor of economics at the University of Guelph and a senior fellow of the Fraser Institute. Douglas Auld is an adjunct professor of economics at the University of Guelph.
ONTARIO HAS JETTISONED ANY PRETENCE OF ECONOMIC LOGIC IN ITS CLIMATE POLICY MIX.