Corn ethanol and alternative energy - and the cost of taxpayer subsidies

In response to an article I wrote on the corn ethanol boondoggle, John Moreton argued that ethanol subsidies, mandates and tariffs hold down gasoline prices. Given that corn ethanol is less than 2.5 percent of BTU-adjusted gasoline consumption, any price effects are probably minor. Even if corn ethanol has a negligible impact on gas prices, diverting one-third of the corn crop to energy causes higher food prices.

Economists refer to this as a distortion in "relative prices." When consumers pay a higher price for chicken or food that uses grain in its production, they are paying for the government's ethanol policy.

On the demand side, there is no good reason why someone who walks to work and eats a lot of chicken should subsidize someone who drives a sport utility vehicle and eats seafood.

On the supply side, the price distortion displaces energy that can survive without benefit of government largesse.

The history of the former Soviet Union teaches us that, even with the help of supercomputers, top-down central planners are not smart enough to duplicate the efficiency of a bottom-up market system. Unfortunately, this lesson was lost on our politicians.

Despite the political clout of the corn lobby, the future of biofuels is not likely to be corn ethanol.

Amyris, a California company known for genetically engineering an anti-malaria drug, has partnered with a Brazilian sugar cane firm to produce a non-ethanol hydrocarbon fuel with the characteristics of diesel.

Craig Venter leader of the privately funded version of the Human Genome Project is genetically re-engineering algae. Unlike vascular plants, algae offers the most direct path for converting sunlight into biofuel.

British Petroleum in partnership with the University of California-Berkeley and the University of Illinois has spent $500 million funding the Energy Bioscience Institute charged with extracting energy from nonfood biomass.

Contrary to the assertions of Corn Belt politicians who have promoted corn ethanol as a job creation program for the rural Midwest, most of the economic benefit to the U.S. from biofuels development will probably come from research. The large-scale processing of biomass is more likely to occur in countries with a tropical climate and lush vegetation.

Several researchers are tantalizingly close to solving the technical problems associated with lithium-ion batteries. General Motors is betting its future on the Volt, the first mass-produced all-electric car that will be ready in 2010. The Volt has a battery pack that is recharged using 110 wall outlet consuming electricity equivalent to 50-cent-a-gallon gasoline for short trips.

In May, General Electric and T. Boone Pickens announced a $2 billion deal to build the world's largest wind farm in Texas while other companies are experimenting with turbines that generate electricity from tidal movement as well as ways to recover heat energy from subterranean rock.

Gridpoint, an Arlington, Va., company, hopes to sell the load management technologies that electric utilities will require when large numbers of electric car owners come home from work and recharge their vehicles at the same time. "Smart grids" also manage the increased variability of electrical power generated from uncertain wind and solar energy.

Google is experimenting with car parks that have awnings coated in solar cells that shade cars while simultaneously recharging employee batteries at work or while drinking their Starbucks coffee at the local shopping mall.

Patrick Moore, one of the founders of Greenpeace, believes nuclear power offers the best long-term solution to climate change.

South Africa has engineered a simple pebble-bed nuclear reactor that is much safer than any of its predecessors, while Toshiba is designing a sealed "nuclear battery" with an output of 10 megawatts and a life of up to 30 years. When it stops working it is returned to the factory for disposal.

Advanced fuel recycling and reprocessing technologies have substantially reduced the amount of nuclear waste that needs to be stored. Even with old technologies, the total waste produced by all U.S. nuclear plants over the last 60 years would only cover a football field five yards deep. Still, a technological advance in the capture and storage of carbon dioxide could re-establish coal as the most efficient form of energy for decades to come.

No one is smart enough to predict with certainty which of these technologies will ultimately prevail, least of all politicians who are easily influenced by powerful special interests. It is more certain that American taxpayers will continue to subsidize corn ethanol regardless of the outcome.

Michael Devaney is a professor in the Department of Economics and Finance at Southeast Missouri State University.