Ethanol: Another ‘Bootleggers and Baptists’ Coalition

I recently became acquainted with an arcane language containing symbols like RFS, RINs, eRINs, RVOs, WTE, RNG, even HBIIP.  It is spoken by groups with their own esoteric names, such as RFA and ABFA and WTEA.

There is a reason for this obscurity: This is the language of lobbying for the multi-billion-dollar  “renewable fuel industry (RFI).” These speakers don’t want you to know much about them except when they make public announcements like: “lower-cost, lower-carbon ethanol fuel blends are better for the environment and the family budget.”

I’m going to share some of the 50 years of history of this renewable fuels  lobbying. My purpose is to explain two ideas that help me understand political history. One is the economist’s notion of concentrated benefits vs. dispersed costs. Another is the “bootleggers and Baptists” coalition identified many years ago by economist Bruce Yandle. [1]

While I am singling out one big (and burgeoning) industry, that is because I have been examining it for my environmental blog, and I have more details there (including definitions of most of the terms identified above). But there  are plenty of other similar stories (start with sugar and cotton) .

Whence Renewable Fuels? 

First, what are renewable fuels? Renewable fuels are primarily fuels made from  corn, wood, grass, and other “biomass.”

But they also include the methane that comes from  a landfill. (That fuel is supported by a different industry association.) These are all called renewable because they are unlike non-renewable oil and gas. The best-known is corn-based ethanol, a biofuel which is widely used to replace up to 10 percent of gasoline.

The federal government just announced that the amount of “renewable fuel” that must be used in this country will go from 20.63 billion gallons in 2022 gallons to 22.33 billion gallons in 2025. With such mandates, the federal government has been a good friend of this industry since the mid-1970s.

“Through a bumpy path of changing laws, incentives, regulations, and scientific and engineering analyses of merit, ethanol ‘stuck’ in the marketplace,” write Caley Johnson et al. in their 2019 history of ethanol.

Ethanol and other renewable fuels have merit. But their extensive use is due in  large part to continually changing federal and state policies in their favor. To summarize:

A Short History

After OPEC quadrupled the price of oil in 1973, panic set in and efforts were made to reduce the price by stretching gasoline supplies with something else. Farmers and companies like Archer Daniels Midland came up with corn-based ethanol—gasoline with 10 percent ethanol, and it was even called gasohol.

To spur this industry, the federal government  removed the excise tax on gasoline that included ethanol, and twenty-five states followed with state-tax exemptions.  Later, after the oil price hike of 1979, the federal government expanded the tax exemption, changed it into a tax credit, heavily penalized oil companies that refused to accept ethanol, and spent about $1 billion helping build new ethanol facilities.[2]

Meanwhile,  as lead was being phased out of gas in the 1990s, ethanol, which increases octane, replaced it—although the 10 percent blend was far more than was needed as an octane enhancer.

Concerns with air pollution caused by gasoline also led to greater growth for ethanol. In urban areas that exceeded federal standards for some pollutants, the added oxygen from ethanol helped to reduce them.

Finally, in the 2000s, as public concerns shifted to greenhouse gas emissions, ethanol was  touted for emitting less carbon dioxide than unblended gasoline. There remains concern, however, that the carbon-emission cost of producing  corn and making  ethanol may outweigh the reductions when used as a fuel. 

What We Can Learn

Here are two important principles that this history reveals:

• • Concentrated benefits vs. dispersed costs

Special interests like biofuel producers can reap multi-billion-dollar rewards if they can tilt government policies in their direction.  The rewards are so great because  the taxpayer knows almost nothing about them and thus will not resist them. The public, whose interests are very broad, experiences only a small cost from each of these policies, and voters can pay attention to only a limited number of issues.

In contrast, a special interest can pour  highly professional and expensive resources into  lobbying government officials and politicians, largely out of the sight of the public—and can profit by it.

And special interests have strong allies in politicians, who  need  funding and volunteers. Who is more eager to help them than a special interest group that wants their vote on just one policy issue? Again, the public doesn’t benefit from discovering the details because the impact of a policy on a single person or family is so small. [3]

• • Bootleggers and Baptists

Special interests often have an additional advantage—a public concern that appears to justify what the special interests want. Initially, ethanol was  a response to an enormous increase in the price of oil. Recently, it has been kept afloat by anxiety over climate change.

In these situations, a large group of the public—environmental activists, for example—is pursuing a “public interest” goal. By promoting what it views as the public interest it may inadvertently support the special interest.

This is the “bootleggers and Baptists” coalition discovered by Bruce Yandle: The phrase helps explain the success of Prohibition.

Baptists (and other temperance advocates) argued against alcohol consumption for religious (or “public interest”) reasons, while the bootleggers worked quietly behind the scenes to keep Prohibition so they could sell more illegal liquor.

People or firms who benefit by a law or regulation can get it adopted by promoting a “public interest” argument—or letting others voice that argument for them. The quotation above, that “lower-cost, lower-carbon ethanol fuel blends are better for the environment and the family budget,” voices the “public interest” argument for ethanol. [4]

These two ways of thinking (“concentrated benefits vs. dispersed costs” and “Baptists and bootleggers”) are tools for understanding history and public policy. Watch for them when  you come across  esoteric phrases.

Opening ceremony of the  2019 Ethanol Summit in Sao Paolo is licensed under CC BY 2.0.

Correction: Initially, this article referred to  70 years of history. It’s mainly extended over 50 years. 

Notes

[1] Bruce Yandle, “Bootleggers and Baptists Revisited,” Regulation Magazine 22, no. 3 (1999), 5–7. Yandle discussed ethanol in this essay.

[2] Caley Johnson,  Kristi Moriarty, Teresa Alleman, and Daniolo Santini. 2021. History of Ethanol Fuel Adoption in the United States: Policy, Economics, and Logistics. Golden, CO: National Renewable Energy Laboratory. NREL/TP-5400-76260. https://www.nrel.gov/docs/fy22osti/76260.pdf.

[2] The problem of the “special-interest effect” is discussed further in James Gwartney, Richard Stroup, Dwight Lee, Tawni Ferrarini, and Joseph Calhoun, Common Sense Economics (New York: St. Martin’s Press, 2016), 126–127.

[3] Yandle discussed ethanol as an example of the coalition in Inside Sources in 2019.