Policy Study

A Federal Ethanol Mandate

Is it Worth it?

Executive Summary

The Clean Air Act Amendments of 1990 require that gasoline used in the United States has additives that oxygenate the fuel. The most common oxygenate was MTBE, which is being phased out due to harmful effects on human health. Both the House and Senate energy bill proposals in 2003 contain a mandate making ethanol the only legal oxygenate for meeting the federal fuel oxygenate requirement. But both versions of the energy bill also abolish the federal oxygenate requirement, but add a requirement to use ethanol as a renewable energy source. Navigating these political waters has been challenging for both politicians and the interests on all sides of the oxygenate debate.

The Environmental Protection Agency formed a Blue Ribbon Panel in 1999 to study the health benefits of fuel oxygenates. The Blue Ribbon Panel report highlighted the fact that the air quality benefits of oxygenated fuel are unclear. The environmental problems caused by MTBE reinforce that concern, but little analysis has addressed the combined air, water and soil effects of ethanol.

The Blue Ribbon Panel recommendation was to eliminate the oxygenate requirement altogether. In this study we perform a benefit-cost analysis of the ethanol mandate as an oxygenate; our findings support the recommendations of the Blue Ribbon Panel. We also analyze the political economy dimensions underlying the success of federal ethanol mandate provisions in both the House and Senate proposals. That success rests on the uncoupling of ethanol as a renewable energy source from ethanol as an oxygenate, a subtle piece of political rhetoric. We conclude that ethanol is not actually a renewable energy source, given the fossil fuel use required to produce ethanol.

We find that whether or not ethanol use generates net positive energy or net negative energy, ethanol-oxygenated reformulated gasoline uses more resources overall and does not pass an economic or environmental benefit-cost analysis. The fossil fuel energy used in producing and transporting ethanol imposes environmental costs, and whether or not ethanol produces negative net energy, its consumption also leads to costs. These costs outweigh the health benefits of ethanol use. Adding the cost of environmental detriment from agricultural runoff from growing crops for ethanol reinforces this conclusion.

Examining the political dynamics of the success of the ethanol provisions reveals that separating the fuel oxygenate issue from the renewable fuels issue has enabled Congress to satisfy both the strong farm and oil interests in the debate, even when ethanol does not make economic or environmental sense.

Thus although Congress is following the recommendations of the EPA’s Blue Ribbon Panel and eliminating the fuel oxygenate requirement, the bait-and-switch of ethanol from oxygenate to renewable fuel has created the opportunity for the ethanol industry to succeed politically, at a cost that is spread across all taxpayers, drivers, and natural resources.


Lynne Kiesling is Director of Economic Policy at Reason Public Policy Institute. She is also Visiting Associate Professor of Economics at Northwestern University. Her previous positions include Assistant Professor of Economics at the College of William and Mary, and Manager in the Transfer Pricing Economics group at PriceWaterhouseCoopers LLP. She has a Ph.D. in economics from Northwestern University, and has published extensively in academic journals.