2022 Theme: The Lesson on Carbon - Ethanol & The Environment

The Biden administration achieved the seemingly impossible this week by dismaying many environmentalists while simultaneously (further) infuriating the oil and gas industry.

Let no one say this that this Presidency can't pull off the impressive.

How did they pull off this miracle, you ask?

By directing the Environmental Protection Agency to issue an emergency waiver permitting year-round sales of E15 gasoline, which contains a 15% (rather than the typical 10%) ethanol blend.

Why do this?

Well, this should save the average American driver around 10 cents a gallon, perhaps a bit more in some places.

At a time when the average gallon in the US costs well over $4/gal this may seem like small beer but the political calculus is clearly that it is better to appear to be doing something rather than weakly accept that there is little any politician can do about global energy prices in the short term.

And why did this dismay and infuriate in equal measure? In short, because ethanol is a really terrible idea.

As someone mentioned on the Pebble Slack channel this week, it is really only good if you are a corn farmer.


  • Ethanol is a biofuel made from corn and it is blended in with regular petroleum based gasoline to make the fuel you put in your vehicle.

  • However, Ethanol is bad for the environment, bad for food prices and, even, bad for your car's engine.

  • Typically, the sale of E15 is forbidden between June and September because, wait for it, air quality concerns.

Yes, that is correct. The administration that promised to be the "greenest in history" has now so successfully boxed itself into a corner over energy that it is waiving its own environmental regulations in pursuit of narrow political gain.

And even if this was an acceptable tradeoff, increasing the ethanol % is long on PR and short on substance. Corn farmers may gain but most consumers will lose over the long term through higher food prices (especially meat) and higher repair bills.

Net-net as they say on Wall Street, we are getting more smog and fewer miles per gallon for very little gain at the pump and a higher bill at the butcher.

Not exactly great.

The entire idea of ethanol is frankly, terrible. The US has wasted billions of dollars over the last 30 years on this wasteful subsidy (at 10% or 15%) and is now moving to do even more. The climate transition needs fewer global fossil fuel subsidies overall and it does not help convince other countries to abandon theirs (and they are legion) when the US is busy doubling down on their own.

As a brief reminder, we continue to like many food based ETFs and we think that grains could only be beginning to take off and this and the next story are some of the reasons why.

This raises the final question that, if ethanol is so bad, then why do we use this stuff at all?

Two reasons:

  1. Because the farm lobby is a powerful constituency in American politics and one with bipartisan support especially in the Senate where many Senators come from lightly populated farming states.

  2. Normally, corn is plentiful and obviously cheaper than regular fossil fuels and so there are fewer painful externalities by using some corn production to power our vehicles.

This second point isn't the case now however.

As we have covered before, thanks to the war in Ukraine, corn is already exceptionally expensive so using even more of it for biofuel won't alleviate gas prices overly and yet it will have an impact in the nascent global food crisis. This is something the government knows too well.

Even for veteran cynics like us, the Biden administration calling an emergency food summit in Washington for next week while at the same time boosting demand for corn-made ethanol with its E15 gasoline blend move is quite something.

Another impressive feat!


Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.


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