Urgent: Ethanol Subsidies

But it takes so much supply to keep ethanol production going that the price of corn and those of other food staples is shooting up around the world.

Green-energy analysts like Amory Lovins, environmental groups like the Natural Resources Defense Council, neoconservatives like James Woolsey, and farm groups like the American Coalition for Ethanol are all touting the biofuel.

Growth of ethanol as a fuel source in the United States has resulted from tremendous subsidies at the federal, state, and local level.

Ethanol fuel is ethanol , the same type of alcohol found in alcoholic beverages.

Making ethanol, they claim, will help America achieve the elusive goal of “energy security” while helping farmers, reducing oil imports, and stimulating the American economy.

Today one major subsidy is the ethanol program, currently with a $0.51 per gallon subsidy, which will in the near future amount to a bill of over $3 billion annually on 6 billion gallons of production.

But I guess the ethanol subsidies have the advantage that Americans can pretend that somebody else is footing this bill.

When all 200 American ethanol subsidies are considered, they cost about $7 billion USD per year.

Concerns relate to the large amount of arable land required for crops, as well as the energy and pollution balance of the whole cycle of ethanol production.

In addition to the direct subsidy from the VEETC, many states reduce motor fuel taxes on favored fuels, and there are numerous separate subsidies and tax breaks for investment in the infrastructure required for biofuel production.

Like any government expenditure, the value of a subsidy must be judged on how well it achieves its intended objective in this case, stimulating the production/consumption of ethanol, and thereby increasing corn demand.

According to their calculations, ethanol contains about 76,000 BTUs per gallon, but producing that ethanol from corn takes about 98,000 BTUs.

The biggest single item is the Volumetric Ethanol Excise Tax Credit, which grants a tax credit to blenders who combine ethanol with gasoline, in the amount of 51 cents per gallon of pure ethanol blended.

It can be used as a fuel, mainly as a biofuel alternative to gasoline, and is widely used in cars in Brazil.

With 14% of the 2005 corn crop already going to ethanol production, devoting even more of the crop to making ethanol means higher prices for corn-dependent products ranging from soft drinks to bacon.

Because it is easy to manufacture and process and can be made from very common crops such as sugar cane and corn, it is an increasingly common alternative to gasoline in some parts of the world.

Eight billion gallons may sound like a lot, until you realize that America burned more than 134 billion gallons of gasoline last year.

Oil get’s big subsidies, not ethanol.

In 1974, as the United States was reeling from the oil embargo imposed by the Organization of Petroleum Exporting Countries, Congress took the first of many legislative steps to promote ethanol made from corn as an alternative fuel.

David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

There is also a large implicit subsidy in the form of the mandate from the Energy Policy Act of 2005 that 4 billion gallons come from renewable fuels in 2006, rising to 7.5 billion in 2012.

It is possible to develop a subsidy that falls as the price of ethanol increases and increases as the price of corn falls.

Summary: Thanks to high oil prices and hefty subsidies, corn-based ethanol is now all the rage in the United States.

That’s $1.45 per gallon of ethanol.

Stimulus to production should be tied to the effect of the subsidy on expected profitability and the change in risk for investors.

Now, thanks to a combination of high oil prices and even more generous government subsidies, corn-based ethanol has become the rage.

In the United States and other large economies, the ethanol industry is artificially buoyed by government subsidies, minimum production levels, and tax credits.

When the government subsidizes a commodity, it normally intends to promote production and/or consumption of that commodity for either political, environmental, or economic reasons.

If an economist were asked to justify this attitude, the argument would have to be that the market cost of imported oil vastly understates its true cost to us in terms of geopolitical implications of U.S. dependence on foreign oil.

That’s more than twice the amount spent on wheat subsidies, three times the amount spent on soybeans, and 70 times the amount spent on tobacco.