Does Ethanol Make Sense?

Does use of ethanol save on use of fossil fuels?

That question, it turns out, is not easy to answer. Ethanol's enthusiasts point to the potential benefits of replacing gasoline with a renewable energy source that they contend will reduce America's reliance on foreign oil and cut greenhouse gases produced by fossil fuels. But the benefits of ethanol, particularly when it is produced from corn, are not so clear cut.

A number of researchers who have looked at the issue have concluded that more energy now goes into making a gallon of ethanol than is contained in that gallon. Others, however, find a net benefit, though most see it as relatively modest.

Even if the answer is an unambiguous yes, that does not mean policy should subsidize ethanol. Ethanol is substantially more expensive than fossil fuel.  A subsidy makes sense only if ethanol reduces externalities from energy use enough to outweigh its higher costs.

The three external benefits that might accrue from ethanol are reduced reliance on foreign oil; reduced air pollution; and reduced emission of greenhouse gases.

The first alleged benefit is, in my view, routinely overstated.  There is no "oil weapon" because Middle East oil producers must sell their oil somewhere.  In a world market any refusal to sell to the U.S. is irrelevant.

The second and third alleged benefits are also likely emphemeral.  Given that ethanol production requires substantial energy use, any reduction in pollution or greenhouse gases has to be minor.

So who benefits from ethanol subsidies?  Corn farmers in the Midwest and the politicans who have caved to their interests.  Taxpayers and the economy are the losers.

Comments

[fred]

You are talking about ethanol from grain fermentation, where the most favorable calculations give a yield of 1.5 energy equivalents for what is put in. Ethanol from sugar cane, as is most extensively used in Brazil gives about 8 units (gasoline equivalents, or whatever). So, obtaining ethanol from grain fermentation will not have any real impact on energy policy.

Most of the carbohydrates in plants are in the form of cellulose, which is not fermentable because the yeast cannot break it down. While there are experimental plans using biotechnology to cheaply produce enzymes to break cellulose down to usable components for fermentation, there is no current commercially viable process using this method. Tax breaks and subsidies just (as you know) shift the costs elsewhere. If we would magically shift tomorrow to a 100% ethanol-based fuel economy, the greater than $200 billion in federal taxes that goes to road maintainance, and equivalent taxes at the state level, would have to be raised somewhere.

[Peter G. Klein]

Jeff, the question is complicated for libertarians, even stipulating that subsidies are harmful, because ethanol subsidies generally take the form of tax credits rather than transfer payments. "Elminating the subsidy" means increasing taxes on ethanol production to, you know, "level the playing field." The ethanol problem can't be satisfactorily addressed, in my view, independent of a general assessment of the efficiency and morality of targeted tax cuts.

[Macneil]

But what about Brazilian ethanol? We should drop all tariffs (I think it's around $0.50 per gallon) and see if it works. Brazilian ethanol is not corn based, so the environmental impact may be lessened.