The Federal Government's Ethanol Bill Is $4 Billion

From what we’re reading in a report released by the Congressional Budget Office, ethanol can’t become profitable on its own, it barely reduces our use of foreign oil, its benefit to the environment is questionable and its cost to the government is massive–$4 billion to be precise.

In the report the CBO says that increased use of the ethanol between April 2007 and 2008, accounted for 10 to 15 per cent of the rise in food prices during that same period. The 10-15% increase in food prices attributed to ethanol means that federal spending on the Supplemental Nutrition Assisteance Program and child nutrition programs went up by $600 to $900 million.

Also in the report, the CBO says firms that blend ethanol with gasoline receive a tax credit of 45 cents per gallon. The cost of that credit in forgone tax revenue was $3 billion in 2007. If that remains steady for this year, it means that the total bill for ethanol production could be $3.9 billion. Factor in an increase in $75 million to the WIC (another government food program) and you’re basically at $4 billion for ethanol.

For all that spending, the benefits appear to be minimal. As far as reducing greenhouse gas emissions is concerned, the Argonne National Labratory says it only reduces them by 20% in the short term on average compared to gasoline. In the long run it becomes less clear, because increasing the amount of land used to farm corn means that there are fewer trees around to absorb carbon.


As the chart above shows, ethanol is only good for the environment if it is produced in a plant that uses natural gas. Then it is cleaner than gasoline. If it is made in a plant using coal powered electricity then it’s worse for the environment than gasoline. The amount of gasoline displaced by ethanol is just 4% and the amount of emissions reduced from transportation was just .7%.

Most importantly, if we want ethanol in our nation, it looks like we’re going to be subsidizing it for a long time. As VeraSun and Aventine Renewables show by going bankrupt, ethanol is not a profitable industry. Without government subsidies, it stands no chance.

From their report:

The Congressional Budget Office’s analysis of current technologies and prices suggests that, without subsidies for producing ethanol, the “break-even ratio” of the price per gallon of retail gasoline to the price per bushel of corn is currently about 0.9.1 In other words, when the price of a gallon of gasoline is more than 90 per cent of the price of a bushel of corn, it is profitable to produce ethanol.

That’s only happened once, in 2005. The break even price with the subsidy is .7 and as you can see it’s rarely been above that historically.

The report says that cellulosic ethanol could provide a solution to the problems of corn ethanol, but it’s yet to be proven on large scale basis.


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