Ethanol: No Free Lunch

Abstract

The sharp rise in energy prices in the 1980s triggered a strong interest in the production of ethanol as an additional energy component. Economists are divided as to the payoffs from ethanol derived corn in part because of the complex interrelationship between energy produced from ethanol and energy from fossil fuels. Using a welfare economic framework, we calculate that there can be treasury savings from ethanol using tax credits as these subsidies can be smaller than direct payments to corn farmers which are essentially eliminated from the expansion of ethanol. Also, to the extent that ethanol dampens fuel prices there can be a net welfare gain from ethanol production in the presence of ethanol subsidies.

How Effective are US Renewable Energy Subsidies in Cutting Greenhouse Gases?

“…There are, however, several studies that consider important interactions between the tax code, renewable fuels mandates, and crop price supports (Gardner 2007;and Schmitz, Moss, and Schmitz 2007). Those studies find that the Renewable Fuel Standard (RFS) mandates are more effective than the tax incentives, and that the RFS effectively limited the impact of the tax incentives on renewable Beyond these studies, much of the literature focuses on whether ethanol production and consumption lead to a net increase or decrease in GHGs per Btu of fuel (Yacobucci and Bracmort 2010;Gelfand et al 2011).…”

The Relative Impacts of U.S. Bio-Fuel Policies on Fuel-Energy Markets: A Comparative Static Analysis

“…Accordingly, several studies have recently reported that the tax credit and mandated ethanol production increases the domestic fuel supply, leading to a reduction in the price of gasoline at the pump (Blanch, 2008;Cooper, 2008;de Gorter and Just, 2009b;Du and Hayes, 2008;Schmitz, Moss, and Schmitz, 2007). Blanch (2008) referenced a Merrill Lynch study indicating that conventional gasoline prices would be 15% higher without mandated ethanol production.…”

“…Du and Hayes (2008) reported that the growth in ethanol production has caused retail blended gasoline prices to be $0.29 to $0.40 per gallon lower than they would otherwise have been. Schmitz, Moss, and Schmitz (2007) reported that the increase in ethanol production lowers the price of gasoline by 4.3-6.0 cents per gallon, depending upon the relative size of the elasticity of demand for gasoline. The Renewable Fuels Association (2008a) summarized the impacts of ethanol on gasoline prices, claiming an ethanol savings ranging between $0.20 and $0.50 per gallon of gasoline.…”

“…Blenders must now blend 10.5 billion gallons of ethanol in 2009, with the mandate rising to 15 billion gallons in 2015 and thereafter. 2 Given the complexity and the magnitude of economic and environmental effects of U.S. bio-fuel policies, results from fuel-energy/ commodity economic models have been increasingly relevant to economic and policy discussions (de Gorter and Just, 2009a,b;Du and Hayes, 2008;Schmitz, Moss, and Schmitz, 2007;Tyner and Taheripour, 2008;Vedenov and Wetzstein, 2007;Westhoff, 2008). However, the net effects on ethanol, conventional gasoline, and blended gasoline prices of both the bio-fuel tax credit under the AJCA and the blending mandate under the EISA have not been adequately discussed in the literature.…”

“…The price of blended gasoline also depends on whether ethanol and conventional gasoline production are independently determined, as implicitly assumed in recent studies (de Gorter and Just, 2009a;Du and Hayes, 2008;Schmitz, Moss, and Schmitz, 2007). When ethanol and conventional gasoline are assumed to be independent in production, but they are perfect substitutes in consumption, total blended gasoline supply would be obtained by adding the ethanol supply curve and the conventional gasoline supply curve.…”