ethanol subsidies: a bad policy that refuses to die
DESCRIPTION
Ethanol subsidies were extended as part of the Dec. 2010 tax compromise. This slideshow explains why ethanol subsidies are a bad policy that should have been allowed to dieTRANSCRIPT
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US Ethanol Subsidies:A Bad Policy thatRefuses To Die
Posted December 19, 2010
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Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Ethanol in the 2010 Year-end Tax Bill
In addition to extending income tax cuts and unemployment benefits, the tax bill passed by Congress in December, 2010, extends key elements of U.S. ethanol policy, otherwise set to expire
A $.45 per gallon tax credit for ethanol used as motor fuel (plus a $.10 bonus for small producers)
A $.54 per gallon tariff that applies to most ethanol imports
NEDAK Ethanol PlantAtkinson, Nebraska
Photo source: http://upload.wikimedia.org/wikipedia/commons/e/e3/Atkinson%2C_Nebraska_factory_to_SE.JPG
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Stated Goals of the Policy
Enhance U.S. national security by reducing dependence on foreign oil
Improve the environment by encouraging substitution of ethanol for gasoline
An oil tanker loading at an offshore terminal in the Middle EastPhoto source: http://commons.wikimedia.org/wiki/File:Tanker_offshore_terminal.jpg
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Negative Externalities and Social Cost
The logic of intervention in fuel markets is that pollution and national security concerns are “social costs” (externalities) that are not included in market costs
Because of them, the true opportunity cost of using petroleum-based fuels is higher than the market price
At the price P0 the quantity sold Q0 is greater than the efficient amount Q1 that would be sold at price P1.
However, it is doubtful that U.S. ethanol policy accomplishes its stated objective of offsetting harmful social costs
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Problem 1: Net Energy Gains from Ethanol are Low
Producing ethanol from corn uses energy inputs in farming and distilling that are nearly as great, or greater, than the energy value of ethanol produced
Studies differ slightly because of assumptions about technology, energy value of by-products, land use effects, and so on
In addition to the net energy problem, other studies suggest that there is little or no net carbon gain from corn-based ethanol
Energy value of inputs
Energy value of ethanol
Energy value of corn
Source: Tad W. Patzek, “Thermodynamics of the Corn-Ethanol Fuel Cycle,” U.S. Berkeley , http://www.bio-nica.info/biblioteca/PatzekCornEthanol.pdf
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Problem 2: Subsidies are Not the Best Corrective Policy
Even if corn-based ethanol were highly efficient, subsidies would be a bad way to correct the social cost problem
Instead, each fuel (gasoline, ethanol, natural gas, electricity, etc.) should bear a tax proportional to its social costs
Such a policy would encourage use of the most efficient fuels, and would also provide an incentive for reducing overall fuel use through choice of more efficient cars, moving closer to work, use of local products, and other lifestyle changes
Revenue could be returned through cuts in other taxes or used to reduce the deficit
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Problem 3: Ethanol Tariff Blocks Efficient Trade
International trade operates most efficiently when products move from relatively low-cost to higher-cost producers (the principle of comparative advantage)
Brazilian sugarcane-based ethanol is the world’s lowest cost source
However, imports of Brazilian ethanol to the U.S. are blocked by a $.54 per gallon tariff Sugar cane harvesters in Brazil
Photo source: Mariordo, http://commons.wikimedia.org/wiki/File:Piracicaba_10_2008_Sugarcane_harvester_199.jpg
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Problem 4: Ethanol Exports
International trade is further distorted by the combined effect of U.S. ethanol tariffs and tax credits
Rather than simply blocking ethanol imports, these policies have made the United States a net ethanol exporter, in direct contradiction to comparative advantage
The reversal of ethanol trade imposes costs on consumers and taxpayers that far exceed the increased profits to corn farmers and ethanol distillers
Posted Dec. 19, 2010 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
The Bottom Line: A Bad Policy that Refuses to Die
U.S. ethanol policy is ostensibly intended to improve environmental quality and national security
Its actual effects are the opposite—it does little or nothing for the environment and national security while imposing huge costs on taxpayers and consumers
It is a bad policy that deserves to die, but refuses to do so