SubsidyEye

Study Shows Ethanol Energy Efficiency Is Growing

Wheels,

You ask: "Is it safe to assume that you thik the whole carrot-and-stick methodology of our tax system is wrong? If we don't like something,"tobacc... alcohol," we tax it. It we want to promote something, "ethanol, wind power," we give it tax breaks or credits."

Well, first of all, you are mixing tax systems. Tobacco and alcohol are subject to excise (product-specific, per unit) taxes. Ethanol benefits at the federal level from something called an excise tax credit, but which is actually a subsidy provided through the IRS -- i.e., through reducing corporate income taxes. That means that it is not subject to budgetary limits, which it would be if the subsidy were provided through the USDA or the USDOE. It also means that somebody who walks or rides a bicycle to work is subsidizing people who drive.

The way that ethanol is supported in the United States also has very poor equity characteristics. Moreover, taxpayers pay the highest ethanol subsidies to people driving the least-efficient vehicles -- big, E85-guzzling flex-fuel SUVs and trucks -- to the tune of $1000 per year PER VEHICLE in the case of a typical FFV, the Chevy Tahoe.

Second, sound tax policy calls for taxing what what we know to be bad -- e.g., pollution. If one of the justifications behind supporting biofuels is to reduce greenhouse gas emissions, it would make more sense to provide a tax differential in the gasoline tax based on its life-cycle GHG emissions. The current rate of subsidization is far higher than the tax differential one would allow at a typical carbon tax of, say, $50 per metric ton of CO2-equivavlent.

It is much more hazardous to directly subsidize the production of something we think to be good, especially a product (as opposed to say, a service like health care for the needy). For one, if subsidizing that product lowers the price of both it and its close substitute (in ethanol's case, gasoline), then what the subsidy amounts to is, essentially, a subsidy for consumption. And we know how self-defeating such subsidies can be.

If the public policy goal is to discourage gasoline use, then why not raise the federal excise tax on gasoline to something closer to the excise taxes levied on gasoline in most other industrialized countries. (Even Turkey charges a far higher tax on gasoline than does the United States.)

That goes, by the way for wind power and other renewables. By providing tax credits to those renewables we are hiding the true cost of producing clean electricity from consumers. In other countries (and in some U.S. states), renewable portfolio standards give preference to wind and solar power, but at least in so doing they force the higher cost of the renewable-generated electric power to be borne by electricity consumers, not taxpayers (and especially not taxpayers from another part of the country).

None of the above applies to subsidies for research. There are plenty of good reasons for governments to support research, and some development and demonstration. But even there, R&D money is not unlimited, so the more neutral or performance-based governments can be in deciding who, and what technologies, benefit from R&D support, the better.

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14,

My opninion on including a 50% tax break for the building of refineries that process oil shale, as well as tar sands, in the bail-out bill?

How's, "Outrageous, stupid, but not surprising."

As the late, , Brian J. Finegan wrote in, "The Federal Subsidy Beast: The Rise of a Supreme Power in a Once Great Democracy", there is no longer a Democratic Party and a Republican Party in the U.S. federal government. There is only one party, the Subsidy Party.

www.abebooks.co.uk/pro.../

(I'm not sure, by the way, what the other stuff in your message is supposed to refer to.)

Study Shows Ethanol Energy Efficiency Is Growing

RickH,

In short, you can't show that ethanol (which replaced more like 4.8 billion gallons of oil in 2007, not 6 billion gallons, though it may be at that higher rate today) has specifically displaced oil imports from "terrorist" suppliers. Of course not: the world oil market doesn't work that way. And, in any case, even if it did, other countries would come in to fill the gap created by reduced U.S. imports. Unless somebody organizes a naval blockade targetted at nasty oil regimes, they will keep exporting at whatever is the world price ... and keep raking in the dollars.

Does that make me an oil supporter? Hardly. And, no, I own no shares in either ethanol or oil companies.

But I do have an interest in good public policy -- which ethanol booseters seem to find quaint. By the way, nobody here challenged the fact that "ethanol efficiency is improving." What I did challenge was Tim Plaehn's twisting of the numbers from the original story to announce that studies had shown that ethanol production is "2 to 3 times more efficient" than originally thought. Tim has shown himself to shoot from the hip whenever he (somebody who DOES own ethanol stocks) defends his favorite industry, often seeming to pull numbers out of thin air.

By the way, I'm glad that you at least acknowledge that high prices induce reductions in demand. That's progress of a sort.

Study Shows Ethanol Energy Efficiency Is Growing

Dear Rick H,

I guess that means we agree that ethanol subsidies have not saved taxpayers money. Good, at least we have that settled.

Have ethanol subsidies, on balance, created more jobs than they have cost the economy? That would be quite a feat for a heavily subsidized industry. Mostly they have driven up commodity prices (affecting food prices for everybody), which in turn means increasing the price of farmland:

www.extension.iastate....

Got some figures to back up your assertion that ethanol has substantially reduced U.S. imports of petroleum from, say, Iran? (Which, in your opinion, are the "terrorist" suppliers?) Because, according to the latest figures from the Energy Information Administration, year-to-date imports of petroleum (crude plus products) are DOWN from Canada and Mexico (our No.1 and No. 3 suppliers), but UP from Saudi Arabia (our No. 2 supplier).

www.eia.doe.gov/pub/oi...

Study Shows Ethanol Energy Efficiency Is Growing

Rick H,

I was refuting Wheels' specific point, which was that 2005 was not an aberrant year. S/he may not understand how the marketing-loan payments work, which depend more on how low the price dips in the year than the average price in the year. In the case of 2005, the closing of the Gulf Ports in the aftermath of Hurricane Katrina coincided with the new harvest. Prices plummeted and marketing-loan payments soared.

My larger point is that, if one is going to "credit" ethanol subsidies for reducing farm subsidies, you have to compare with a more average year, or construct a realistic counter-factual.

Point 1: Ethanol subsidies are not part of the envelope of farm payments that are limited under the USA's commitments to the WTO. Hence, as long as those payments are under the limit, Congress will find a way to keep the money flowing. When you look at total payments over the last several years, expected payments in 2008 are close to the average, assuming that 2005 was an outlier. (See my numbers, above.) Hence, it is hard to make the case that there have been any significant savings overall in farm payments.

Point 2: In saying that "14 billion bushels of corn per year with an average support cost of 50 cents per bushel is more than this years ethanol subsidy". It is more than what will be paid out in the volumetric ethanol excise tax credit (perhaps $4 billion this year ... but rising every year, and it is not the only subsidy benefiting ethanol), but 3-4 billion of those bushels are themselves due to ethanol support policies. Hence, the quantity for comparison should be the amount of corn that would have been produced in the absence of ethanol.

Looking at the trend in recent years (before ethanol production started expanding rapidly), annual U.S. production was fairly stagnant, at around 250,000 metric tonnes (around 10 billion bushels):

farm4.static.flickr.co...

With rising world demand, and therefore U.S. exports, production in the absence of ethanol would have risen to perhaps 11.5 billion bushels. But, that leads me to point 3 ...

Point 3: With that rising world demand, corn prices would have risen -- not by the same degree that they have with the additional demand for ethanol, but by at least $1.50 per bushel. Even the World Bank's Donald Mitchell, whose estimate of the contribution of ethanol to the rise in commodity prices is the highest among the major studies,

papers.ssrn.com/sol3/p...

allows that some 1/3 of the rise (between 2002 and April 2008) was due to rising energy prices and factors such as increased world demand for food and feed and the fall in the value of the dollar against other currencies.

So, to complete our counter-factual, even in the absence of support for ethanol, corn prices would have risen above the levels that would trigger price-support payments.

Conclusion: ethanol subsidies have not saved taxpayers money. They have, and will continue to be, an additional burden on top of the already existing farm payments.

Study Shows Ethanol Energy Efficiency Is Growing

Sorry, obviously I meant to say, "then why shouldn't the long-term trend (all else equal) for corn prices have been downwards, or at least rising at less than the rate of general inflation?"

Study Shows Ethanol Energy Efficiency Is Growing

"The university of Illionis shows corn prices growing at half the rate of inflation dating back 30 years." Well, we're always hearing from the industry that they continue to improve yields and drive down costs. Given that farmers are price takers, then, why should the long-term trend (all else equal) for corn prices have been downwards?

Of course, subsidies played a role in depressing prices also. But, I maintain, 2005 was not a typical year. Marketing loan payments for crops during that year were TWICE what they were in 2004. And ad hoc and emergency payments were 10 times what they were in 2004.

All in all, federal government payments to farmers in 2005 were almost twice ($24.3 billion) what they were in 2004 ($13.0 billion). In 2008 they are expected to be $13.4 billion -- i.e., no lower than what they were in 2004, and a bit higher than what they were in 2002 ($12.4 billion).

fpc.state.gov/document...

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14: that was in 2005, an a-typical year (thanks to Hurricane Katrina, which shut down the Mississippi ports for several months, thus limiting exports and depressing the domestic price).

The point about ethanol subsidies (unlike the crop payments), is that the USA has committed to reducing crop subsidies as part of the WTO's Agreement on Agriculture, whereas in the case of ethanol subsidies, the sky's the limit. And the annual expenditure is growing fast.

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14, as for deducting the costs of crop subsidies, that is an interesting question. Crop subsidies depressed crop prices, some would say (in the nine years following the 1996 reforms) by 23% below average farm production costs for corn, and 15% for soybeans.

www.ase.tufts.edu/gdae...

Rather than speaking of "savings" in crop subsidies, however (which I do not think should be treated as entitlement), when we count the contribution of corn-ethanol subsidies to increases in the cost of corn, we should count only the increase above the price that would have obtained in the absence of crop subsidies -- i.e., which would at least have covered production costs. Sorry, but I can't provide that figure at the moment.

Study Shows Ethanol Energy Efficiency Is Growing

Frflyer, I'm glad to learn that you are "not a big advocate of ethanol unless it proves to be economical and environmentally makes sense." I can agree with that.

As for the $84 billion a year estimate from the "Set America Free Foundation", I can't find in the document. The figure I find is $43 billion in lost local, state and federal tax revenues. That figure is $10 billion higher than the $33 billion reported by Freinds of the Earth, and is presumably explained by the inclusion of state and local tax breaks and subsidies.

The report also enumerates numerous other costs of oil, some of which would be hard to confirm or refute without looking at the original studies from which teh data are derived.

But back to the comparison with ethanol subsidies, the figures I referred to above were just federal subsidies for ethanol. Throw in state and local tax breaks and subsidies, and the total value comes to over $1 per gallon currently.

www.earthtrack.net/ear...

Of course, if one were to expand ethanol use on the basis of (U.S. produced) cellulosic ethanol, then you're looking at $1.01 per gallon ($1.50 per gallon of gasoline equivalent) just in federal tax credits, not to mention subsidies for related infrastructure and (at least in the near term) for plant construction. Add to that various state sales-tax and fuel-tax exemptions for ethanol (or E85) and the total cost could exceed $2.00 per gallon of gasoline equivalent in a number of states.

Of course, as the Set America Free Foundation document points out, there are indirect costs associated with oil dependency. So to are there from biofuel use, especially biofuels made from cropland. Higher prices for food and other agricultural materials is just one. Economic losses due to supply disruptions could also be high: witness the panick that preceded this year's corn crop before the floods finly subsided.

Again: the country needs to wean itself off of oil, and stop subsidizing it, but it is hardly a winning strategy to try to buy itself freedom from that dependency by creating a new industry that itself is massively dependent on subsidies.

Study Shows Ethanol Energy Efficiency Is Growing

Mr. frflyer, could you please provide a source for your "$84 billion annually in tax credits and subsidies to big oil"? I provided a source for my number -- Friends of the Earth (hardly an organization that could be accused of being biased towards the oil companies).

You equate subsidies for corn ethanol with subsidies for renewable energy generally. When so much non-renewable resources (eroded soil, fossil water in the western Great Plains, phosphate, energy to produce the N fertilizer, fossil energy used in farming and processing the ethanol) are used in its production, calling it "renewable" is stretching the definition.

Study Shows Ethanol Energy Efficiency Is Growing

Um, from where does the "2 to 3 times more efficient than previously thought" come from? The article says "Compared to just five years ago, ... ethanol plants produce 15 percent more ethanol from a bushel of corn and use about 20 percent less energy in the process". It is unclear whether they mean that the plants have reduced their energy use per gallon or per bushel by 20 percent (the latter would then mean a gain of 44% more gallons for the same amount of energy inputs), but I'm not sure how that translates into "2 to 3 times more efficient".

I agree with Duude, of course, when he writes, "So then, let's get rid of the subsidy and see how it works." Wheels 14 writes, "Are you willing to get rid of all subsidies? We could start by getting rid of the subsidies oil and natural gas receive."

Of course we should. But let's compare apples with apples. According to a recent study by Friends of the Earth, "Big Oil, Bigger Giveaways",

www.foe.org/pdf/FoE_Oi...

oil companies will receive around $33 billion from the federal government over the next five years. That comes to $6.6 billion per year, divided over 75 billion gallons (1.8 billion barrels) of production, or $0.088 per gallon.

tonto.eia.doe.gov/dnav...

By contrast, the federal volumetric ethanol excise tax, starting next year, will be $0.45 per gallon (or $0.67 per gallon of gasoline equivalent). Assuming average production of 11 billion gallons a year over the next five years, that will come to a total of just under $5 billion per year, just for that one subsidy. Add in other federal subsidies (e.g., the small ethanol producer tax credit and subsidies for R&D and demonstration plants), and total federal outlays in support of ethanol will easily come up to parity with oil ... but for 1/10th the amount of energy.

Oil companies do not need federal subsidies. Some ethanol producers might "need" subsidies to survive. But why should we keep them dependent on the public teat? And why should ethanol producers have priority over other sectors for government hand-outs during these austere times?

Ethanol Stocks: The Good News and the Bad

"It seems that biodiesel has a much better future than ethanol. There is too much government involved in ethanol." -- bobjou

You need to read up on biofuel policy, bobjou. Federal support for biodiesel is as heavy as for ethanol, granting it $1.00 per gallon in tax credits, compared with $0.51 per gallon for corn ethanol. In addition, most producers benefit from a $0.10 per gallon Small Producers Credit on the first 15 million gallons they produce in any given year. Producers in Kentucky get an additional $1.00 per gallon, and producers in Pennsylvania $0.75 per gallon.

First-generation biodiesel would have no future (except as a botique fuel made from waste cooking oil) were it not for these subsidies. The price of feedstock accounts for 80% or more of the cost of producing biodiesel, and that cost is today almost 3x what it was three years ago.

Biodiesel from algae may have a bright future ... eventually. But it is still in the pilot and demonstration stage.

Ethanol: Our Answer to Reducing U.S. Dependence on Foreign Oil

Good for you, Rickl, if you can get the same gas mileage on E30 as with pure gasoline. Most people's vehicles wouldn't.

Ethanol: Our Answer to Reducing U.S. Dependence on Foreign Oil

Dear RickH: Yes, that's why I put in brackets "(or, ultimately, how far it can move a vehicle with a given volume)". I realize that engines vary in the fuel-economy hit they take with different ethanol blends. But there is also a lot talking up of the kind of fuel economy vehicles COULD achieve if their engines were optimized for ethanol. Meanwhile, in the real world, E85 reduces fuel economy in FFVs by 25% ... at least according to the EPA.