Monday, June 14, 2010
What Would Ethanol Policy Look Like If It Were Actually Planned To Be Economically Beneficial?
What are all of the federally-funded subsidy programs and energy policies that are part of the fabric of ethanol? There is the tax credit for fuel blenders. And there is the tariff on imported ethanol. There is also the mandate to produce and blend increasing larger amounts of ethanol into the motor fuel supply. There are probably others, but the question is, are all of them needed to still achieve the goal of producing a domestic renewable fuel for the US motoring public?There are numerous factors that affect ethanol, in addition to the federal policies; there are many fuel taxes, the potential carbon tax that is being considered by Congress, oil prices, corn prices, and even the value of ethanol co-products. While there are many issues swirling around that will impact the price of ethanol, a group of economists from Iowa State University and the USDA analyzed the various federal policies to determine if any could be eliminated or if some where duplicating the role of others. They ask, what is the minimum federal support needed for ethanol? Their report seeks to answer that question.
Government support for ethanol has helped increase production from 1.65 billion gallons in 2000 to 10.76 billion gallons in 2009, aided by a 45¢ per gallon tax credit for blending and a 54¢ per gallon tariff on imported ethanol. Additionally the federal energy policy mandates targets to reach in ethanol production and use that will reach 12.95 billion gallons in 2010 and 20.5 billion gallons in 2015. While economists have looked how ethanol will be impacted if some of those polices were reduced or eliminated, some of the newer impacts would be the proposed $25/Ton carbon tax on fuel consumption and how ethanol policy affects global expansion of farmland into fragile areas. The research lead by the Iowa State economists varies the governmental policies to see how those affect prices of corn, oil, ethanol, and gasoline. They say their results show the largest economic gain would really be in conflict with current international trade policy because it would require tariffs on oil imports. As an alternative, they would suggest increased taxes on gasoline.
In addition to the variables tested economically, the group looked at what would happen if no changes were made. Retained would be the federal fuel tax of 39¢, the ethanol blending credit of 45¢, and the result would be higher ethanol prices, a modest decline in oil prices, and an 18% increase in corn prices. That would result in a decline in domestic fuel consumption, and with a 3% decline in carbon dioxide emissions. The decline in pollution costs would be $1.6 billion.
If there was no ethanol policy, the 39¢ federal gas tax would continue, but the ethanol industry would be a shadow of itself, producing only 5% of what it does now. Pollution would be 20 million tons of carbon dioxide emitted.
The economists say the best policy is a 27.8¢ per gallon tax on ethanol, a 37¢ per gallon tax on gasoline, a $19.20 per barrel import tariff on oil and a $1.10 export tariff on corn. The result would be a $15 billion economic enhancement compared to no policy and $7 billion better than the current policy. Such a plan would increase the price of oil by 21% and drop world prices by 9%. Despite the tariff on corn exports, US corn prices would increase 16% and world corn prices by more than 51%. Overall fuel consumption would fall significantly and since ethanol would replace gasoline, carbon dioxide emissions would decrease slightly over 10%. Oil imports would fall by 24%, easing our dependence on foreign oil.
Summary:
For ethanol to continue in the midst of economic turmoil, the best support for it may not be the current federal policy. The best support may be oil import tariffs, corn export tariffs, and a carbon tax. However, the tariff proposals are in opposition to current rules of international trade.
Posted by Stu Ellis on 06/14 at 01:23 AM | Permalink