A new study (found via Tidepool, and reported here in the Des Moines Register) claims that U.S. taxpayers will pay somewhere between $5.1 billion and $6.8 billion dollars this year to subsidize ethanol production. That’s works out to, oh, around a buck and a half per gallon of gasoline equivalent, on top of the sales price of the fuel.
As far as I can tell, the authors have done a pretty credible job of tallying up the various costs of ethanol subsidies — not just the federal tax credits, but also farm subsidies, accelerated depreciation allowances for capital investments, and even state-level ethanol promotion programs.
Still, I don’t think this is the last word on the matter. Not by a long shot. A complete assessment of the issue would look even farther afield, and tally a far wider swath of costs, as well as benefits.
And when I do that, I see billions and billions of dollars, on both the plus and minus sides of the ledger. But the climate-change benefits of ethanol? Not so big.
If you’re just looking at the public costs and benefits of ethanol, there are a number of things you could point out on the plus side of the ledger.
First, there’s this: ethanol producers pay taxes too — about $2 billion a year, according to an industry spokesdude (see, e.g., the Des Moines Register article). That suggests that the net taxpayer cost of the subsidies, after adding in tax receipts, is about a third lower than the gross cost. Not quite as spendy after all, perhaps.
Second, using ethanol means we use less petroleum — which, in turn, means that means we pay less in petroleum subsidies. An old estimate places that at about 40 cents per gallon; it’s probably higher now. And that, of course, doesn’t count the costs of security vulnerabilities, military “adventures,” etc.
Also, ethanol subsidies increase the demand for corn, which raises its price by about 30 cents per bushel. You might think that’s bad for consumers, and in a way it is, since it means we pay a tiny bit more for food. But cheap corn often shows up in our diets as empty calories, so in the big picture, making corn more expensive might lead to tiny savings on medical costs, through lower rates of obesity. Health is such a huge part of the economy — about a seventh of American GDP these days — that even tiny reductions in medical costs can add up to billions in savings.
Also, under the current farm subsidy system, expensive corn has a perverse side benefit. Many corn subsidies are tied to price: the lower the market price, the higher the subsidy. So the fact that ethanol subsidies raise the price of corn means they can reduce spending on crop subsidies — and perhaps reduce the pressure for congress to provide “countercyclical” assistance when prices are particularly low. Spending on price-sensitive corn subsidies has totalled about a billion a year over the last decade. (A shout out to my homies at EWG for the numbers.)
So there you have a few reasons to believe that ethanol subsidies may not be quite as costly as advertised.
But then there’s the other side of the ledger — the hidden costs that aren’t captured in a direct tally of government spending.
All else being equal, ethanol subsidies are the sort of thing that keeps economists (even left-leaning ones) up at night. They mean higher prices for consumers (for corn and other agricultural products) and slightly lower productivity (the money to pay for the subsidies gets pulled out of other, potentially more productive activities).
And then there’s driving. Increasing the supply of ethanol lowers the cost of gas at the pump — slightly, but significantly. And cheaper gas has unfortunate effects: it reduces incentives for more efficient cars, and it creates a subtle incentive for people to drive a bit more than they otherwise would. Again, those incentives are small. But they’re also real. The net result is that ramping up ethanol production means we drive a little more than we otherwise would — and save a little less petroleum than we think we will.
Plus, extra driving means all sorts of hidden and indirect costs — for accidents, roads, noise, you name it. The best estimate I’ve seen is that the external costs of driving — the costs not paid by the driver, but show up as lost productivity, lost quality of life, or higher taxes — total about 40 cents a mile. Given that Americans drive about 3 trillion miles a year, even a slight increase in driving means huge costs across society as a whole.
OK then. Here are some rough, poorly-sourced, cocktail-napkin estimates of the pluses and minuses of ethanol. On the plus side of the ledger, we have:
- $2 billion in tax receipts per year from the ethanol industry;
- maybe $1 billion in farm subsidy savings (at least, given the set of farm policies that have been operative over the past decade);
- savings on petroleum subsidies, starting at about $1 billion per year but possibly higher; and
- a hard-to-quantify but potentially significant saving from improved diets.
On the minus side we have:
- about $2.5 billion in extra consumer costs for corn;
- between $5.1 and $6.8 billion in taxpayer subsidies; and
- “external” costs from extra driving, which could exceed $6 billion.
I don’t make any claims of completeness here — there are probably lots of other pluses and minuses on both sides of the ledger. (I’ll leave aside the effects on the farm economy, which is a can of worms I don’t have time to open.)
Notice that I don’t mention environmental costs here. There’s a reason. On the minus side of the ledger, the costs of corn production are huge — think “dead zone” in the Gulf of Mexico, soil erosion, stream degradation, habitat loss, yada yada. But those costs also very hard to quantify, and probably have huge error bars. Still, even though I haven’t done the math, I bet it’s possible to put the long-term economic costs of those things in multiple millions, or perhaps billions, of dollars per year.
But on the plus side of the ledger, there’s the reductions in climate warming emissions brought about by switching from fossil fuels to a biofuel. And climate change, in my view, is the defining environmental struggle of the next century.
So how much are the anti-climate-change benefits of ethanol worth?
Well, not that much, as it turns out. The U.S. will produce about 4.3 billion gallons of ethanol this year. That has the energy equivalent of about 2.6 billion gallons of gasoline. According to a fairly comprehensive meta-analysis of the literature (see this PDF), current ethanol production reduces climate-warming emissions from the fuel cycle by about 10 percent.
So when I do the math (2.6 billion gallons of gas * 26 pounds of CO2 per gallon of gas * 10% emissions reduction for ethanol vs. gas * 80% to account for extra driving due to lower fuel prices), the ethanol production system reduces global warming emissions by somewhere around 2.5 million metric tons.
That’s something, anyway. Except that, if you look at the price of CO2 on the European market, it seems to range from about 12 to 20 euros — or about $15 to $25 dollars — per metric ton. Which means that, from a multi-billion-dollar investment in ethanol, the climate benefits total about, oh, $50 million or so per year. Think of the scale here. Most of the numbers you see bandied around in the ethanol debate are in the billions: gallons produced, bushels of corn consumed, taxpayer subsidies, farm subsidy savings, external costs of driving. They’re big numbers.
Compared with all that, the cost of the CO2 reductions aren’t even a rounding error; they’re a footnote to a rounding error. We’re talking orders of magnitude here, folks. OK, sure, $50 million is nothing to sneeze at. But throwing billions of dollars at an enormously complex mosaic of subsidies, with uncertain and hard to predict effects, is certainly a roundabout way of making such a small dent in climate change.
What all of this means to me: don’t even try to tell me that the real rationale for ethanol subsidies is the fight against climate change. Don’t even try. For ethanol, the climate impacts — even if real — are a teeny-tiny part of a much bigger game. And that game is all about following the money; when it comes to grain alcohol, the subsidies are the real intoxicant.
