There have been a number of recent articles and reports that have come out attempting to quantify whether the various subsidies for first-generation biofuels, such as corn ethanol and soybean-derived biodiesel, make economic sense.
And while they are interesting, most are missing the bigger picture.
This month, the National Resource Defense Council (NRDC) interpreted a University of Missouri study to mean that the "current corn ethanol tax credit is effectively costing tax payers $4.18 per gallon and driving up grain prices."
Shockingly, pro-ethanol industry organizations like Growth Energy and the Renewable Fuels Association took issue with these claims.
Let's get to the facts.
In 2010, the U.S. government will require under the Renewable Fuels Standards (see EPA Issues Renewable Fuels Standards) that 12.0 billion gallons of corn ethanol are produced. The U.S. government will provide a $0.45/gal "blender's tax credit" for petroleum refiners to blend corn ethanol which is equal to a $5.4 billion dollar subsidy.
There is also the issue of the indirect subsidy in the form of a $0.54/gal tariff on imported Brazilian biofuel (see Brazilian Ethanol Takes a Hit) to insulate U.S. ethanol producers from foreign competition. Basically, due to the favorable economic structure of sugarcane ethanol over corn ethanol, if this tariff did not exist, the U.S. would import billions of gallons of Brazilian ethanol.
12 billion gallons of corn ethanol has the btu equivalence of 9 billion gallons of gasoline -- roughly 6.5% of the U.S. gasoline supply of 140 billion gallons.
Some argue that the true amount that first-generation biofuels are subsidized must account for increases in the cost of food. That is, the laws of supply and demand suggest that if the U.S. is utilizing approximately 30% of its corn crop to produce ethanol then the price of corn would decrease if that portion of the corn crop was diverted to human consumption rather than to ethanol and DDGS production.
Others counter that the U.S.' 13.2-billion-bushel record corn harvest of 2009 (see A Comeback for Corn Ethanol?) illustrates that corn producers continue to become more productive and that the "food vs. fuel" debate is immaterial. While there is truth to the observation that corn yields have continued to improve, the U.S. is still utilizing the equivalent of almost thirty million acres of scarce cropland to produce feedstocks for biofuel.
Then there is the issue of Indirect Land Use Change (ILUC) (see Inconvenient Truth: Biofuels Have a Carbon Footprint).
Although the talking heads of Big Agriculture and Big Ethanol's propaganda wings like to pretend otherwise, there is only a finite amount of cropland on this planet. As more and more farmland gets planted for bioenergy -- and the global population continues to grow by 80 million people per year -- deforestation occurs in places like Brazil and Indonesia, where carbon-rich peat forests are cut down to grow crops that otherwise would have been grown in the West.
This deforestation is the primary reason why Indonesia and Brazil are now the third and fourth largest C02 emitters on the planet, respectively. The more that pro-ethanol lobby groups like the Renewable Fuels Association (RFA) and Growth Energy dispute the existence of indirect land use changes and lobby their friends in Congress to strip the EPA of its right to use ILUC in life-cycle carbon analyses, the more that they undermine their credibility about their environmental stewardship and the economic benefits of first-generation biofuels like corn ethanol.
Thus, the calculation of corn ethanol's costs are a combination of direct subsidies like the blenders credit, renewable fuels standards, and the import tax on Brazilian ethanol, as well as indirect subsidies in the form of higher food prices and any positive carbon footprint that might exist.
What is the exact total? Given the lack of agreement on the methodology to determine how much corn ethanol contributes to corn price increases as well as disagreements over how to calculate indirect land use, the best estimate is "tens of billions of dollars" per year. Yet, this might not be as significant as it seems when we consider the other side of the coin.
What are corn ethanol's economic benefits?
While I am completely unapologetic in my belief that Congress and the White House are unwisely pursuing a biofuels policy in which corn ethanol, soybean biodiesel, and cellulosic ethanol have been chosen over radically transformative feedstocks like algae and designer organisms that can produce "drop-in" renewable gasoline, jet fuel, and diesel, I also believe that credit should be given where credit is due.
In order to assess the cost and benefits of first-generation biofuels like corn ethanol, we must ask ourselves, how much did the United States save in recent years by substituting domestic ethanol for petroleum fuels?
According to the Energy Information Administration (EIA), the global average price of a barrel of crude oil jumped from $56.64 to $99.67 between 2005 and 2008, an increase of 76%, while the global supply of oil increased only 1% -- from 84.58 million barrels per day to 85.46MBD. Tight global supplies and supply chains had accelerated the price rise over small volume increases, as producers hit the limit of what they could produce and deliver.
During the same period, the Renewable Fuels Association (RFA) reports that domestic ethanol production increased 130% -- from 3.9 billion gallons per year to 9.0 billion gallons per year -- reaching 373,600 barrels of oil per day on an equivalent Btu basis in 2008.
Significantly, this increase in biofuel production was the dominant contributor to U.S. imports of foreign oil falling over that same period, during a period of robust economic growth and falling U.S. oil production. Certainly, anyone concerned about domestic energy security would find that statistic encouraging.
Economically speaking, without ethanol production, the U.S. would have required an additional 1.3% of its total oil consumed -- predominantly from abroad -- or 0.34% of the global oil supply. Considering a price increase of $43/bbl from the previous 1% rise in world demand, simple but conservative extrapolation suggests that the additional one-third of a percent of the supply that biofuels supplanted would have increased global oil prices by an additional $15/bbl -- resulting in nearly $120 billion of annual savings for American oil consumers, based on a total of 8 billion barrels consumed annually. And this is to say nothing about the jobs that biofuels created, the tax revenue generated, and biofuels' contribution to national GDP.
In light of the diminishing supplies of inexpensively accessible oil, it seems likely that biofuels' role in directly replacing petroleum and softening the impact of diminishing crude supplies will become paramount in the coming years, especially as 2.5 billion people in "Chindia" continue to undergo their industrial revolutions, 6 billion people on the planet catch up to the personal mobility mass consumer lifestyles that 1 billion of us take for granted, and we approach the peak of easily accessible conventional oil supplies.
The forthcoming oil shocks will be partially mitigated by higher ethanol supplies -- and for that, we have reason to thank the corn ethanol industry. Yet, the economist in me cannot help but wonder about the opportunity costs that we have incurred over the last several decades. Specifically, by not investing the tens of billions of dollars necessary to scale up second- and third-generation biofuels that could displace 100% of our petroleum consumption with non-food based feedstocks, rather than the investments that were made in first-generation biofuels that have led us to be subservient to an Agricultural Industrial Complex that dictates our national biofuels policy (see Biofuels 2010: Spotting the Next Wave).