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Share Research & Analysis | Biofuels
Joshua Kagan 03 18 10
The True Cost of Corn Ethanol
A number of recent studies have missed the mark.
.
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).
..16 Comments
Matt Hartwig 03/18/10 1:03 PM
Josh
While there are many issues i have with your description of the issues surrounding American ethanol production, i must ask how you calculate a $12 billion subsidy this year for ethanol? Your math is fuzzy to say the least. First, the $0.45 would apply to the 12 billion gallons of ethanol used as required by the RFS (the RFS mandates use, not production). However, the $0.54 tariff on imports would only apply to gallons actually imported, not all those used considering the vast majority will be domestic production. Additionally, the tariff is a revenue generator not a subsidy. Nor does it protect the industry. it is there to offset the value of the tax credit for which all ethanol is eligible regardless of origin.
Based on 12 billion gallons of use, the tax incentive is worth, at most, $5.3 billion.
Reply
Ralph 03/18/10 1:13 PM
Why did you apply the 54 cent tariff to ALL 12 billin gallons?! That is extremely misleading and doesn’t make sense. The tariff is only assessed on imported ethanol and is meant to offset the blender’s credit that is claimed on every gallon of ethaol blended—whether from Iowa or Brazil. The U.S. will probably only import 150 million gallons or so this year. So, your math really should look more like this: 12 bg x .45 = $5.4 for the tax credit; plus 150 mg x .54 = $81 million; for a total of $5.48 billion—or less than half of the figure you cite. Please correct.
Reply
MMerritt 03/18/10 2:17 PM
While I disagree with some of your points, it is refreshing to see ethanol critics scrutinized to the same degree as ethanol supporters. It has become popular to simply accept ethanol criticism as truth while dissecting the minutia of every pro-ethanol argument. I appreciate that you took nothing for granted in this post. Keep it up.
Reply
Joshua Kagan 03/18/10 2:41 PM
Matt and Ralph, thank you for your comments highlighting a sloppy distinction I made. The point that I failed to convey is that if we didn’t impose the $0.54/gal Brazilian tariff, you can be well assured that our market would be flooded with Brazilian ethanol—- as the economics of Brazilian ethanol are generally better than corn ethanol (until very very recently). Thus, the tariff of $0.54/gal is an indirect subsidy as it protects domestic producers from international competition. I was probably a bit too presumptuous in assuming that ALL 12 billion gallons would come from Brazil. For that, I apologize for my sloppiness.
Reply
Matt Hartwig 03/18/10 3:19 PM
Josh
The market likely wouldn’t be flooded for a number of reasons, not least of which is Brazil’s own mandate for use. That being said, the tariff is not a barrier to entry. We imported nearly 600 million gallons of ethanol in 2008, much of that paying the tariff. The tariff simply offsets teh value of the tax incentive for which Brazilian ethanol is eligible.
You might find it interesting that Brazil impose a 20% tariff on ethanol imports, but that isn’t something they frequently like to discuss.
Thanks for the clarification.
Reply
Ralph 03/18/10 3:43 PM
Joshua,
First, thank you for acknowledging your mistake and posting the clarification. Too often bloggers won’t back down from incorrect statements they make, even when it is clearly pointed out by commenters that factual mistakes were made.
Second, I agree with you that imports from Brazil could increase dramatically if the tax credit is discontinued. It is probably a given that if the tax credit goes away, the tariff goes away too (because as Mr. Harwig explained, the tariff is meant to “cancel out” the tax credit on foreign ethanol). If the tax credit and tariff expired, I think you would see many U.S. ethanol plants close down and foreign producers would rapidly increase their production to take advantage of the U.S. mandate for ethanol. So the question facing lawmakers is, from an energy security standpoint, is imported ethanol any better than imported oil?
Thanks,
R
Reply
randydutton 03/18/10 4:21 PM
You’re missing the mark.
Additional cost of incorporating ethanol into our fuel supply is the cost to repair or replace millions of open cycle engines. Read the Outdoor Power Equipment Institute report http://www.opei.org/ht/a/GetDocumentAction/i/1926.on just how destructive, dangerous, and inefficient ethanol is. And according to the WA State Dept of Ecology, “and more than 2% ethanol in the fuel supply and Seattle doesn’t attain EPA ozone attainment levels”.
Further, America HAS the oil, its just that the Congress has blocked its extraction. No thanks to my Rep. Norm Dicks who authored the 2008 Energy Act that specifically blocked industry extraction of oil. Read the 2010 NARUC report that shows $2.37 trillion LOSS to US GDP because of the moratoria being in place http://www.naruc.org/News/default.cfm?pr=183. The report shows just how much MORE oil and natural gas America has than previously thought.
Reply
Derek 03/18/10 5:31 PM
In the United States; 95% of the oats, 80% of the wheat and 80% of the corn is fed to cows. It takes 10 to 16 pounds of grain, 1 gallon of gasoline and 2,500 gallons of water to produce one pound of grain fed beef. In the American West, the livestock industry consumes 70% of the water. Globally, livestock production accounts for 21% of greenhouse gas emissions. Minus water and grain subsidies a pound of ground beef (basic hamburger) would cost more than $35/lb. With the same water, farmers could produce 16 pounds of broccoli, 25 pounds of potatoes, enough soybeans for three pounds of tofu or enough wheat for nearly five pounds of whole wheat bread.
U.S. subsidies for Oats, Wheat and Corn (feedstock) are more destructive to the Global Economy and Environment than all the illegal drugs put together including Afghanistan Poppy fields, Columbian Cocaine, and Mexican marijuana.
While our soldiers, law officers, diplomatic staff and citizens die over drug production and distribution, the livestock industry does more damage to our country by both squandering our land, air, and water resources and by its ability to offer artificially low prices on the unhealthiest of foods, at the expense of U.S. produced fruits and vegetables.
In the U.S. we enjoy personal freedom to eat what we want and like, but we are fooled into thinking that meat is cheap while fruits and vegetables are expensive by government policies that favor powerful companies that produce most of our foods. The beef and livestock industry controls an inordinate percentage of our food supply, and extracts government (Taxpayer) payments to make the most damaging and unhealthy foods substantially less expensive than broccoli, apples, and spinach.
At the very least, we should demand that our government remove all subsidies for Feedstock in favor of fruit and vegetable production. This is the first and most effective step our country can do to address food and environmental security along with water and land conservation.
Other steps include eliminating the free use of our land, water, and waste sinks by the livestock industry which has lead to exploitation and pollution. These resources should be fairly priced to reflect the full economic and environmental costs. At the same time, herders, producers and landowners can be paid for environmental services that fairly regulate and conserve water and preserve the land.
We need a national moratorium on the environmental and health impact of current livestock and energy production so that we can redirect programs, policies, and money into those areas that provide the jobs and industries of the future while making the best use and preservation of our natural resources.
Reply
Dr Aaron Wolf Baum 03/18/10 6:43 PM
I don’t see how your final assertion makes any sense at all, it’s not in accordance with the most basic economics.
“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.” So the price of oil went UP while the supply ROSE. If the price of oil were determined solely by supply, then the statistics you quote would indicate that an increase in supply would INCREASE oil prices. So by your logic corn ethanol is *costing* the U.S. $120B/yr!
Clearly, demand must have risen a lot during this period, and demand changes are primarily driving the economics.
There is no doubt some lowering effect on oil prices from corn ethanol, but you have to dig a lot deeper into the mechanics of the oil market to figure such things out, and I think that the idea that a 0.34% change in production leads to a ~30% change in oil prices is a stretch, to say the least…
Reply
Joshua Kagan 03/18/10 7:23 PM
Aaron,
I appreciate your comments. I have read them a few times and I still have no idea how you interpreted my reasoning to assume that I believe that “the price of oil [is] solely determined by supply.” Let me clarify, oil producers (other than Iraq) had every incentive in the world to produce more oil and meet heightened demand from an era of global prosperity from 2001-2007. Yet, the fact is, supplies increased in a very small manner. The supply/demand imbalance resulted in extreme price inelasticity as demonstrated by the data illustrating that for every 1% increase in supply there was a XX% increase in price. Iran announced this week that it will need to invest $200B to maintain oil production levels through the next decade. The era of cheap and ubiquitiously available supplies of crude oil is coming to an end whether we like it or not. And yes, when there are extremely tight oil supplies, marginal increases in demand can have massive price increases. Had the financial crisis and ensuing global recession of 2H 2008 not occurred, we could be at $250/bbl oil today.
Kevin 03/18/10 7:04 PM
While the above commenter is correct on some level, we should also not forget that petroleum prices are not determined in close to a perfect market. Gas prices are controlled by the monopoly power exercised by OPEC. This makes any assertion like the one presented here largely speculative (i.e. there’s no way of knowing what oil prices would have been sans ethanol). However, the basic premise is accurate - ethanol probably depresses oil prices.
Reply
Dean 03/19/10 10:23 AM
It is interesting how a so called green person can attack renewable fuel and not mention the footprint of petroleum. If corn is so bad why do you not mention the millions of acres of coffee around the world with no food value. Coffee acres truely do take up rain forest land. Corn ethanol produces as much feed (DDGS) as it does fuel. Reality check sir!
Reply
DCPerspective 03/19/10 10:49 AM
Very well thought out points in your article, refreshing to see valid and truthful coverage of what should be considered a proud and innovative American Industry success.
A few points to add.
It must be acknkowledged that without corn ethanol the expertise, funding, and infrastructure base would not be in place for second and third generation ethanol technologies to develop, much less enter a market that is still very hostile to ethanol even considering the positives you have pointed out.
Indirect land use- this is a theory with no accepted basis of accuracy, even acknowledged by the thoerists themselves. Your point on limited cropland is indeed valid however until ILUC expands its assumption that only American biofuels are subject to any implementation of this theory is simply biased heresy. Without addressing it uniformly across all industries and nations it will continue to stand as it is- a highly subjective theory that aims to penalize a single industry without regard to science.
A very important point that is overlooked here beyond the savings to American consumer is that the money is staying HERE and is not funding hostile or unfriendly nations.
Lastly the effect of having a proven, growing, and successful alternative transportation fuel is priceless in terms of national capabilities and national security.
Reply
StevenS 03/19/10 5:31 PM
Your assertion of finite cropland is technically correct, but the truth of the the matter is that even the US, a large percentage of the arable land is idled. Add to that the ever increasing yields and more sophisticated farming practices, and you are worrying about a non-issue. The starch used for ethanol is hardly missed in the agricultural supply chain, since the part of the kernel that livestock utilize is still available as a high protein feed.
Heaven forbid the price of corn should rise enough to cause the farmers to no longer need agricultural subsidies. Heaven forbid the proce of corn should rise enough to justify the use of farmland in developing nations, since the cost of farming cannot compete with the massive amounts of free or nearly free grain the US dumps into overseas ports.
We have become victims of our own productivity and stupidity. We produce more than we need, so we found ways to prop up the markets. Now that we finally find a way to use some of that excess, the unimaginative pundits jump in and support the corporations whose profits are threatened.
ILUC has got to be one of the most ill founded ideas that I have ever heard of. Can we really justify penalizing our own efforts to develop alternative fuels? If the US does not develop alternative fuels, who will? China? USDA numbers indicate that US exports of grains INCREASED, despite the use of corn for ethanol. ILUC is a farce. Do you think we should penalize a Prius owner for causing the price of gas to fall, making his neighbor’s SUV more affordable?
The assumption that we are causing deforestation by using our surplus is simply not borne out by a single fact. Deforestation was occurring at a record clip long before corn ethanol, and has actually slowed according to the United Nations FAO. Compared to the 1990-2000 period, deforestation in the 2000-2005 period slowed considerably. Again, ILUC is not borne out by facts.
Reply
Ron Steenblik 03/19/10 5:56 PM
Josh,
You should have stuck to your guns. An import tariff affects the price of ALL domestic sales, not just of sales of the imported competing good. It may not raise the price of domestic goods by the full value of the tariff (i.e., there may be “water” in the tariff), but whatever effect there is will percolate throughout the market.
Consider the case of Japan, for example. Import tariffs keep out all but a trickle of imported rice in that country. But thanks to its high border protection, the domestic price of all rice sold in that country is several multiples of the world price.
Matt Hartwig is correct, however, that if the tariff (or the tariff and the VEETC) were removed, the U.S. “market likely wouldn’t be flooded”. Besides Brazil having a mandate for its own use (and supplying ethanol to Swedish and other European consumers), its own prices will of course represent global supply and demand. And there are natural barriers created by geography. As a recent analysis by the Baker Institute showed, the it is unlikely that Brazilian ethanol would be able to compete with U.S. corn ethanol in the U.S. heartland — i.e., east of the Rocky Mountains and west of the Appalachians — tariff or no tariff in place.
If gasoline prices were to rise considerably, more Brazilian ethanol would most likely be sold in the United States without a tariff than with a tariff. But more ethanol would be sold in total, which is what a lot of people concerned about imported oil say they want.
But Matt Hartwig is leaving out some important details when he writes, “That being said, the tariff is not a barrier to entry. We imported nearly 600 million gallons of ethanol in 2008, much of that paying the tariff. The tariff simply offsets the value of the tax incentive for which Brazilian ethanol is eligible.”
There are two claims being made here, both eroneous. First, the tariff is most decidedly a barrier to entry, It was less of a barrier until October 2008 (note that Hartwig cites import statistics for 2008 but conveniently not for 2009 or later), when importers could “drawback” the import duty by exporting an equivalent amount of jet fuel (e.g., by filling up tanks of aircraft flying to another country). So, though some of the Brazilian ethanol that was imported “paid the tariff”, that tariff was later rebated, neutralizing its effect.
The passage of the 2007 Farm Bill in 2008 extended the $0.54 import tariff for two years, until December 31, 2010, but also eliminated the duty drawback on re-exports that do not contain ethanol. (See http://www.thompsonhine.com/publications/publication1487.html). This had an immediate chilling effect on the import market. Thus, according to F.O. Lichts, while the United States had imported more than 68,000 cubic meters of denatured ethanol from Brazil between January and July 2008, during the same period a year later it imported only 36 cubic meters. (Meanwhile, imports from Canada, which are free of import duty under NAFTA, more than doubled, to 42,000 cubic metres). Similarly, imports of undenatured ethanol from Brazil declined from almost 373,000 cubic metres in January-July 2008 to just 47,000 cubic metres during the corresponding period a year later.
Incidentally, the tariff does not “simply offset the value of the tax incentive for which Brazilian ethanol is eligible.” First, the tariff is 9 cents per gallon higher than the blenders’ tax credit. But, more importantly, even if it were the same, all that would mean is that Brazilian ethanol would not be disadvantaged compared with gasoline (which is imported from all nations nearly duty free). Because domestic U.S. ethanol suppliers also benefit from the blenders credit, the disadvantage to Brazilian ethanol (apart from that channeled through countries such as Jamaica under the Caribbean Basin Initiative (duty free up to 7% of domestic consumption) vis-avis U.S. ethanol producers is the full rate of the tariff: it does not matter at what level the VEETC is set.
Finally, Matt Hartwig notes that “Brazil impose(s) a 20% tariff on ethanol imports, but that isn’t something they frequently like to discuss.” Perhaps that is because the Brazilian ethanol exporters are embarrassed by their government’s action. Indeed, UNICA, the Brazilian Sugarcane Industry Association, has been arguing for the import tariff (which was recently raised back to the bound rate of 20% after having been at zero since February 2006) to be eliminated as soon as possible. http://english.unica.com.br/releases/show.asp?rlsCode={FD292910-8B87-4CDB-96AC-8B491DEF00A2}.
Reply
Ron Steenblik 03/19/10 6:05 PM
SteveS,
You write, “but the truth of the the matter is that even the US, a large percentage of the arable land is idled.”
Please be more specific and provide some statistical evidence? Are you referring to land enrolled under the Conservation Reserve Program (CRP)? Are you saying that you would be happy to see that land—much of it highly erodible—plowed up?
You write also that “The starch used for ethanol is hardly missed in the agricultural supply chain, since the part of the kernel that livestock utilize is still available as a high protein feed.”
That high-protein feed can substitute for a significant proportion of the feed rations of cattle, but not of poultry and hogs, which DO miss the starch. If DDG was such a great boon to the livestock industry, why are the poultry and hog raising industries calling for an end to subsidies for ethanol?
Reply
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