CAFRI

U.S. Ethanol Policy:
Is It the Best Energy Alternative?

Otto C. Doering III
Professor of Agricultural Economics, Purdue University

This paper was presented at the annual meeting of the Canadian Agricultural Economics Society (Halifax, June 2004) in a session entitled “Bio-Energy in North America: Problems, Policies and Potential”. Papers presented at CAES meetings are not subject to the journal’s standard refereeing process.

The Issue

U.S. ethanol policy has several drivers. Among these are increasing the incomes of U.S. corn farmers, enhancing the environment, providing a source of sustainable energy, and reducing dependence on foreign oil. Each of these has its own advocates and critics. While it is true that ethanol production can enhance the incomes of corn farmers, some ask who benefits more from the public subsidy of ethanol production – farmers or processors. Some question whether ethanol always delivers a clean air benefit and whether it provides a source of sustainable energy while reducing dependence on foreign oil. The large public subsidy provided for ethanol production is yet another issue. While all of the above considerations relate to ethanol policy, this article focuses primarily on energy-related issues.

The context for ethanol policy is U.S. energy policy, which is almost exclusively supply driven. Consistent with this thrust, the current target is to increase annual ethanol production from 3 billion to 5 billion gallons over the next several years. At the direct subsidy level of $US0.52 per gallon of ethanol produced, this level of production will result in a public expenditure of US$2.6 billion. The question is, what other options might provide better energy alternatives on the basis of cost and other considerations?

Implications and Conclusions

Ethanol is a minor component of the supply-oriented U.S. energy policy. It is reasonable to ask whether we would perceive the same pressing need to produce ethanol for energy supply reasons if U.S. energy policy were more diverse. Would policy makers consider options like demand reduction? Would they view energy use in terms of the services provided rather than in terms of the form, time and place constraints associated with a particular energy source? Alternative policy options might be undertaken, and analysis of these alternatives is worthwhile. Highly subsidized ethanol production does not make a major contribution to reducing liquid petroleum imports to the United States. And ethanol production has evolved so that it requires what is now another critical strategic fuel, natural gas. The issue is not whether ethanol production is a net calorie gainer or loser; rather, it is whether ethanol reduces strategic dependence and provides a needed form of fuel or energy service at lower opportunity cost when compared with demand reduction or other means of providing an energy service. Finally, the subsidy for ethanol production might be redesigned to mitigate the boom-bust nature of this capital-based processing industry and make full costs and subsidies more transparent.

The views expressed in this article are those of the author(s) and not those of Current Agriculture, Food & Resource Issues nor the Canadian Agricultural Economics Society.

Suggested citation: Doering, O. C. 2004. U.S. ethanol policy: Is it the best energy alternative? Current Agriculture, Food & Resource Issues 5: 204-211. Retrieved [date] from the World Wide Web: http://www.CAFRI.org

U.S. Ethanol Policy: Is It the Best Energy Alternative?

The Issue

U.S. Ethanol Policy:
Is It the Best Energy Alternative?