January 3, 2012.  On Sunday January 8th, the 30-year old ethanol subsidy will expire. Given the price of gas, and the escalating federal alternative-fuel mandate, there will likely be little or no drop in production. Tax payers will pay less by 45¢/gallon of ethanol or 4.545¢/gallon of the gasoline-blend most of us buy. But that does not mean we will pay more at the pump.

The reason the ethanol industry has lobbied hard for this in the past is because they get the money. And that means that without the subsidy they would lose the money. And that means they don’t think they could just pass the cost on to us. This makes sense economically, because in the long-run, the price of ethanol sticks very close to the price of gasoline. So I think this is a win for taxpayer/drivers, and a loss for the ethanol factories.

But it won’t help the environment. Ethanol will still increase CO₂ emissions a bit because it requires significant fossil inputs and because producing a barrel of ethanol will not force Saudi Arabia or Exxon to pump a barrel less of oil.⁽¹⁾Producing more ethanol cause oil producers to pump less, and oil users to use more. There is no direct effect—nothing forces any producer or consumer to change behavior—so the effects work only through the world price of oil. The net result is that ethanol displaces roughly 70% of what environmentalists expect. So its carbon reduction is 30% less and that ends up meaning that the ethanol production actually increases carbon emissions. So Why does the Environmental Protection Agency mandate it? Because environmentalists are not good economists. Here’s the paper I wrote on this for the Clean Air Task Force, to help them sue the EPA to stop the ethanol mandate.  Besides the CO2 emissions, the increased production of corn requires huge amounts of nitrogen fertilizer, much of which which ends up in the Gulf of Mexico, and it raise the price of corn for the worlds poor. Subsidies, even environmental ones, are usually poisonous (research is the main exception.) 

We use only data from pro-corn-ethanol researchers, & the National Academy of Sciences —no data from anti-ethanol researchers. We love cellulose ethanol.

Energy Independence?   2.8%
According to the pro-corn-ethanol US Dept. of Agriculture, 2006 ethanol production was enough for 1.5% oil independence, and by 2017, we will max out at 3.7%.  But this ignores the foreign fossil energy input to ethanol production, shown at the right. (seeDriving)

Greenhouse gas reduction?  0.2% max
Less than 0.2% in 2017. These global warming emissions calculations based on data from the National Academy of Sciences (NAS), which is more optimistic than data from UC Berkeley’s Renewable and Appropriate Energy Lab. Corn’s heavy use of nitrogen fertilizer is contributing to the dead zone in the Gulf of Mexico — the NAS again. 

How did we get into corn ethanol anyway?
Follow the money. Huge subsidies, huge profits, lots of votes. The politicians are for it. They’re doing the math, but not the global warming emissions math. Who started it?

How big are the subsides?
In 2006, the feds paid ethanol blenders $2.5 billion and ethanol corn farmers $0.9 billion. We paid an extra $3.6 billion at the pump. Total was $2.21 extra per gallon of gasoline replaced. Of all that, $5.4 billion went for windfall profits, creating what USDA’s chief economist called “ethanol euphoria.”