Environmental Valuation & Cost-Benefit News

To hear the candidates tell it -- especially those on the stump in Iowa -- ethanol is the answer to America's energy-security woes. And back in Washington, politicians since 1978 have been putting your money where their mouths are: Ethanol is currently subsidized to the tune of 51 cents per gallon when blended with gasoline.

To make sure foreigners don't share the ride on the ethanol gravy train, moreover, Congress has imposed a 54-cent tariff on imported ethanol. ...

Farmers and refiners remain bullish on ethanol, even though market prices have dipped in recent months -- and domestic production capacity will nearly double once refineries now under construction come on line. Yet in all the decades ethanol has been subsidized, Washington has never rigorously applied cost-benefit analysis to ethanol's myriad preferences.

A study Robert Hahn authored with Caroline Cecot, just released by the AEI-Brookings Joint Center, attempts to fill that gap. The results, based on a recent Environmental Protection Agency report on the economics of mandating the production of alternative fuels, strongly suggest that the case for ethanol is lacking.

The authors used EPA numbers to calculate the environmental benefits of ethanol, along with the security benefits linked to its potential to reduce oil imports. They then compared these benefits with the direct costs of producing and distributing ethanol, the environmental costs associated with its manufacture and combustion, and the cost of the slew of incentives offered to refiners and corn farmers.

If annual production increases by three billion gallons in 2012 -- a plausibly modest number when the EPA made its own calculations -- they estimate that the costs will exceed the benefits by about $1 billion a year. If domestic production reaches the more "optimistic" Energy Department projection for that year, net economic costs would likely top $2 billion annually.

Their analysis is deliberately weighted to give ethanol the benefit of a doubt.
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Even if ways are found to make alcohol cost-effectively from otherwise worthless sources of carbon, the process would undermine local air quality as it slowed global warming. Though ethanol is likely to reduce tailpipe emissions of carbon monoxide and toxic hydrocarbons including benzene and formaldehyde, the extra nitrogen oxides react in sunlight to form smog.

For each barrel of oil displaced by ethanol, there are benefits in the form of slightly lower oil prices and reduced potential for economic dislocation from oil-price spikes. We estimate these to be in the neighborhood of $500 million annually in 2012.

In 2005, the ethanol program used about 15% of U.S. corn supplies but displaced less than 2% of gasoline use. Even if all corn produced in the U.S. were devoted to distilling ethanol, the renewable fuel would amount to about 12% of the gasoline demand in 2005. And the more corn used to make alcohol, the greater the potential for collateral damage. Beef producers, not to mention Mexico's tortilla makers, are already upset with high corn prices. Environmentalists, too, seem to be waking up to the fact that ethanol from corn is no panacea.

by Robert Hahn, Executive director of the AEI-Brookings Joint Center and was co-chair of the U.S. Alternative Fuels Council under President George H.W. Bush.

This article was published in the Wall Street Journal on November 24, 2007.
AEI-Brookings Joint Center www.aei-brookings.org
http://www.aei-brookings.org/policy/page.php?id=302