Subsidies to Ethanol in the United States

Abstract

Ethanol, or ethyl alcohol used for motor fuel, has long been used as a transport fuel. In recent years, however, it has been promoted as a means to pursue a multitude of public policy goals: reduce petroleum imports; improve vehicle emissions and reduce emissions of greenhouse gases; and stimulate rural development. Annual production of ethanol for fuel in the United States has trebled since 1999 and is expected to reach almost 7 billion gallons in 2007. This growth in production has been accompanied by billions of dollars of investment in transport and distribution infrastructure. Market factors, such as rising prices for petroleum products and state bans on methyl tertiary butyl ether (MTBE), a blending agent for which ethanol is one of the few readily available substitutes, drove some of this increase. But the main driving factor has been government support, provided at every point in the supply chain and from the federal to the local level. This chapter reviews the major policy developments affecting the fuel-ethanol industry of the United States since the late 1970s, quantifies their value to the industry, and evaluates the efficacy of ethanol subsidization in achieving greenhouse gas reduction goals. We conclude that not only is total support for ethanol already substantial — $5.8–7.0 billion in 2006 — and set to rise quickly, even under existing policy settings, but its cost effectiveness is low, especially as a means to reduce greenhouse gas emissions.