The Costs and Benefits of U.S. Ethanol Subsidies
July 21, 2011
Policies to promote biofuels are extensive. The political rhetoric justifying them typically takes one of three forms. The first is to support farmer wealth. The second is to reduce our dependence on foreign oil. And the third is to reduce greenhouse gases (GHGs). To meet these objectives, policymakers have historically relied on biofuel subsidies. Indeed, the Government Accountability Office recently estimated that federal ethanol subsidies add up to roughly $6.7 billion per year, says Christopher R. Knittel, a professor at the Massachusetts Institute of Technology and a research associate with the National Bureau of Economic Research.
Knittel examines whether current policies are cost-effective at meeting any of the three goals. The author arrived at the following conclusions:
- It is not clear that biofuels have a lower social cost compared to petroleum-based fuels.
- Perhaps most importantly, there is no well-founded scientific research suggesting that subsidy programs, such as the volumetric ethanol excise tax credit (VEETC), and performance standards, such as the renewable fuel standard (RFS) and low-carbon fuel standard (LCFS), are cost-effective ways to reduce petroleum-based fuel consumption.
- Subsidies and performance standards carry a substantial increase in the risk associated with measuring the indirect land-use changes associated with biofuels.
- If the goal of the current biofuel policies is to reduce our dependence on foreign oil or reduce GHG emissions, tariffs on foreign low-GHG biofuels, such as Brazilian ethanol, should be abandoned.
- If the goal of the current biofuel policies is to increase farmer wealth, basic economics shows that subsidies are an inefficient way of funneling money to farmers.
Given points one through five, the evidence overwhelmingly suggests that the VEETC, RFS and import tariffs should be eliminated, and a national LCFS should not be adopted, says Knittel.
Source: Christopher R. Knittel, "The Costs and Benefits of U.S. Ethanol Subsidies," American Enterprise Institute, July 2011.
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