The proposed farm bill just sent to President Bush (and expected to be vetoed) contains several ethanol provisions. One is to cut the corn ethanol subsidy from $0.51/gal to $0.45/gal. Forbes explains:
It also includes $1 billion for energy-related programs, including several provisions related to ethanol and other biofuels. Notably, it reduces the tax credit paid to ethanol producers from 51 cents to 45 cents per gallon. The bill also establishes a sugar-to-ethanol program and includes a temporary tax credit of up to $1.01 per gallon for production of cellulosic ethanol, made from non-edible products like wood chips.
“Now that the ethanol industry has matured, it is appropriate to curb the tax subsidy provided to ethanol,” says a Senate Finance Committee report on the tax provisions of the bill.
A small reduction in the subsidy, for an industry that has “matured” completely misses the point, which is “Why is there a need for a subsidy?” Answers will vary, depending on who you ask, but every answer I have ever heard also misses the point: Ethanol is mandated. It seems that people don’t understand what this means. It means that it is mandatory that a certain amount of ethanol is blended into our gasoline supply. For 2008, it is required that we blend 9 billion gallons of ethanol into the gasoline supply. The cost of the ethanol is not a consideration in the mandate, so why is the subsidy required?
In my opinion, the subsidy remains to hide the true cost of ethanol. If there wasn’t an offsetting credit, then the economics of ethanol blending look a lot worse. So what? It’s still mandatory. This means that if the economics look worse, the cost is now going to be passed on to consumers. Under the current system of a blender’s credit, our taxes subsidize drivers. People who don’t drive are subsidizing drivers. If you removed the subsidy, drivers would be forced to pay higher prices for fuel with less energy content – or start thinking about conserving.
Digressing for a moment, this is certainly not the only case in which our taxes subsidize drivers. While some have argued that certain wars are hidden oil company subsidies, in reality this is just another example where the government subsidizes driving (which theoretically is still beneficial to oil companies, by keeping prices lower and demand high).
The subsidy for cellulosic ethanol is a different matter. In the case where you want to influence a technology in a certain direction, those kinds of subsidies make more sense. It’s the same question I have asked before: “Do subsidies to oil companies ever make sense?” Only in the case that you are trying to influence their behavior in a certain direction. In the case of cellulosic ethanol, you are trying to wean producers away from using food. (For the record, I am not a big fan of governments trying to pick technology winners; I would prefer to raise carbon taxes and then let the alternatives compete with each other on a level playing field).
But get rid of grain ethanol subsidies. They are redundant with a mandate in effect.
Great blog, clear thinking, and realistic, practical topics! I like your viewpoint, and concurr. How do we change these mandates? My big, simple idea is to cut back on subsidies tarrifs and taxes, and instead tax every purchased good heavily on how much it weighs and how far it is moved across the planet’s surface. I would appreciate some feedback on this idea, it’s been on my mind for a long time and I want to know why we should not or cannot institute such a commerce/tax structure.
With the tax revenue, fund infrastructure projects/maintenance needs. Food, energy, cars, made in Merica might acually be more affordable, purely for natural infrastructure reasons. Seems to me the only fair and efficient way to encourage responsible consumption and logical infrastructure changes.
In my opinion, the subsidy remains to hide the true cost of ethanol.
BINGO!
Ethanol = Feel good pandering. Nothing to do with achieving anything in the real world.
Like that story about “Terror Free” Oil, only it was no more “terror free” (hey, that would be inconvenient and we can’t have that) than any other oil, but it makes you feel good.
Likewise, ethanol is about making you feel good. And remember to vote for the same wimps in November!
evan: so you are advocating a return to economic isolationism and tariffs on trade?
I agree that globalism as it’s currently practiced is unsustainable, but I’m not sure tariffs are the answer. Transportation represents only a fraction of the environmental cost of most products. A large ocean-going cargo ship is very efficient when the amount of cargo is taken into account.
Our current economy is inefficient because we fail to assign a monetary cost to the extraction of natural resources and the degradation of the environment. What we need is a way to put a price on the exploitation of natural capital of all kinds. Efficiency will follow.
Great post and comments. If ethanol (and biodiesel) really had potential, why shouldn’t they prove themselves on the farm first?
If farm machinery, rolling and otherwise, could run totally on a small portion of their own yields, a significant chunk of our economy would be weaned from oil.
If successfully employed on the farm, then biofuel use might logically grow outward from there.
It is actually worse than that. Essentially this is a wealth transfer from the rest of the country who don’t use ethanol for fuel (like Florida) to people living in non-attainment areas (which require ethanol blending) and farm mandate states (like Iowa and Minnnesota).
If they subsidy extends to sugar I wonder if this would qualify:
E Fuel 100 Earth’s first home ethanol system.
How if it would only dispense gin along with the fuel I might be interested.
Robert:
This gives me another opportunity to discuss a problem that I find gets relatively little attention. Switch grass and cellulosic ethanol is still being strongly pushed as an answer to the biofuels problem. Even though the energy balance may end up to be positive, the yield/acre is quite small as is the case for biomass in general (see http://www.pnas.org/cgi/content/abstract/0704767105v1) and the full paper cited). They reported the net primary productivity to be 5.2 to 11.1 metric tons/ha-yr (0.52 to 1.11 kg/sq meter) and the net energy yields to be 60 GJ/ha-yr (5,680 Btu/sq meter). The full paper indicates approximately 300 gallons of ethanol/acre-yr which is somewhat lower than that of ethanol from corn. I made a rough calculation that shows the mass yield to be in the neighborhood of 25%. Ignoring fossil fuel inputs this indicates 0.13-0.27% solar conversion for the net primary productivity (as expected for biomass) and ~0.08% for ethanol conversion. For comparison, present single crystal Si PV panels convert solar energy at ~15%. Also, average annual solar insolation for the U.S. is 200 watts/ sq meter = ~ 6 million Btu/sq meter.
I just cannot see how this makes any sense, particularly when coupled with recent articles in “Science” showing the potential for massive carbon dioxide release if wildlands are converted to biofuels.
Russ said: “If farm machinery, rolling and otherwise, could run totally on a small portion of their own yields, a significant chunk of our economy would be weaned from oil.”
Excellent point Russ.
I’ve always felt and said that if our politicians want to force ethanol mandates on us, they should first make them apply to corn farmers. Tell corn farmers and ethanol plants they must use ethanol as the energy source for making more ethanol.
If it turns out that corn farmers and the ethanol industry resist such mandates because they can’t profitably use ethanol to make more ethanol, that would pretty much tell us all we need to know about the efficiency of corn ethanol production.
Regards,
Gary Dikkers
In the past farmers set aside a portion of their land to grow feed for the horses that worked the land. As a result of the “green revolution” and the introduction of petroleum-based farming, the energy input was externalized and the entire area could be used for food production. With oil prices rising it makes sense to go back to the old system of the farm providing its own energy.
The ethanol subsidies might have made sense in the “infant industry” days. But those days are over.
With GM claiming their Volt is real by 2010, and that it will get 40 miles on battery, and with Shell saying they can extract shale oil at $30, I don’t see the need for ethanol.
I do think we need tariffs on imported oil, and on pollution. Energy security and pollution to two externalities the price system does not capture.
As PHEVs become commonplace, we will see radical declines in oil consumption. Interestingly, our stock of US buildings will be using less and less energy also, thanks to better lighting and other technologies.
The fly in the ointment is a collapse of oil prices undercutting all the alternative technologies.
Really, add it up: 1) World oil production keeps going up. 2) Oil demand is flat at best, probably falling at these prices. 3) Battery-powered cars are two years away. 4) Shell says it can produce shale oil for $30 a barrel, and we have gobs of the stuff.
5) Biofuel production is rising sharply.
Right now, Iran is storing oil on docked tankers, as it has no buyers.
I realize we set another all-time record for oil today, but I think it is a spec bubble. Time will tell.
many arguments/comments regarding the economics offered above by readers are sound/valid. but the system is driven by “profit politics”, not sound reasoning/technical bases. the majority of “farmers” in this topic do not live on farms, but in high rises, estates and yachts. the POLS are intermediate level’ administrators effecting policy and legislation at the whims of “BIG GRAIN”.
like the man said–“… if you want the answer, follow the money..”
fran
How about this approach? — jmg
http://gristmill.grist.org/story/2008/4/26/101952/578
Local Biofuels article
Down in the first page of the article there is a quote that US non-ethanol corn production has increased “from 9.7 billion bushels in 2002 to 12.2 bushels in 2007“
So, although 20% of US corn is going into ethanol, production has risen to compensate for that, plus another 20%. So much for the opinion that the ethanol mandate is starving the world by diverting food to fuel.
Fran: A large portion of absentee ownership of farmland is due to farming being non-profitable since the 1970’s “green” program started increasing production and causing a year-to-year surplus which held commodity prices below real cost of production. The population urbanized and a large portion of farmland was inherited by people with careers in the city. If there continues to be profitability in agriculture, there is a chance that the next generation will choose agriculture over chemical engineering or computer programming. We better hope so, because the mean age of current North American farmers is way past 50 years old.
Here is an idea:
1. Pull head from butt
2. Think about who is going to raise the food our kids and grandkids eat
3. How are they going to do it if there is no profitability in current agriculture to transition into something sustainable?
Corn ethanol is a ridiculous attempt at continuing a “business as usual” consumer fuel mentality, but the effect was that has helped make North American agriculture at least somewhat feasible. If there is some profit floating around, ideas like transitioning tractors to electricity become possible. If delivery trucks are able to move to electricity, then it’s very possible to do with farm equipment that moves slow and requires heavy weight for traction. BEV or PHEV tractors won’t happen if there is no profit in farming, but that doesn’t matter because once all the 55 year old farmers retire, there won’t be anyone to run the diesel tractor fleet or affordable diesel fuel to fill them.
Then what are we going to eat?
Ethanol would survive without subsidies. It’s used to raise the octane level of gas and make it burn cleaner. MTBE used to be the additive of choice,but a lot of states have banned it. Without lead,MTBE,or ethanol in our fuel,engines would be knocking,and tailpipes would be emitting more greenhouse gases. If subsidies were halted tomorrow,the market would adapt fairly quickly. Demand probably wouldn’t be affected.
Here in Iowa, 10% ethanol blend is $0.10 per gallon cheaper than 87 octane unleaded gasoline, which is also available. As long as the blend appears to be cheaper at the pump (many people don’t realize their mpg will decrease with ethanol), people will buy the ethanol blend. Without the subsidy, who will buy ethanol? I don’t even buy it now as pure unleaded is cheaper overall when taking mpg into account.
IMO, no subsidy = no demand for ethanol.
What an inane commentary. The VEETC isn’t a “subsidy”, it’s a tax rebate due to the overcharging per gallon based on Btu content. More anti-ethanol propaganda from the Oilman bloggers.
Without the subsidy, who will buy ethanol?
That’s the thing. They won’t have any choice. If they don’t buy it over 87 octane unleaded, then it will start to get blended into 87 octane unleaded. That’s the whole point – this isn’t optional. This year 9 billion gallons of ethanol will go into the gasoline pool – subsidy or not.
RR
The VEETC isn’t a “subsidy”, it’s a tax rebate due to the overcharging per gallon based on Btu content.
Yet with the mandate in place, why is the subsidy needed? So what if it’s overcharging? That just means the consumer pays instead of the taxpayer. Why should people who don’t drive pay taxes to subsidize those who do?
More anti-ethanol propaganda from the Oilman bloggers.
Now that’s funny, considering that the oil industry would take a hit from getting rid of the subsidies. Gas prices would have to rise, further softening demand.
You didn’t really think your comment out very well, did you?
RR
US non-ethanol corn production has increased “from 9.7 billion bushels in 2002 to 12.2 bushels in 2007”
Bob, you raise some valid points about agriculture and declining profitability. This is an international problem, made worse by First World countries dumping their subsidized food in Third World markets, often destroying Third World agriculture. But I digress…
That jump in corn production mostly happened in 2007, didn’t it? And it came at the expense of other crops, especially wheat and soy (I believe). Hence wheat prices are up even more than corn prices.
The bottom line remains though: there is no way we can profitably convert food into fuel. The sooner we stop subsidizing AND mandating that, the better for everybody.
but that doesn’t matter because once all the 55 year old farmers retire,
That would be the point where demand exceeds supply leading to high prices for grains, which would lure people back to farming, no?
More anti-ethanol propaganda from the Oilman bloggers.
Ah, the birdbrain ethanol supporters show up. Welcome to the site. Now shut up, and get educated!
Jerry,
It seems you are also confused by the meaning of the metric unit Watt (W). Watt is a unit of power (like horsepower) and not energy (like BTU, kWh [get it?] and Joule).
So, 200 watts/ sq meter = ~ 6 million Btu/sq meter should be 200 watts/ sq meter = ~ 6 million Btu/sq meter per year, and 60 GJ/ha-yr (5,680 Btu/sq meter) should be 60 GJ/ha-yr (5,680 Btu/sq meter per year). Perhaps that’s what you meant, but neglected to say.
The fly in the ointment is a collapse of oil prices undercutting all the alternative technologies.
Other than a rather painful collapse of the world economy, I don’t see this happening.
Think of it this way: the world economy has dealt rather well with ~600% increase in oil prices over the last few years. Let’s hope it does just as well with the next 600%…
Farmers could easily fuel their tractors and such with a small fraction of the ethanol they produce. The big energy input is not tractor fuel but process heat in the ethanol plant itself (mostly for distillation). It makes no sense to use a transportation-grade liquid fuel for process heat. US corn ethanol plants logically use NG and coal for process heat. In the future they may use cob (POET’s plant in Emmettsburg IA will be the first, unless I’ve missed one).
Down in the first page of the article there is a quote that US non-ethanol corn production has increased “from 9.7 billion bushels in 2002 to 12.2 bushels in 2007”
These numbers can’t be right. USDA says 2007 US corn production was 13 billion bushels. Ethanol consumed about 2.5 billion bushels of this, so non-ethanol corn was more like 10.5b bushels. I don’t have 2002 numbers handy, but 2004 corn was 11.8b and ethanol was about 1.3b so non-ethanol corn decreased was still around 10.5b.
Corn growth from 2004 to 2007 was mostly the result of high acreage: 93.6 million acres vs. 80.9. Much of this displaced soybeans or wheat, pressuring those prices. Furthermore, prices are forward-looking. 2008 acreage is estimated to be back down to 86m. We’re nominally looking at 12-12.5 billion bushels this year with almost 30% of that going to ethanol. That gets us back down to 9 billion bushels of non-ethanol corn, the lowest in many years and at a time when stockpiles have been depleted. The “Big Grain” claim that ethanol has little effect on grain prices is absurd.
Optimist:
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It seems you are also confused by the meaning of the metric unit Watt (W). Watt is a unit of power (like horsepower) and not energy (like BTU, kWh [get it?] and Joule).
So, 200 watts/ sq meter = ~ 6 million Btu/sq meter should be 200 watts/ sq meter = ~ 6 million Btu/sq meter per year, and 60 GJ/ha-yr (5,680 Btu/sq meter) should be 60 GJ/ha-yr (5,680 Btu/sq meter per year). Perhaps that’s what you meant, but neglected to say.
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I’m not sure what bothers you here. If it’s that I did not put 6 million Btu/ha-yr, I apologize. I think I only did that in parenthesis and I suppose I thought it obvious that they were annualized numbers.
If it was because you thought I was mixing power and energy, here are the numbers. (200 watts/sq meter X 8760 hours/yr)/1000 = 1752 kWh/yr = ~ 6 million Btu/Sq Meter-yr (3,410 Btu/kWh). NREL uses 1800 KWh/ sq meter-yr for average U.S. solar insolation which is equivalent to 205 watts/sq meter.
There are 1 million kJ in a GJ. There are 3,600 kJ/kWh so the conversion from kJ to Btu is 3,410/3,600 = 0.947. I suggest you get a table of conversion factors.
On the other hand were you bothered by using 60 GJ/ha-yr instead of 60GJ/ha per year? If so, perhaps you need to reread how to express units.
Paul, thanks for the feedback, I’m glad to see discussion here. I don’t know how my comment encouraged tarrifs and isolationism. There seems to be a lack of extremeists in cyberspace. Everybody is blindly idealistic or blindly realistic. I am trying to come up with a real world way to account, economically, for the resistance involved in extracting resources, as an actual solution. Free trade and capitolism follow the path of least resistance, no matter how peachy or vile the cause. Seems logical to me that if resources are more expensive to extract from far off people we don’t care about, and naturally costly to extract from local neighbors, then resources will have to be used more responsibly. Energy extraction seems to encourage the highest degree of resistance/exploitation/environmental impact. why not start by imparting a fairly distributed tax on the transportation(energy) it takes to move all extracted goods and resources(energy) away from the owners? It is very difficult to replace the skill and craftsmanship built into a Japanese automobile, obviously worth the shipping cost. Oil is just oil, and alternatives can be made and conserved by other means, given a securely based, non-subsidized, and fair economic opportuinity. Peace in the Middle East
If it’s that I did not put 6 million Btu/ha-yr, I apologize.
That’s it, pretty much.
I think I only did that in parenthesis and I suppose I thought it obvious that they were annualized numbers.
If it was a rare mistake, it wouldn’t matter much. But the fact that high-ups in the EPA seem confused about this, means it’s a widespread error. Your annualization was implied, but not clearly stated.
Not trying to be a PITA, just want to knock out a common misperception.
The “Big Grain” claim that ethanol has little effect on grain prices is absurd.
That’s not what I said. I said that US subsidy policies and constant increase in production since the early 1970’s have kept grains below cost of production for Western Canada (and below cost of production minus subsidies for the US). Idiotic ideas like “Paying farmers not to seed” just subsidized the acres they did seed. duh!
Ethanol has used up the corn surplus, caused a cutback in other grain acres and the blender’s subsidy meant that farmers weren’t getting the subsidy directly and that forced prices up across the board. Grain prices above the cost of production are a good thing. The only way to restore the small producer model is to have profitable grain prices and local absentee ownership laws.
From a non-US farmer point of view, I would have been just as happy if the US dumped 20% of the corn crop in the ocean. Making ethanol out of it is probably slightly less silly, but the jury is still out on that. 🙂