Saturday, July 05, 2008

Where Obama and McCain stand on ethanol subsidies

Before someone jumps me justifiably for not knowing where the two presidential candidates stand on the federal ethanol subsidies travesty that is partly responsible for rising food prices, there is this word just in (June 25) from Greg Mankiw's excellent economics blog about where the candidates stand.

3 comments:

Anonymous said...

It's kind of scary, but I actually agree that the ethanol subsidy (and tariffs) has never made sense in the US, either economically or energetically. The biggest beneficiary is Archer Daniels Midland, which has given large sums of money to both parties foe many years. Looking at corn links here gives articles only back to Jun 15, 2008 with no indication why Mr Cothran is against ethanol subsidies.

http://www.econbrowser.com/archives/2007/02/ethanol_subsidi.html


"February 08, 2007
Ethanol subsidies

Why do Americans love their ethanol so much?

Growth of ethanol as a fuel source in the United States has resulted from tremendous subsidies at the federal, state, and local level. The biggest single item is the Volumetric Ethanol Excise Tax Credit, which grants a tax credit to blenders who combine ethanol with gasoline, in the amount of 51 cents per gallon of pure ethanol blended. But this is only part of the story, as detailed in a report released last October (hat tip: Cato Institute) by the International Institute for Sustainable Development. In addition to the direct subsidy from the VEETC, many states reduce motor fuel taxes on favored fuels, and there are numerous separate subsidies and tax breaks for investment in the infrastructure required for biofuel production. There is also a large implicit subsidy in the form of the mandate from the Energy Policy Act of 2005 that 4 billion gallons come from renewable fuels in 2006, rising to 7.5 billion in 2012. The impact of these mandates on the price of ethanol is greatly amplified by the 54-cents-per-gallon tariff currently in effect for imports of ethyl alcohol intended for use as a fuel. Finally, there are significant direct agricultural subsidies for farmers that reduce their water, fuel, and other costs below market. The IISD estimated that such subsidies currently sum to $1.05 to $1.38 per gallon of ethanol.

What this means is that the economic value of the resources that are used to produce a gallon of ethanol are nearly 50% greater than the value of the product to the consumers. Some have argued that ethanol is actually a net energy loss, requiring more energy in the various inputs than is contained in the final product, though the U.S. Department of Energy and a National Academy of Sciences study have endorsed the claim that there is some modest energy gain. But even assuming that ethanol does effectively add slightly to our net energy supplies, what sense does it make to pay attention only to the inputs of energy that are required in order to produce ethanol from corn, acting as if the inputs of land, labor, and capital can be valued at zero?"


jah

John Freeland said...

You said, "The biggest beneficiary is Archer Daniels Midland,"

At July 1 2006, ADM common stock closed at about 40. Last Thursday, it closed a tad over 31.

Here's an article about a big corn sweetener company that has fallen on hard times because of high corn costs. Considering the health troubles associated with high fructose corn syrup, one could argue that's a good thing.

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/06/19/cxmktrep119.xml

ADM is a huge producer of HFCS. They are also affected by the entrance of corn into the renewable energy market.

Check out the website of the National Corn Growers Association for their side of the debate. They claim big food, like ADM are fighting ethanol subsidies with the goal of returning to dirt-cheap corn.

Anonymous said...

1) I read the Telegraph story; I don't see the connection to ADM. Yes, ADM produces HFCS, they also are into biofuels. Also, the Telegraph mentioned no subsidies for that company.
2) If ADM stock drops that much with the subsidies they receive, perhaps the company should shut down?
3) I found a website http://www.ncga.com/ but didn't fids a link to "their" side of the story.


1a) ADM is not just a "corn sweetener company". Look at their own website http://www.admworld.com/naen/fuels/
BIODIESEL - ETHANOL


Ethanol
As an industry leader with decades of experience, ADM can deliver consistently high-quality ethanol. As the largest producer of fuel ethanol in the United States,...

Biodiesel
In addition to ethanol, ADM is a world leader in another
renewable fuel: biodiesel.


Perhaps someone can explain why an industry leader in ethanol and biodiesel would be against ethanol subsidies, as Mr Freeland claims?

Forgetting the subsidies, ethanol from corn in the US is at best a marginal energy gain and most likely an energy loss - it takes more energy to get ethanol than it provides as fuel. See here for a summary of recent studies:
http://www.ethanol-gec.org/corn_eth.htm or http://journeytoforever.org/ethanol_energy.html

Here's a different comment on ADM's prospects http://www.dailyherald.com/story/?id=79158

jah