The Costs and Benefits of US Ethanol Subsidies
Christopher R. Knittel
The federal government subsidizes the production of ethanol for use as a motor vehicle fuel through subsidies, tax credits, tariffs on imported ethanol, and fuel-composition standards. This paper examines the economic and environmental costs of the program. The highlights include:
1) Corn-based ethanol can create more greenhouse gas emissions than oil-based fuels once one factors in changes in land use and the energy used to produce the ethanol.
2) These policies cost taxpayers $3–7 billion per year: The total cost to Americans is much higher when including the pure economic waste (“deadweight loss”) these policies create in subsidizing an inefficient industry. For every $1.00 of wealth received by a farming region under the subsidies, another roughly $0.45 is wasted.
3) These policies transfer large amounts of wealth from cities and suburbs to farming regions: Every major metropolitan area is a loser from the current policies, sending up to $104 per person ($416 for a family of four) every year to farming regions. Those areas, particularly western Iowa, are massive winners. Many counties receive
economic benefits up to $6,700 per person ($26,800 for a family of four) from citizens in cities and suburbs.
4) The current set of policies should be repealed: The current set of policies costs taxpayers billions and reduces economic growth. If Congress wants to reduce greenhouse gas emissions cost-effectively, it should repeal current ethanol policies and adopt a cap-and-trade system. If it simply wants to increase farm-region wealth, it should increase the amount of direct payments farmers currently receive. If it wants to do neither, it should not replace
the programs at all.