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Ethanol Madness

Ethanol Madness. Environmental Policy Gone Bad Robin Havens & Nisha Patel. Overview. In 2005 Renewable Fuels Standard was passed through the Energy Policy Act: required increased usage of renewable fuel , from 4 billion gallons/yr. in 2006 to

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Ethanol Madness

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  1. Ethanol Madness Environmental Policy Gone Bad Robin Havens & Nisha Patel

  2. Overview • In 2005 Renewable Fuels Standard was passed through the Energy Policy Act: required increased usage of renewable fuel, from 4 billion gallons/yr.in 2006 to 7.5 billion gallons of ethanol and biodiesel by 2012. • Catalyzed increased production of ethanol. • “That’s what we’ll do with all that extra corn!” • Ethanol adds to the growing market for corn products (corn plastics, corn syrup)

  3. Cycle of Economic Disruption 1920s Reduced demand for American agriculture products 1920s American tariffs on foreign goods High corn prices = more firms enter the market, “set-asides” of acreage, market gets more efficient and increases production 1933 Farm subsidies are born Ethanol subsidies for farmers Tariffs on foreign ethanol Corn surplus (glut)

  4. Politics • Political Claim: Ethanol lowers air pollution • Reality: EPA says no environmental advantage • Ethanol production most efficiently conducted on a small scale and must be transported by truck or rail, which is far more costly than the pipelines used for gasoline • Political Claim: Ethanol is a renewable energy • Reality: Production uses fossil fuels and wastes resources • Reality: Ethanol actually yields less energy per gallon than gasoline • Political Claim: Ethanol lowers dependence on foreign oil • Reality:Impact is “tiny”(3%) and it would most likely be Canada and Mexico, not Persian Gulf sources, who we would buy less oil from • Does the trend toward more fuel-efficient cars plays a more significant role in decreased dependence?

  5. Politics • Political economics: Agribusiness benefits and consumer cost is spread thin • Benefits a small group (agribusiness, ADM) at a cost to taxpayers. With no clear environmental or economic benefit • Rational ignorance: high opportunity cost (time) for consumers to research how policy actually affects them • Public information is cultivated by ethanol PR and politicians informed by lobbyists • There are fewer organized anti- ethanol groups

  6. Market Effects: Corn • Price floor on corn drove increased corn production, resulting in a corn surplus

  7. Supply + Demand • Effect of mandated use of ethanol in gasoline: • Demand for ethanol increases; demand curve for ethanol shifts right • Effect on market for corn: • Demand for corn increases; demand curve shifts right, demand for ethanol shifts right; equilibrium price and quantity of corn increases Market for Corn Market for Ethanol Supply P P Supply P2 P2 P1 P1 Demand Demand Q1 Q2 Q Q1 Q2 Q

  8. Consumer Demand • Relative inelasticity of demand for gasoline due to poor transportation alternatives • Short run: People’s willingness to pay threshold for gas is high, due to commuting needs, poor transportation alternatives, and lack of fuel substitutes • Long run: As gas prices rise, people are substituting more fuel-efficient cars for less efficient vehicles • California passed legislation, SB375, in 2008 that calls for regional growth planning that reduces transportation-related greenhouse gas emissions – lowering demand for gas

  9. Long-run demand • Demand could shift back to the left if lifestyle changes are implemented Market for Ethanol Supply P P2 P1 Demand Q1 Q2 Q

  10. Opportunity Costs of Corn Production • Land used for ethanol corn production cannot be used for: • Food production • Grazing livestock • Open space – habitat for diminishing animal species • Other land uses Thus, ethanol wastes resources because of the high opportunity costs

  11. A Farmer’s (son’s) Perspective:175 acre Indiana farming • Machinery required leads to farmer loans that need to be maintained by consistent (and high) corn prices • Farmers are attracted to anything, like ethanol, that boosts corn prices and helps them pay their loans • Wayne (farmer’s son): “There’s not enough people in the World to eat the corn we make.”

  12. Policy Implications U.S. Federal law: Ethanol will be added to gas in increasing amounts through 2022 • Winners: Corn farmers and ethanol producers • Losers: The environment, American tax payers, consumers of gasoline • Ethanol politically marketed as a substitute, but not a real substitute for consumers Foreign policy: Brazilian ethanol producers (who make ethanol from sugarcane) have lower production costs than U.S. producers • U.S. imports millions of gallons of Brazilian ethanol per year, despite a $0.16/gallon transport fee + U.S. imposed import tariff of ~ $0.60/gallon

  13. Discussion Questions • Are there potential economic benefits to eliminating corn-based industrial products, like ethanol? • Use the theory of rational ignorance to explain why the ethanol subsidy is only 51 cents per gallon rather than, say, $5 per gallon. • Why are foreign producers of products so often the subject of special taxes such as the tax on imported ethanol?

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