Biofuel support policy costs to the U.S. economy

Mar 2008

Current Federal law pays a fixed minimum of $0.51 per gallon for all ethanol blended with gasoline. Payments go to petroleum blenders in the form of a tax rebate. The recently enacted Energy Independence and Security Act of 2007 also mandated 9 billion gallons of renewable food-based biofuel use in 2008 and 15 billion gallons by 2015. There is also additional Federal support for small ethanol producers, a $0.54 per gallon import duty on ethanol, and biodiesel tax credits. Additional Federal mandates for biofuels raise the total mandate to 36 billion gallons in 2022. State and local programs for both fuel ethanol and biodiesel also add to the financial support for biofuels.
The effect of biofuel policy on biofuel costs and profitability is perhaps the greatest irony of our biofuels support policy. By dramatically increasing demand for limited supplies of feedstocks our Federal energy policy has increased the total cost of biofuel production well beyond what the free market alone would have allowed. Biofuel producers are not reaping most of the benefits of the program.
Federal U.S. biofuels policy is designed to increase biofuels production to levels well beyond those that would result from the marketplace alone. However, ethanol and soyoil-based biodiesel, our two major biofuels, use corn and soybeans as their feedstocks. Corn and soybean production are both limited by available land resources. There simply is no significant reserve of fertile, productive, farm land in the U.S. (or in the world) that can be brought into production to satisfy major demand increases. Neither is there any government sponsored set-aside that could be released for production. Yields of both crops have trended up over time, but too slowly to have much short term impact on production. Therefore, if biofuel producers are to use significantly more food, some other U.S. user or overseas customer will need to use less.
This paper focuses on the effects of the Federal biofuels program for corn-based ethanol and soyoil-based biodiesel.

By: T. E. Elam (FarmEcon)

 
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