Energy & Entrepreneurs                                                                       

CBO on Ethanol: More Costs and Questions

by Raymond J. Keating

While ethanol mandates and subsidies have grown over the years, ethanol has fallen out of favor from both economic and environmental standpoints. Never let it be said, however, that politicians let facts get in the way of the policies they want to impose.

On Thursday, April 9, the Congressional Budget Office released a report titled "The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions."

A few interesting points from this study:

• "[R]oughly one-quarter of all corn grown in the United States is now used to produce ethanol."

• "Since 2006, food prices have also risen more quickly than in earlier years, affecting federal spending for nutrition programs (such as school lunches) and the household budgets of individual consumers. The increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices between April 2007 and April 2008, the Congressional Budget Office (CBO) estimates. In turn, that increase will boost federal spending for the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp program) and child nutrition programs by an estimated $600 million to $900 million in fiscal year 2009."

• "Beyond the one-year period that ended in April 2008, food prices are likely to be higher than they would have been if the United States did not use ethanol as a motor fuel."

• " Research conducted by the Argonne National Laboratory (ANL) and used by federal agencies suggests that in the short run, the production, distribution, and consumption of ethanol will create about 20 percent fewer greenhouse-gas emissions than the equivalent processes for gasoline. For 2008, such a finding translates into a reduction of about 14 million metric tons of carbon dioxide and equivalent gases (a standard measure of greenhouse-gas emissions), or CO2e2. In the long run, the result is less clear. If increases in the production of ethanol led to a large amount of forests or grasslands being converted into new cropland, those changes in land use could more than offset any reduction in greenhouse-gas emissions- because forests and grasslands naturally absorb more carbon from the atmosphere than cropland absorbs."

The economics are pretty straightforward. Government mandates increased use of ethanol as a fuel. More resources go to growing corn for ethanol. Costs rise in terms of food production, especially production tied to corn.

And there are other costs tied to ethanol, particularly given the enormous taxpayer subsidies imposed.

Government actions are plagued with negative, unintended consequences. That's evident once again with the political push on ethanol. It serves as another reminder to let the market sort out which fuels make sense, and which fuels do not.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.