Ethanol:The alternative energy of the near

future? I will attempt a quantitative analysis of corn

ethanol subsidies in the united states. I will look at a number of factors. Political Economic Environmental Social

Benefits of Ethanol

Green EnergyAmerican JobsReduced Dependence on foreign oilRenewable ResourceHigher Octane rating

Background: Scope

The United States produced 13.3 billion gallons of ethanol in 2011, that number is mandated to jump to 36 billion by 2022. This would give ethanol the largest share of the alternative energy market.

Brazil produced nearly 7 billion gallons of Ethanol in 2011, together the united states and Brazil accounted for 88% of the world's ethanol use.

However, the United States still used 138 billion gallons of gasoline.

Background: Scope

Background: Chemistry

Photosynthesis 6 CO2 + 6 H2O + light → C6H12O6 + 6 O2 Fermentation C6H12O6 → 2 CH3CH2OH+ 2 CO2 + heat Combustion CH3CH2OH + 3 O2 → 2 CO2 + 3 H2O + heat

Background: Carbon Cycle

Background: Production Process

Farming Fermentation Distillation Dehydration

Economic: Gasoline vs. Ethanol 1 bushel of corn produces 2.8 gallons of ethanol 1.38 gallons of gas to produce 1 bushel. 1.53 gallons of ethanol:1 gallon of gasoline. Current price of E10: $3.38/gallon. Current price

of ethanol: $2.98/gallon. Ethanol is roughly 35% more expensive/unit

energy. You are paying roughly 10 cents more per

gallon of E10 gasoline. For a total of $14 billion/year

Economic/Political: Government Subsidy

Eliminated 45 cents per gallon subsidy for corn ethanol.Still madates gasoline must be 10 percent ethanol.The mandate is a subsidy passed off to the consumer.

Economic:Octane rating

Does increase the octane rating by 10 points. This decreases engine knocking and could

extend the life of the car. However, some sources believe that ethanol

fuel will leave behind residue which will decrease the efficiency of the engine.

All things considered, it's probably about a wash and I will not consider the effects in the overall calculation.

Economic/Environmental: Independence from foreign oil?

The U.S. Imported less than half of their oil. Of which, less than 20% comes from the mid-east.

The production of ethanol produces 1.3-1.6 units of energy for every unit of energy consumed.

Environmental: Air Pollution

Depending on who you ask and the efficiency of the process ethanol decreases greenhouse gas emissions(including carbon dioxide) by between 10-30%.

Combustion of ethanol can produce nitrous oxide, a major air pollutant.

Gasoline also produces a number of pollutants, however they are catalytically cleaned before leaving the car as exhaust.

Environmental:Land/Water/Energy

Only 4% of earth's land surface is arable Growing population to feed Scarcity of water Fossil fuels are dwindling

Economic:American Jobs and taxes

Ethanol creates 150,000 jobs in the united states.

Assuming that the average worker earns $40,000 a year and is taxed at 10.5% $630 million would be generated in additional tax revenue.

Farmers are beneficiaries of increased corn prices, however, 75% of all farms are now corporate owned.

Many argue that ethanol subsidies are a form of corporate welfare.

The world food price index nearly doubled from 2005 to today.

Economists attribute between 10-50% of the jump to ethanol production.

The cost of food for an average family has risen from $3000/year to $6000/year in the united states.

Social/Economic: Food vs. Fuel Social Implications

Social/Economic: Crisis in the Economy

Corporate profits were $1.4 trillion, they were effectively taxed at roughly 13.5%.

Political:Iowa caucuses 1st state to vote in the primary elections to

decide on their party's nomination for president. The Iowa caucus has correctly predicted the

democratics and republican presidential nominees 8/9 and 6/6 times respectively. Although the G.O.P.'s run will probably end in the 2012 election. Rick Santorum won the Iowa caucus and is listed at 50/1 to win the G.O.P.

Political: Iowa makes corn(duh!)

Ethanol production consumes approximately one-third of Iowa's corn production, and renewable fuels account for 8% of the state's gross domestic product.[1]

Iowa's unemployment rate of 6.5% is one of the lowest in the country.

Political:Politician's view on ethanol “We'll also fund additional research in cutting-edge methods of

producing ethanol, not just from corn, but from wood chips and stalks or switchgrass.”

"I've long been a strong supporter of the RFS, I am strongly committed to advancing biofuels as a key component of reducing our dependence on foreign oil."

“Ethanol is a joke.”

“I support the subsidy of ethanol. I believe ethanol is an important part of our energy solution for this country.”

Politically, ethanol makes sense.

We Make It up(kind of) Any economic investment should return economic profits

greater than the best alternative.

Economic Revenue:

The jobs created by the mandate.

The emissions saved, including carbon dioxide compared to traditional gasoline.

The favorable swing in trade balance.

Econmic Costs:

The increased price of gasoline.

The environmental impact caused by the production of ethanol.

The increased price of food

Cost of ethanolRevenue($M) Costs($M) Profit($M)

Increased Gas Prices 0 $12000-$16000

Increased food Prices 0 $30,000-$120,000

Environmental Considerations

$200-$400 0

Increased Tax Revenues $400-$800 0

More Favorable trade Balance $3000-$4000 0

Unemployment Benefits $3000-$5000 0

Total $6600-$10,200

$42,000-$136,000

$-129000-$-31800

Environmental Comparison Gasoline emits about 14 lbs of CO2/gal. If .78 gallons of gasoline are used to produce

1.53 gallons of ethanol. 11 lbs/gal of carbon dioxide are emitted per ethanol replacement.

13.3 billion gallons of ethanol would reduce carbon dioxide emissions by 40 billion pounds/year.

The E.U trades carbon permits at $20/ton. The U.S has introduced legislation to tax carbon dioxide at $10/ton. The savings from ethanol would amount to $400 million/year under the European rates, or $200 million/year under the proposed American rates.

Economic Benefits/Costs As I calculated earlier, the government can expect to receive $630 million

directly from taxation of jobs created as a result of the ethanol industry.

Additionally, savings in unemployment benefits could total $4 billion.

U.S ethanol exports totaled $500 milion in 2011.

Ethanol production reduced demand for foreign gasoline by 3-5%. This saved the United states roughly $3 billion.

However, we calculated earlier, consumers were paying an additional $14 billion/year at the pumps.

The price of food has doubled since 2005, if you attribute 10% of the cost to ethanol subsidies and adjust for inflation you would find that americans are spending an additional $25.5 billion dollars because of ethanol.

This would put total ethanol benefits in the range $8.5 billion. If you consider costs of $39.5 billion dollars, the year price tag on ethanol mandates is roughly $31 billion/year.

New technology could change this picture, but right now this seems to be poor investment.

Looking globally

Brazil is well positioned in the agircultural ethanol market.

Sugarcane is much more effective, it has an energy return ratio of 8-10 to 1, compared to 1.3-1.6 to 1 for corn.

Large amounts of arable land and very favorable climate

Deforestation of amazon has actually slowed

Native peoples

Food prices

Rapid growth(300% in 10 years.)

Next generation ethanol

Cellulostic Ethanol Algae Far better payback ratios energy in:energy out.

But still prohibitively expensive. A gallon of cellulostic ethanol carries a production cost of $4. Large infrastructure costs.

Other options/future tech.

Hydropower ~ 3% Solar ~1% Wind <1% Geothermal <<1% Wave <<<1% Fusion?

Questions

Role of government in alternative energy, subsidies vs. market based reform. Euro model vs. american model.Role of government in protecting the environmentFood vs. Fuel debateHow to deal with depleting supplies of water, energy and food.Basically my essential question is, how do we weigh various factors; environmental, social, and economic in order to provide quanitative answers to an economic policy question.

My suggestion

Remove the mandate

or Re-structure the mandate such that there is a

minimum ratio of energy produced:energy consumed.