What are the impacts of ethanol subsidies?

URBANA, Ill. – Researches are looking at whether the policy of supporting ethanol through tax breaks and mandates is really benefiting U.S. corn farmers and consumers.

Three professors, David Bullock, Madhu Khanna and Amy Ando, are working on an economic model that they hope will provide policy-makers and other interested parties a source of non-biased information.

The study becomes timely in light of recent legislation passed by the U.S. Senate that increases ethanol consumption considerably over the next 10 years.

“If this proposal makes it into law, there will be a lot more ethanol on the market,” said Bullock. “However, at this point, no one has a clear idea of what the impact of that policy will be. Will it actually benefit corn farmers or consumers or decrease U.S. dependence on foreign oil?”

A number of estimates exist on ethanol’s impact in the above areas and some are more promotional than factual, Bullock said.

“There simply are not many good studies out there and there’s a real need for unbiased information,” he said

Ando said the study based on economic modeling represents an attempt to “learn about whether the proposed policy changes benefit society as a whole.”

She added that the study will examine a number of policy options related to energy policy to determine their impact.

Ethanol has received tax breaks since the mid-1970s and yet still remains unable to compete economically with gasoline without tax breaks.

“It’s a complex issue,” Bullock said. “It is not just an economic issue, i.e. does it increase the price farmers receive for corn, but it is also a national security issue and an environmental issue. In examining the benefits of a policy, you have to look at all these elements.

“Are there better ways to deal with pollution, with low corn prices, with reliance on foreign oil? It may be that ethanol support is a good idea or the model may show that it is not or is, but only as part of a broader policy. If the idea is to help farmers by mandating ethanol, are we manipulating energy policy to make farm policy and is that sort of like the tail wagging the dog?”

Bullock said that as long as the U.S. economy runs on petroleum, “it will be hard to compete with the Saudi Arabians because they can pull fuel out of the desert cheaper than we can make it out of corn.”