| |
Total Direct and Indirect Subsidies
The indirect subsidy to ethanol on the 4.9 billion gallons produced in 2006
comes to $3.9 billion. Together with the direct subsidies of $0.9 billion for
corn and $2.5 billion for ethanol the grand total is $7.3 billion. That's
$1.50 per gallon of ethanol, or $2.28 per gallon of gasoline replaced.
In 2006, the total subsidies for
ethanol came to roughly $7.3 billion, which is $1.50 per gallon of ethanol
produced or $2.28 per gallon of gasoline replaced.
These subsidies have produced an enormous boom in ethanol. Between
August 2006 and January 2007, the capacity of existing plants and plants under
construction grew from 7.4 billion gallons to 11.4 billion, a 54% increase in
six months. Collins (USDA, 2006) describes the state of the market as ethanol
euphoria.
The Cost of Subsidies
Subsidies are not the same as social cost. One man's tax payment is another
man's profit. Social cost measures the use of the nation's resources, such as
labor, capital, and energy. Collecting income tax and putting the money into
the pockets of ethanol producers does not use up any resources, and is not a
net cost to society, but it is a cost to tax payers.
Unfortunately there is no accurate public data on the
excess profits of ethanol producers. For the sake of discussion, suppose the
chief economist of the USDA is right that ethanol costs $1.65 per gallon to
produce (USDA, 2007b). Gasoline with the same energy cost 38¢ less in 2006, so
the social cost of using ethanol instead of gasoline is 38¢ per gallon of
ethanol. This does not include the costs and benefits of externalities; those
must be compared against this market-based social cost. The rest of the $1.50
per gallon subsidy, or $5.4 billion in total, lines the pockets of real
farmers, corporate farmers, and ethanol distillers. In the following table,
the "Apparent Cost" refers to the total cost of subsidies and the "Real Social
Cost" refers to the extra, market-determined cost of using ethanol in place of
gasoline. The costs shown are based on the calculations of GHG and energy
import reductions discussed above.
2006 Cost Increase
from:
|
Real Social Cost
|
Apparent Cost
|
Reducing fossil imports by the energy in
1 barrel of crude oil
|
$33
|
$131
|
Reducing CO2 emissions by 1 ton
|
$478
|
$1,881
|
The reader may believe the USDA has misestimated the cost of ethanol
production. In this case, the choice is between believing more than $5.4
billion went to windfall profits, or believing real social costs are higher
than indicated in the table above. They cannot both be lower; the $7.3 billion
in subsidies went somewhere.
The corn-ethanol subsidies create a net flow of money from
the rest of the country to the corn states. Just as advertised, this creates
wealth and jobs in these states. But spending more in corn states means
spending less in other states, which reduces employment in the states that pay
for the corn-ethanol market euphoria.
|
|
