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Monday, July 19, 2010

Reduce Gasoline Use by Ethanol Subsidy or Gasoline Tax?

Senator Jeff Bingaman (D-NM) wants to end the ethanol subsidy. The chairman of the Senate Energy and Natural Resources Committee says $7.6 billion a year in taxpayer support is unnecessary for "a mature technology whose market share is well protected." Bingaman cites this CBO report that analyzes the cost-effectiveness of the biofuels subsidy at reducing petroleum usage and greenhouse gas emissions.

Note that the CBO study is about the subsidy for all biofuels, but in 2009, 94% of the 11.5 billion gallons of biofuel produced in the U.S. was ethanol.

The CBO report includes some useful numbers on the energy in gasoline and ethanol:
  • One gallon of gasoline contains 125,000 BTUs of energy.
  • One gallon of ethanol contains 85,000 BTUs of energy.
  • You thus need 1.48 gallons of ethanol to get the same amount of energy as you can get from one gallon of gasoline.
  • By current techniques, ethanol producers burn 11,000 BTUs of petroleum fuel to produce each gallon of ethanol.
  • An ethanol producer thus needs to put 1.69 gallons of ethanol on the market to replace the energy from one gallon of gasoline at the pump and petro-fuel taken off the market to make that ethanol.
Remember: the ethanol credit is 45 cents per gallon (which goes to blenders, not farmers). So the net subsidy to support the 1.69 gallons of ethanol needed to replace one gasoline gallon's worth of energy is 76 cents. Displacing fossil fuels also causes a decrease in excise tax receipts, so the total taxpayer cost for replacing gasoline energy with ethanol energy, says CBO, is $1.78 per gallon of ethanol.

Harvard's Professor Mankiw asks an interesting question: if our goal is to reduce gasoline consumption, might we not do so more cheaply and in a better targeted fashion simply by adding a dollar-per-gallon tax to gasoline and charging those who keep consuming rather than levying additional income tax on all taxpayers?

Bonus note on energy: CBO says that corn ethanol production and use emits maybe 15%–20% less carbon dioxide than gasoline per 125,000 BTUs of fuel made available at the pump. Cellulosic ethanol production and use beats gasoline on CO2 emissions by well over 80%. In other words, cellulosic ethanol promises one-fifth the carbon footprint of corn ethanol.


  1. It seems insane to produce ethanol using diesel fuel; oilseeds make far more sense to produce.

    Ponderosa pine adapts to South Dakota soils and winters without saturating habitat with Roundup(R) and produces heptane, a far more efficient and cleaner burning fuel than ethanol is and can be used in diesel engines.

  2. A jump of $1 for the cost of fuel is a bit much with our fragile economy. I vote for adding a 10 cents per gallon tax each year. This will provide clear and long term motivation for fuel efficient vehicles while not hurting ourselves horribly with a one time large tax increase.

  3. Smooth landing -- perfectly reasonable, Tony. Give people time to ease into new habits, save up for that heptane hybrid!

    Larry, remind me: are we grinding up the whole tree to get that heptane? Any idea how much land and time it takes to produce heptane in amounts comparable to the ethanol we get from corn or can get from switchgrass?

  4. How about offering tax incentives to refiners and manufacturers to produce more ethanol-based fuels and more ethanol-burning motor vehicles?

    Not more taxes, not more subsidies, but less and less -- thereby encouraging the private sector to do what's best for the country without costing the taxpayer anything.

    I was tempted to say "let the private sector take care of it, let the free market take care of it on its own," but even I know better than to boil things down to such a simple formula as that.

  5. This paper describes an experimental study concerning the feasibility of using bio-oil namely turpentine obtained from the resin of pine tree. The emission and performance characteristics of a D.I. diesel engine were studied through dual fuel (DF) mode. Turpentine was inducted as a primary fuel through induction manifold and diesel was admitted into the engine through conventional fueling device as an igniter. The result showed that except volumetric efficiency, all other performance and emission parameters are better than those of diesel fuel with in 75% load. The toxic gases like CO, UBHC are slightly higher than that of the diesel baseline (DBL). Around 40–45% smoke reduction is obtained with DF mode. The pollutant Nox is found to be equal to that of DBL except at full load. This study has proved that approximately 75% diesel replacement with turpentine is possible by DF mode with little engine modification.

    Here is a good paper, too.

    And here

  6. There is no such thing as a free lunch.

    Use all of our land to grow corn for ethanol and you'll drive up food prices.

    Capitalism will find a solution way before politicians can legislate one.

    Ethanol is a wonderful product for reducing smog in the big cities. It is not the whole answer to our energy problem.

  7. Anyone notice that we have so much food that we have to burn it to break even? Breaking even includes receiving a farm susidy check, also.

  8. Stan-

    Offering incentives for ethanol is anti-free market. You are only supporting one solution while ignoring all others. Taxes target the problem and let the free market make up the solution.

    For example, subsidizing ethanol will not promote adoption of electric vehicles while a gasoline tax might.

    We do not know what the most efficient solution is going to be. However, we do know the problem. We should target the problem, not one single proposed solution.

  9. Tony:

    You're probably right. One can create a product (or encourage someone to make it) but people will buy what they want. A tax incentive alone probably won't work.

    On CNBC this morning I see ...


    What people need and what they want constitute two quite different animals, I guess.

    The old war between needs and desires ...

    If we impose a new gasoline tax we had better not go too far or it could backfire. In any case, all the revenue should go toward development of alternatives.

  10. As the economy heats up the big oil companies will be"taxing" gasoline at a higher rate than a dollar. A tax would at least keep the money here instead of sending it to Venezuela, not to mention as oil prices increase more money flows into Iran,but any increase in the gas tax will hurt lower income people more proportionately.The best thing is to begin the transformation away from petroleum, any sensible policy that moves in that direction should be supported.


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