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Interpreting ethanol’s value

When a study conducted by Rice University’s Baker Institute for Public Policy landed on the desk of one of our sister publications – well, on the computer screen – it raised some questions.

The study said the U.S. government needs to “fundamentally rethink” its policy of promoting ethanol. It questioned the basis for the billions of dollars in federal subsidies and import tariffs that protect domestic ethanol production.

The sister publication, Corn and Soybean Digest, goes to farmers in the Midwest and other areas who are enjoying crop prices that are nearly twice the level they were five years ago primarily due to ethanol.

So the publication’s editors sent the study to contacts with knowledge of the ethanol industry. One of those responding was Chad Hart, the grain marketing economist for Iowa State University. Hart was head of the ISU Center for Agricultural Research and Development’s Biorenewables Policy Division.

In the study, the authors say the U.S. spent $4 billion in biofuels subsidies to replace roughly 2 percent of the U.S. gasoline supply in 2008. They claim the average cost to the taxpayer of those 'substituted' barrels of gasoline was roughly $82 a barrel, or $1.95 per gallon on top of the retail gasoline price.

They also say the U.S. biofuels policy could increase detrimental regional environmental impacts along with creating water shortages and other problems without reducing greenhouse gases when compared to the burning of gasoline.

“The numbers are skewed,” said Hart in response. “The authors concentrated on what they defined as ethanol that replaced gasoline. By the time they were adjusting, they had roughly 2 billion gallons of ethanol for 2008. The U.S. produced more than 9 billion gallons, so their adjustments removed 7 billion. This narrow view gets you the very high numbers in the report.”

I contacted Amy Myers Jaffe, the lead author on the study. Jaffe said the difference in the numbers is due to what happened in the oil industry after EPA “made a mistake” and allowed the oil companies to blend MTBE with gasoline to meet the requirements of the Clean Air Act.

“It became impossible for the oil companies to use MTBE,” she said. “The companies decided that ethanol was one of the cheaper alternatives they could blend. We believe that the first 6 billion gallons of ethanol are actually replacing MTBE and shouldn’t be counted as a replacement for gasoline.”

Jaffe, a fellow in energy studies at the Baker Institute, noted that the 170-page study, which can be found at, contains a 20-page section that explains the substitution of ethanol for MTBE.

By the way, the study was supported by a research grant in environmental engineering from Chevron Technology Ventures.

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