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Ethanol subsidies need new approach

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[APRIL 20, 2006]  URBANA -- Federal and state tax subsidies for ethanol production may not necessarily be bad, but they do need a new rationale, conclude two University of Illinois agricultural economists.

"Rather than saying ethanol production creates jobs or lowers the price of gas, ethanol proponents will need to justify the subsidies along the lines of national defense or creating a lower-cost industry for the future," said David Bullock, an associate professor in the Department of Agricultural and Consumer Economics.

At a recent U of I conference, "Sustainable Bioenergy: Focus on the Future of Biofuels and Chemicals," Bullock presented a paper he co-authored with colleague Peter Goldsmith. They addressed the politics and policies of bioenergy production in the United States.

"Are there enough environmental benefits from the use of ethanol and other biofuels to justify the subsidies? Are there good reasons to subsidize the Midwestern rural economy at the expense of the rest of the country?" Bullock asked. "These questions are unanswered at this point."

Bullock termed the politics surrounding biofuels production as "colorful" and "complicated." Both proponents and opponents have made claims sometimes founded in dubious research. The situation is complicated by avoiding discussions of the trade-offs inherent in government support for a specific industry or region.

Additionally, policies that on the surface seem to affect only bioenergy markets actually affect many markets.

"There are many markets linked to bioenergy markets," Bullock said. "When you raise the price of corn, for instance, by subsidizing ethanol production, you impact many other markets."

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Net job creation claims for ethanol are based on economic models that are speculative, he noted. These models don't account for the lost tax revenue, from the rebates given ethanol producers, that could be used for other needs.

"When you implement these policies you have winners and losers," he said. "The Midwestern rural areas are clearly winners because the tax dollars that support these programs are coming from other areas of the country as well.

"When are such policies appropriate, and when are they wasteful? Government subsidizes many things -- national defense, national parks, education, infrastructure and targeted industries -- and none of these are necessarily bad things. But you have to have reasons for doing so."

The idea that ethanol will, by itself, produce lower gas prices is false, he noted.

"It will be a long wait before U.S. farmers can produce energy more cheaply than the Saudis can pull crude oil out of the desert," Bullock said. "Pulling it out of the desert is cheaper than trying to grow energy through corn.

"And if the price of crude oil does go down too low, the price of ethanol won't pay the producers' costs to grow corn."

Bullock indicated that those involved in promoting biofuels need to clearly define the reasons for the redirection of resources and funds involved in government support for a specific industry.

[University of Illinois College of Agricultural, Consumer and Environmental Sciences news release]


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