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Variable subsidy most effective for ethanol, study suggests

Ethanol subsidies could be more effective if tied to oil prices, the Purdue University study suggests

A variable subsidy could be the most effective way the government could support ethanol production in the US, perhaps tied to the price of oil.

That is the recommendation from Purdue University agricultural economist Wally Tyner in a study funded by the National Science Foundation.

The study suggests that a variable subsidy rate could protect ethanol producers from low oil and ethanol prices, but that the government would save money when oil prices are high and financial support for ethanol is unnecessary.

Current government subsidies for ethanol – around 45 cents per gallon – are to expire at the end of the year, with legislation needed from Congress to extend or replace the incentives.

Professor Tyner’s study, published in the October issue of the journal Energy Policy, shows how a variable rate could be the most beneficial.

“We could see ethanol plants close if the subsidy isn’t renewed in some form,” Prof Tyner said.

Variable

A variable subsidy would kick in only when oil prices drip below a certain level, and then vary the rate of support based on how low the oil price drops in order to ensure ethanol producers can stay financially afloat.

Prof Tyner’s study sketches out a scenario where there would be no subsidy at all when oil prices were above $90 a barrel, then with oil prices at $80 per barrel a subsidy of 17.5 cents per gallon of ethanol would kick in. This rate would then increase 17.5 cents per gallon for every $10 per barrel drop in oil prices.

According to the study’s calculations, the current subsidy system would see a flat rate of about $316 million paid out for a typical ethanol plant over its lifetime. Under the variable subsidy system, the subsidies would be between $58 million and $360 million over the life of the plant, depending on the oil prices during that time.

The variable rate could also entice new cellulosic ethanol production, in lowering the risks for investment in the new technology, the study points out.

Blending wall

Prof Tyner pointed out that the study’s findings will be moot anyway if the Environmental Protection Agency does not increase the amount of ethanol that can be blended with gasoline from the current 10% limit.

He said with the industry currently facing this “blending wall”, all growth in ethanol production will stop since the maximum amount possible is already being purchased.

The EPA is expected to make a decision on the blending limit by the end of September.

While the ethanol industry pushes for a decision from the EPA allowing the sale of 15% ethanol in gasoline (E15) or even an intermediate E12 fuel, opponents wrote to Congress this week asking for House and Senate hearings on the matter.

A letter from 39 groups – including some unusual bedmates, for example green pressure group Friends of the Earth and oil lobbyists the American Petroleum Institute – requested hearings in September to investigate the safety of using higher proportions of ethanol in ordinary car engines.

The groups said in their letter to the Senate: “We believe there are many questions remaining before EPA makes its final decision on the mid-level ethanol fuel waiver, and that the Environment and Public Works Committee is the ideal place to ask those questions.”