Criterion Affiliate Robert Hahn and Caroline Cecot Analyze the Benefits and Costs of Ethanol in AEI-Brookings Study

November 27, 2007

The AEI-Brookings Joint Center for Regulatory Studies released an analysis of the current U.S. ethanol program today, entitled "The Benefits and Costs of Ethanol." The study is the first thorough benefit-cost analysis of substantially increasing ethanol production.

In their paper, Dr. Hahn and Caroline Cecot examine the energy security and environmental benefits of ethanol made from corn and finds that they are unlikely to outweigh the significant costs. They find that the costs of increased production are likely to exceed benefits by about three billion dollars annually in 2012 if current policies continue.

Hahn and Cecot based their study on the Environmental Protection Agency’s analysis of the impacts of increased ethanol production. Among the study’s findings:

• Benefits: Increasing ethanol production from 4 billion gallons per year to 7 billion gallons per year produces $300 million in benefits for society; increasing production from 4 billion gallons per year to 10 billion gallons per year produces $600 million in benefits.
• Costs: Increasing ethanol production from 4 billion gallons per year to 7 billion gallons per year costs society about $1.5 billion and increasing production to 10 billion gallons per year costs about $3 billion.
• Net Benefits: Costs exceed benefits by about $1 billion when ethanol production is increased to 7 billion gallons per year and by about $3 billion when ethanol production is increased to 10 billion gallons per year. This result suggests that increases in the production of ethanol above 4 billion gallons will cost society much more than it will benefit society.
• Uncertainty Analysis: The authors run a monte carlo simulation of 3,000 trials to take into account uncertainties associated with the quantity and unit value estimates. In both scenarios of ethanol production increases, the costs outweigh the benefits in 99 percent of trials.

Dr. Hahn and Caroline Cecot suggest four policies related to ethanol that can promote energy security and environmental goals more efficiently. First, the U.S. should repeal the ethanol import tariff, which expires at the end of 2008. Second, the U.S. should limit direct domestic support for alternative energy sources to basic research. Third, the U.S. should consider taxing key externalities, such as those related to energy security and the environment. Fourth, the U.S. should modify or eliminate the ethanol tax credit.

To read their study in full, please click here.