"Ethanol's Bottom Line"

Excerpt from this Wall Street Journal article:

...in all the decades ethanol has been subsidized, Washington has never rigorously applied cost-benefit analysis to ethanol's myriad preferences.

A study I authored with Caroline Cecot, just released by the AEI-Brookings Joint Center, attempts to fill that gap. The results, based on a recent Environmental Protection Agency report on the economics of mandating the production of alternative fuels, strongly suggest that that the case for ethanol is lacking.

We used EPA numbers to calculate the environmental benefits of ethanol, along with the security benefits linked to its potential to reduce oil imports. We then compared these benefits with the direct costs of producing and distributing ethanol, the environmental costs associated with its manufacture and combustion, and the cost of the slew of incentives offered to refiners and corn farmers.

If annual production increases by three billion gallons in 2012 -- a plausibly modest number when the EPA made its own calculations -- we estimate that the costs will exceed the benefits by about $1 billion a year. If domestic production reaches the more "optimistic" Energy Department projection for that year, net economic costs would likely top $2 billion annually.

Our analysis is deliberately weighted to give ethanol the benefit of a doubt. For example, we assume that, on balance, ethanol from corn reduces greenhouse emissions, even though recent science suggests that substituting ethanol for gasoline might actually have a negative impact (it increases emissions of nitrous oxide, a more potent greenhouse gas than carbon dioxide). Ethanol distilled from grasses and waste materials has a better environmental payoff, but has much higher direct production costs.

Even if ways are found to make alcohol cost-effectively from otherwise worthless sources of carbon, the process would undermine local air quality as it slowed global warming. Though ethanol is likely to reduce tailpipe emissions of carbon monoxide and toxic hydrocarbons including benzene and formaldehyde, the extra nitrogen oxides react in sunlight to form smog.