The Congressional Budget Office (CBO) relased a new report on “The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emmission”. The report found ethanol responsible for only 10-15% of 2007-2008 food price increases – this despite widely accepted claims of much greater impact. According to the Consumer Price Index’s “Rising Energy and Food Prices” report, US food prices increased 5.8 during that period.
That was when massively increased corn consumption by the ethanol industry sparked concerns that Americans were feeding their cars at the expense of poor people.
Not ethanol, but general energy-price increases hiked food-prices during that time, according to the report.
Aside from speculation and inquiry into the causes of food-price spikes – something I don’t trust the CBO to accurately research and report on – the report addresses the practical economics of ethanol production.
The exact break-even point for corn ethanol—without any subsidies–is when gasoline costs 90% of what a bushel of corn costs. That, the CBO says, has occurred precisely once in recent decades–in 2005.
That is the point at which ethanol is a viable competitor of gasoline. With the massive government support for ethanol, the break-even point is reduced to about 70%. Gasoline is currently worth about 37% of corn in futures markets….
Thus, ethanol depends on subsidization and expensive gas to become viable (ignoring impact on food prices). The cap & trade scheme will likely boost ethanol, regardless of any environmental or social impacts, with an increase in gas prices. The CBO cites a report finding ethanol to emit 20% fewer greenhouse-gas emissions than gasoline. If that is true, cap & trade would indeed boost ethanol’s viability.
I’m very skeptical of any “solution” that relies heavily on government’s manipulation of market prices. Subsidies are not certain, nor is the cap & trade scheme, nor is the impact on food prices. Perhaps ethanol just needs more R&D to reach economic, social, and environmental sense. But the stakes seem as great as the sum of existing government funding to botch this one.
