Intense lobbying will likely surround the future of ethanol production and subsidies when the U.S. Farm Bill is under negotiation, beginning this fall.
It’s due to replace the existing Farm Bill than runs out next year.
Christopher Knittel of Massachusetts Institute of Technology (MIT) has prepared a report that calls for an end to government-legislated amounts of ethanol and other biofuels and for their replacement with a carbon-based cap-and-trade system.
Under cap and trade, each commodity, industry or company would have a limit on the amount of carbon they could emit each year. If they are successful in bringing their emissions below target, they could “sell” the difference to others who exceed their limit.
Under cap and trade policy, ethanol distilled from corn would likely carry a tiny “credit” that could offset a “deficit” for oil.
Under existing U.S. policy, Knittel estimates that 40 million acres are diverted to corn production for ethanol. Under cap and trade, he estimates the diversion from food production would be only 672,000 acres.
Knittel makes six points against existing policy, such as no clear evidence that the biofuels policies have a lower social cost compared with petroleum-based fuels, that there is no research to show that biofuels are a cost-effective way to reduce petroleum-based fuel consumption and it’s a poor way to subsidize farmers.
If the aim is to reduce U.S. dependence on imported fuels, then Knittel says the U.S. should drop its tariff on ethanol, including sugar-based ethanol from Brazil.
If the aim is to subsidize farmers, it would be better to simply hand them cash, he says. That would not distort markets.
Knittel’s report is part of an American Boondoggle package of reports released by the American Enterprise Institute and designed to influence politicians as they begin to debate the new U.S. Farm Bill.
