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Development Of Variable Ethanol Subsidy And Comparison With The Fixed Subsidy

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  • Justin Quear

    ()

  • Wallace E. Tyner

    ()
    (Department of Agricultural Economics, College of Agriculture, Purdue University)

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    Abstract

    The federal government currently subsidizes ethanol with a fixed payment of $.51/gallon of ethanol blended with gasoline. Ethanol profitability is closely linked to the prices of corn and ethanol. The purpose of this paper was to develop a variable subsidy based on corn and ethanol prices and then to compare that variable subsidy with the fixed subsidy. This analysis proceeded in several distinct steps: • First, we estimated ethanol profitability over a wide range of ethanol, corn, and distillers grains prices. • This data was used in a regression analysis to estimate the ethanol profitability from the set of corn and ethanol prices. The regression coefficients became the basis for the variable subsidy. • A version of the subsidy that used gasoline prices instead of ethanol prices was also developed. • Administratively, it would be burdensome to have a subsidy that changed every month, so we implemented both variable subsidies using quarterly data. • We then compared the average annual government cost and monthly private profitability using historical data and assuming the variable subsidy and the $0.51 fixed subsidy was applied. When using historic gasoline and corn prices from the last ten years, the variable rate subsidy cost the government nearly 40% less than the flat rate subsidy. Profit received by producers on average is a little less; however, producer’s risk is lower with the variable subsidy than the flat rate subsidy.

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    File URL: http://ageconsearch.umn.edu/bitstream/28636/1/sp060016.pdf
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    Bibliographic Info

    Paper provided by Purdue University, College of Agriculture, Department of Agricultural Economics in its series Working Papers with number 06-16.

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    Length: 21 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:pae:wpaper:06-16

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    Keywords: Ethanol; variable subsidy; energy policy; ethanol economics;

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    1. Yongheng Deng & Stephen L. Ross & Susan M. Wachter, 2002. "Racial Differences in Homeownership: The Effect of Residential Location," Working papers 2002-05, University of Connecticut, Department of Economics.
    2. Lance Freeman, 2005. "Black Homeownership: The Role of Temporal Changes and Residential Segregation at the End of the 20th Century," Social Science Quarterly, Southwestern Social Science Association, vol. 86(2), pages 403-426.
    3. Robst, John & Deitz, Richard & McGoldrick, KimMarie, 1999. "Income variability, uncertainty and housing tenure choice1," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 219-229, March.
    4. Gabriel, Stuart & Painter, Gary, 2003. "Pathways to Homeownership: An Analysis of the Residential Location and Homeownership Choices of Black Households in Los Angeles," The Journal of Real Estate Finance and Economics, Springer, vol. 27(1), pages 87-109, July.
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