Development Of Variable Ethanol Subsidy And Comparison With The Fixed Subsidy
AbstractThe 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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Bibliographic InfoPaper provided by Purdue University, College of Agriculture, Department of Agricultural Economics in its series Working Papers with number 06-16.
Length: 21 pages
Date of creation: 2006
Date of revision:
Ethanol; variable subsidy; energy policy; ethanol economics;
Find related papers by JEL classification:
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2007-01-14 (Agricultural Economics)
- NEP-ALL-2007-01-14 (All new papers)
- NEP-ENE-2007-01-14 (Energy Economics)
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