Biofuels like ethanol have been touted by nations such as Brazil as an answer to the world’s energy crisis, but research from CNR economists suggests that the costs of ethanol may outweigh the benefits of cheaper gas prices.
Ethanol, a colorless chemical compound made from distilling crops such as corn, sugar cane, and maize, can be blended with gasoline or used by itself as a more affordable alternative fuel for cars and other machinery. An economic analysis by agriculture and resource economics professor David Zilberman shows that a U.S. ethanol production subsidy saved U.S. gasoline consumers $11 billion and saved gasoline consumers in the rest of the world $36.3 billion in 2006.
However, according to Zilberman’s report, “Biofuel Challenge: Filling the Tank without Emptying the Stomach,” there is an economic downside to ethanol. Its use has already resulted in a surge in the price of grains, meat, and soda, among other commodities. For example, the average price of corn in 2006 increased $0.52 per bushel due to the demand for corn for ethanol production. The higher corn prices cost U.S. consumers $4.4 billion, and consumers outside the U.S. $1.1 billion, making ethanol production potentially devastating to third world countries.
“Much of the discussion about ethanol focuses on benefits such as lessening carbon emissions and boosting farm income, but the potential benefit to everyone who drives in this country is substantial,” said Zilberman. “Of course, there is also the tradeoff for food. The poor may go hungry so that the rich can drive their SUVs more cheaply.”