Congress Ends Era Of Ethanol Subsidies

Over the weekend, the multi-billion dollar subsidy for ethanol expired. It had been in place for more than 30 years but Congress let it expire. Bruce Babcock, the Cargill endowed chair of energy economics at Iowa State University, talks to Linda Wertheimer about the effects of the subsidy expiring on the ethanol industry and consumers.

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STEVE INSKEEP, HOST:

It's MORNING EDITION, from NPR News. I'm Steve Inskeep.

LINDA WERTHEIMER, HOST:

And I'm Linda Wertheimer.

The multi-billion dollar ethanol subsidy expired on Saturday. Most of the ethanol added to gasoline in this country is produced from corn. And, of course, Iowa produces huge amounts of corn. But even in this political season, even as Iowa prepares to caucus today, Congress let the formerly sacred subsidies expire after more than 30 years and about $20 billion. To talk more about why the era ends now, we called Bruce Babcock. He's the Cargill chair of energy economics at Iowa State University.

Thank you for joining us.

BRUCE BABCOCK: It's a pleasure.

WERTHEIMER: How do farmers feel, do you think, about losing this subsidy? In a single year, it's amounted to, like, last year, for example, about $6 billion.

BABCOCK: Well, most farmers haven't even realized it's gone, because the price of corn has been so high, and it continues to be high with or without the subsidy. So at the farm level, it hasn't really had much of an impact on them.

WERTHEIMER: Do you think it's going to have much of an impact on consumers? Will we see higher prices at the gasoline pump, or lower prices when we pick up a bag of chips?

BABCOCK: I don't think consumers are going to notice much impact at all. My calculations suggest that, on average, you should see corn prices go down maybe by 40 cents a bushel, which is about 8, 10 percent, something like that. So a very modest impact on corn prices.

WERTHEIMER: And, as I understand it, it's not as if the farmer used to get a check for X amount for participating in the ethanol program. That subsidy went to the producers of energy.

BABCOCK: That's right. It's an indirect affect on corn prices. The subsidy was paid to the oil companies to entice them to buy ethanol, which then increased the price of corn. And then that helped the corn farmers.

WERTHEIMER: How do you see this affecting the corn-ethanol industry?

BABCOCK: I don't see anything on the horizon that suggests that gasoline or crude oil prices are going to go down. And so when you have a hundred dollar crude oil prices, that increases the price of gasoline. And then that increases the search for lower-cost substitutes for gasoline. And corn ethanol really is the only lower-cost substitute we have right now in the short-to-intermediate run.

WERTHEIMER: Now, not only are subsidies ending, but also tariffs on corn ethanol imports. Is that going to change things for U.S. producers of corn?

BABCOCK: No, it won't. Ironically, most people think that import tariffs have kept out the lower-cost Brazilian sugar cane ethanol. But Brazil's demand for ethanol has skyrocketed over the last few years, and their domestic supplies haven't been able to keep up. So, somewhat surprisingly, the U.S. has been supplying Brazil with ethanol. So eliminating the tariff won't do anything, because the U.S. is more likely to be supplying Brazil with ethanol over the next few years than the other way around.

WERTHEIMER: I understand there is one kind of ethanol that will continue to be subsidized, and I guess it's similar to what Brazil makes: cellulosic ethanol. Isn't that switchgrass?

BABCOCK: Cellulosic ethanol can be made from anything with cellulose. So it can be switchgrass. But the first cellulosic ethanol plants are actually going to be made with corn stalks and corn cobs. And so some subsidies for cellulosic ethanol are going to continue.

WERTHEIMER: Dr. Babcock, what do you think happened here? Do you think it was the maturing of the industry or the enthusiasm of the people who want to cut spending in Congress?

BABCOCK: I think it was both. I think that the industry matured. They saw that they could compete with sugar cane ethanol from Brazil and with gasoline. And Congress wanted to cut spending. So those two things together is the reason why we don't have that subsidy anymore.

WERTHEIMER: Bruce Babcock, thank you very much.

BABCOCK: It's been a pleasure talking to you.

WERTHEIMER: Bruce Babcock is an agriculture economist at Iowa State University.

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