Ethanol Policy: Past, Present, and Future

I. INTRODUCTION Corn ethanol is one of the fastest growing industries in the United States, with production growing from about 175 million gallons in the early 1980s to almost 6.5 billion gallons in 2007. (1) This remarkable growth rate has benefited farmers by pushing corn and other agricultural commodity prices to near-record highs (2) and has stimulated economic activity in rural areas. Besides benefiting the farm sector, many U.S consumers find ethanol appealing for its environmental attributes and because it is made from domestic resources, not imported oil from the Middle East. However, ethanol is beginning to draw attention from critics arguing that using corn for ethanol is driving up world food prices and that further growth could result in land use expansion (e.g., cultivating land in rain forests) that would be harmful to the environment. (3) There are other factors behind ethanol's remarkable growth rate, but the ethanol industry owes much of its success to government policies and regulations. The early development of the U.S. ethanol industry was sparked by government policy; the recent expansion in ethanol plant capacity can be directly linked to government regulations; and the future of ethanol will greatly depend on continued government support. The three primary motivations behind government support for ethanol are environmental, energy independence, and rural development. Ethanol initially entered the U.S. fuel market as a replacement for lead additives to gasoline, which were being phased out by the Environmental Protection Agency (EPA) during the 1970s. (4) The 1970s was also a time of gasoline shortages caused by political unrest in the Middle East, and for the first time policymakers began to think about alternatives to petroleum fuel. Policymakers began to look to the U.S. agricultural sector as a source of energy supply, which had the ability to turn corn and other crops into renewable fuels. There was also interest in creating a new market for farmers who suffered from persistently low commodity prices caused by frequent crop surpluses. (5) While ethanol has many desirable characteristics, it often has a higher production cost compared to gasoline. (6) In addition, the potential supply of ethanol made from corn is very limited relative to the size of the gasoline market, (7) so ethanol has primarily been used in the United States as a fuel additive that is blended with gasoline at a level between five and ten percent. Because of its high octane and oxygen content, ethanol began to establish a role as an octane additive to replace lead in gasoline in the late 1970s. (8) In order to encourage more investment in the fledgling ethanol industry, ethanol production received its first tax credit in 1978. (9) Ethanol advocates argued that government support for ethanol was justified because it provided public benefits in terms of reduced air pollution, enhanced energy security, and economic growth in rural areas. Since the private sector generally lacks direct price incentives to provide public goods, (10) it is the government's role to provide energy security, a clean environment, and economic opportunity to all citizens. Government support for increasing energy production and developing an energy infrastructure has a long history in the United States. As early as 1902, the Reclamation Act provided hydroelectric power in many areas of the West. (11) The Tennessee Valley Authority increased energy production in the Mid-South. (12) The Rural Electrification Act of 1936 helped finance rural electrification. (13) The early development of the U.S. oil and gas industries benefited from federal energy tax policies that encouraged increasing domestic oil and gas reserves and production. (14) The purpose of this paper is fourfold: (1) to provide a comprehensive review of ethanol policy over past thirty years; (2) to describe the convergence of energy policy with agricultural policy via the enactment of the 2002 Farm Bill; (15) (3) to review new and proposed energy legislation aimed at increasing ethanol production; and (4) to look at the effect ethanol policy has had on ethanol production, energy security, agricultural and energy markets, and the environment. …