AEI Center for Regulatory and Market Studies

Ethanol: Law, Economics, and Politics


Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such are reducing greenhouse gas emissions, and energy security goals. This paper analyzes the economic and political issues surrounding the ethanol industry. It provides a cost-benefit analysis of substantially increasing ethanol production, and finds that costs are likely to exceed benefits by about three billion dollars annually in 2012 if current policies continue. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test.

The paper then identifies key issues that will affect future ethanol support and suggests how politics could affect the development of sensible energy and climate policies in general. Finally, the paper offers some suggestions for more cost-effective development of energy alternatives that would enhance energy security and environmental quality.

I. Introduction

Ethanol is a fuel that has been touted by politicians and technologists for a variety of reasons related to both energy security and the environment. It fig-ures prominently in President Bush’s strategy to address climate change.

Largely as a result of government policies, the production of ethanol in the United States is expected to grow dramatically during the next decade. As of December 2007, there are 134 ethanol plants in the United States with a total capacity of more than 7 billion gallons per year. This capacity is expected to exceed 13 billion gallons per year after current construction and expansion pro-jects are completed.