State Ethanol Subsidies Costly but Effective, AgBio Research Shows

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Mark Skidmore (view larger image)

State subsidies and tax credits for ethanol producers affect ethanol plant location, so states aiming to be leaders in the emerging biofuel industry may want to consider offering them—but the incentives are expensive, according to a new study by an MAES researcher.

“State subsidies have played an important role in ethanol plant location decisions,” explained Mark Skidmore, MAES agricultural, food and resource economics scientist. “The size of the incentives is important, too—the larger the subsidy or tax credit, the more likely it is that an ethanol plant will locate in that state.”

Skidmore and co-author Chad Cotti, assistant professor of economics at the University of Wisconsin-Oshkosh, examine the influence of federal and state incentives for corn-grain ethanol production in a paper in the April 2010 issue of the Southern Economic Journal.

Experts agree that federal subsidies have helped expand national ethanol production capacity. Skidmore and Cotti’s paper is one of the first to analyze the effect that state incentives have had on the ethanol industry. Only the corn-grain ethanol industry was studied because a commercial cellulosic ethanol plant has yet to open in the United States.

Though state subsidies may help attract ethanol plants, Skidmore emphasized that these subsidies do come at a cost to taxpayers. In Wisconsin, which offers a subsidy of 20 cents per gallon for ethanol (up to 15 million gallons), the cost of the subsidy works out to be about $71,000 per ethanol plant worker, according to the scientists’ research. Skidmore added that many of the incentives represent a long-term commitment from the state to subsidize biofuel production.

“Ultimately, state tax dollars are used to pay for these subsidies,” he said. “It’s up to a state’s political leaders to decide if ethanol subsidies are the best use for those funds and if the benefits of ethanol production are worth the cost.”

In 1980, U.S. ethanol production was minimal but had increased to 6,500 million gallons by 2007.

Michigan has had ethanol tax credits and subsidies in place since 2003, and the state’s ethanol production capacity in 2007 was 262 million gallons.

“If a state wants to play a significant role in the emerging biofuel industry, then policymakers may need to consider ethanol incentives,” Skidmore added. “States such as Iowa and Nebraska offered ethanol incentives relatively early, and this has enabled them to lead the industry; plus those two states also have ideal corn growing conditions. But even states such as Oklahoma and Montana, which can’t grow corn very well, offer ethanol subsidies. Like Michigan, this could set them up to be leaders in the cellulosic ethanol industry when that becomes commercially viable.”

This research is supported by the Michigan Agricultural Experiment Station.

The paper, “The Impact of State Government Subsidies and Tax Credits in an Emerging Industry: Ethanol Production 1980-2007,” is available online.

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