Ethanol has been slowly adopted, helped by various tax credits and incentives that will continue to exist for years to come. That is the upshot of a new study on ethanol and biofuels which provides policy makers with instant feedback about their decisions.

Ethanol and biofuels policies have been analyzed by the Food and Agricultural Policy Research Institute at the University of Missouri to determine the impact of biofuels policy in 10 years, depending upon what was decided. Their analysis keeps today’s basis policies in place, not only the ethanol supports, but also the biodiesel credit that expired in December.

The growth of ethanol soon begins to slow down, but 15 billion gallons will be produced in 2015 when other types of ethanol gain a foothold. Because of the upper limit for corn use in ethanol production, imported sugar begins to see significant use.

The blend wall will essential be reached in the coming year, and 10% ethanol will be at its maximum use level. Higher levels of blending will soon capture more market share, but for E-85 to see any significant use, there must be more flex fuel vehicles on the road and it must been priced competitively. While gasoline prices will increase, supporting ethanol prices, the price of ethanol will be pushed lower relative to gasoline in the future to reflect its energy value and its marginal use as a fuel replacement in E-85.

If Congress mandates specific types of biofuels, there will be different prices for different fuels. While that will keep conventional ethanol priced lower than gas, the mandate for advanced biofuels made from corn stocks and other cellulosic materials will be able to rise to higher prices because of the mandated amounts. Cellulosic ethanol production will expand after 2015. While technology will have to be available to produce advanced ethanol, Congress may waive its mandates as the technology is refined.

If the 45 cent per gallon blender’s credit expires, blenders will have less incentive to use biofuels, and the ethanol tariff expiration makes it cheaper to import ethanol. When ethanol is imported, prices for domestically produced ethanol will fall, however the Congressional mandates must be met. Ethanol imports will expand without the tariff, despite the expiration of the blender’s credit. The loss of the credit will slow the production of cellulosic ethanol.
When the tariffs and credits expire, and domestic use declines, the Congressional mandates for use prevent large reductions in use. Toward the end of the decade the cost to comply with the Congressional mandates reaches $6.5 billion, but without the tariffs and credits, the cost of compliance with the mandates reaches beyond $9 billion.

Ethanol production and use will continue to rise, but the Congressional mandate for achieving higher annual amounts of use, along with the tariffs and tax credits to foster the economic viability of biofuels will be necessary. Advanced biofuels will slowing show increasing market share, but the cost of meeting the mandates will continue to rise, regardless of what ethanol is distilled from.

Source: Stu Ellis, University of Illinois