Ethanol

Ethanol has been recognized as a quality motor fuel since the design of the first automobiles because of its high octane and British thermal unit content. The original Ford Model-T was designed to run on ethanol which has been used as a motor fuel for nearly three-quarters of a century.

The potential of gasoline supply disruption and shortages during World War II resulted in a heightened interest in ethanol as a motor fuel in the United States while, at the same time, it was successfully being used by the Germans as an aviation fuel. Eventually low oil prices made it impossible for fuel-grade ethanol to compete and the market all but disappeared. The oil shortages of 1973 and 1978 again gave rise to the use of ethanol as a motor fuel as Congress looked to diversify our resource base.

Since its inception in 1978, the U.S. ethanol industry has continued to develop through deliberate public policy incentives created by the Congress in an effort to reduce foreign oil purchases, create new markets for grain and improve air quality. Commercial investment and business development have depended upon a variety of production and marketing incentives, primarily the exemption of ethanol blends from a portion of the federal excise tax on gasoline. When ethanol is more widely accepted by the petroleum industry, then it can be used in its highest value application as an octane enhancer in premium and midgrade motor fuels and as a feedstock for the production of ethyl tertiary butyl ether or ETBE. Ethanol also has great value as an air pollution control strategy, particularly for carbon monoxide.

Historically, the ethanol industry's support among the various executive agencies and Congress has been favorable. Analyses by such diverse entities as the Congressional Research Service, the National Advisory Panel on the Cost Effectiveness of Ethanol Production convened by the Secretary of Agriculture the Senate Environment and Public Works Committee, the General Accounting Office and the President's Task Force on Regulatory Reform all conclude that the ethanol industry's government incentives to stimulate production and marketing are a cost-effective "investment" of government tax dollars. They conclude the investment is justified on the basis of ethanol production's contribution to agricultural program cost reductions, carbon monoxide emission reductions and imported oil trade balance improvements.

Ethanol was originally used as a gasoline extender and an octane enhancer. Ten percent volume ethanol blends, in addition to displacing gasoline often derived from imported crude oil, also increased octane by two to three points, thereby providing a valuable additive to mid to low octane gasolines. Although the original tax incentives available to ethanol required that it be used in ten percent volume increments, there is no underlying technical need for that amount and ethanol is used successfully in various concentrations up to ten percent volume or 3.5 percent by weight oxygen content. Ethanol blends are universally approved at up to ten percent volume by every automobile manufacturer selling cars in the United States.

As the U.S. Environmental Protection Agency and Congress began to fully appreciate the value of oxygen content in gasoline in the late 1980s, interest in ethanol production continued to grow. The partial exemption of ethanol blends from the Federal Motor Fuel Excise Tax is now applied proportionately to blends of less than ten percent in order to encourage its use in oxygenated fuel programs across the country. (A number of states also provide tax related incentives which are discussed beginning on page 27.) While one of ethanol's most positive characteristics is that it can be blended with gasoline, it also has the potential to be used in its pure or "neat" form, or in concentrations ranging from 85 to 100 percent.

Ethanol is an approved alternative fuel as defined in the Energy Policy Act and in certain locations throughout the country could potentially compete with other fuels for use in fleets, urban buses and heavy-duty engines. The use of ethanol in fleet applications may be limited due to the lack of automobiles designed to operate on ethanol. The current generation of variable or flexible fuels can operate on any concentration of ethanol or methanol mixtures and may provide additional near term opportunities for ethanol.

A significant improvement in performance and mileage and consequently in the economic competitiveness of ethanol as a neat fuel would result from its use in engines that are optimized to take advantage of its fuel properties. This would include modifications to timing and compression as well as the replacement of some parts such as stainless steel tanks and non-corroding hoses. General Motors' Ethanol Vehicle Challenge is designed to generate such changes. Ford and Chrysler have incorporated many of these changes in recent model year flexible fuel vehicles.

Economic Impact of Increased Ethanol Production

The economic benefits of ethanol as a transportation fuel are significant. Increased ethanol production has the potential to create a positive economic impact on employment, personal and business income creation, as well as on the federal budget.

The U.S. Department of Agriculture, the Department of Commerce, the Department of Economics at Iowa State University and the Western and Great Lakes Regional Biomass Energy Programs have produced four different case studies in recent years on the job and income creation from increased ethanol production. Each analysis concluded that the construction and operation of a 50-100
million gallon wet milling ethanol production facility would result in a significant increase in job and income creation. A study by economists at Northwestern University confirmed that these economic benefits improved the U.S. trade balance by approximately $2 billion in 1997.

Through these different studies, it can be estimated that the actual construction of such a facility would produce from 370 local jobs to 5,604 person-years of work with an income creation of $60 million to $130 million. Jobs created during the operation of the facility are estimated to range from approximately 900 to more than 4,000, with an estimated created income of $47 million to $100 million.

A 1995 report by the U.S. Department of Agriculture illustrates the economic importance of the ethanol industry. The report notes that elimination of current ethanol incentives would increase the trade deficit by $4.5 to $7.8 billion between 1998 and 2005. Using Department of Commerce estimates, that means the United States could lose between 95,500 and 152,800 jobs, if current incentives are eliminated.

Corn growers will receive a significant increase in income because of higher corn prices and heightened demand for their product. Figures from the Corn Refiners Association place annual exports of corn gluten at more than $800 million, $300 million of which is attributable to ethanol production. According to the USDA, the top ten corn growing states reported a combined $464.8 million boost in tax receipts as a direct result of income from ethanol production in 1997.

In general, increases in corn production and prices result from strong domestic and export markets. Today, ethanol production represents a rapidly growing, reliable market for grain producers. In 1997, nearly 1.6 billion gallons of ethanol were produced from 800 million bushels of corn and grain sorghum. Much of this production occurs in small Midwestern communities where the impact of new jobs, expanded local grain markets and broadened tax bases have a significant impact on the economy. In Nebraska for example, ethanol production alone accounted for more than three percent of total tax receipts and ethanol processing plants use nearly 15 percent of all corn grown in the state.

Presently, ethanol contributes positively to the U.S. trade balance by approximately $1.5 billion a year. If ethanol production increased to two billion gallons per year, the USDA predicts it would make an additional contribution of one billion dollars. The use of ethanol as a gasoline additive displaces imported MTBE and some imported petroleum products. According to the Energy Information Agency, increased use of ethanol in alternative fuel vehicles can continue to reduce fuel imports. The EIA forecasts a growth rate of 20 percent annually, providing .12 quadrillion Btus of transportation fuel early in the 21st century.

Ethanol and Agriculture

Ethanol can be produced from a variety of feedstocks, but the most efficient and widely used of these feedstocks is corn. A significant amount of research continues in both the public and private sector regarding the production of ethanol from such products as sugar beets, potatoes, agriculture and municipal wastes and various forms of biomass. For the foreseeable future, however, the continued growth of the ethanol industry will result in the increased utilization of corn and other agricultural based products. This could address many chronic problems facing the American agriculture industry.

According to the National Corn Growers Association, more than two billion bushels of corn have been used in ethanol production during the last decade. This has resulted in significant rural economic growth and stimulation as well as the reduction of government farm program costs. An additional element to producing ethanol from corn is the variety of co-products derived from the process that are used in many sectors of the economy. The ethanol production process converts the starch content of the corn, leaving a high protein co-product that is a quality animal feed.

Beneficial impacts on American agriculture resulting from increased ethanol production include the following:

• Ethanol production is estimated to increase the market price for corn by a minimum of 15 cents per bushel
  and could increase corn prices by as much as 50 percent over the next decade as a result of new demand created by the Clean Air Act.
• For each 100,000 bushels of corn used in ethanol production, more than two thousand new jobs are created, resulting in revenue flow back to the government in the form of increased personal and corporate income taxes at both the federal and state levels.
• Increased ethanol production offsets diminishing export markets.
• Corn used in ethanol production provides both fuel and feed through co-products used for livestock feeding.

Each year, U.S. farmers can potentially plant approximately 80 million acres of corn. Estimating an average yield of 125 bushels of corn per acre over the next five years shows that the U.S. farmer has the capacity to produce ten billion bushels of corn annually.

Uses for that corn are broken down as follows:

• 4.5 billion bushels for domestic livestock, hog and poultry feed;
• One billion bushels for processing, including starch, sweeteners and ethanol; and
• One-two billion bushels for export, depending on world conditions and U.S. subsidy.

This suggests that more than two billion bushels of corn could be grown for the sole purpose of converting it to ethanol. Many believe the federal government should encourage and support programs that allow American agriculture to supply both food and fuel, particularly considering ethanol's environmental advantages.

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