Policy Alternatives for the Future Biofuels Industry

US and state governments have subsidized ethanol since 1978, and the rationale for these subsidies has varied over time from supporting farm prices and income, to environmental quality, and more recently to energy security and reduction of greenhouse gas emissions. The recent boom in ethanol investment and production can be considered as an unintended consequence of an ethanol subsidy keyed to $20 crude oil and fixed at 51 cents per gallon combined with oil surging to $70/bbl. Thus, in the 2005-07 period, ethanol was extremely profitable inducing substantial new investment. For the future, different political action groups and political figures propose renewable fuels targets or standards ranging from 35 to 100 billion gallons per year. To achieve anything like these levels, it is likely that the current policy set will need to be reconsidered. In addition to the current policy, this paper considers using a subsidy tied to the energy security gains and greenhouse gas emission reductions provided by renewable fuels, subsidies targeted specifically at cellulose ethanol, and different versions of a renewable fuel standard such as the one passed by the US Senate. It is clear that we must develop a better understanding of the consequences of these alternative policy pathways.