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The End of Ethanol Subsidies: Good News for Food Security?

In June, the US Senate voted in favor of a deal to end a 45-cent-per-gallon subsidy for the ethanol industry, as well as a 54-cent-per-gallon ethanol tariff. Originally decried by Agriculture Secretary Tom Vilsack as a move that would cost American jobs, lead to less choice for consumers, and further dependence on foreign oil sources, the proposal is seen as progress by those who fear that using crops for fuel can destabilize the food and feed markets and lead to higher food prices. Additionally, with US ethanol production and profits reaching record levels, it is being suggested by many that the industry no longer needs support by a government program that costs the American taxpayers US$6 billion per year. With the ongoing heated debate about how to reduce the country’s deficit and slash the budget, the era of ethanol subsidies in the US is nearing the end.

Government subsidies for the ethanol industry have been in place since 1978; combined with a federal mandate requiring refiners to use 15 billion gallons of the corn-based fuel by 2015, these subsidies were meant to strengthen the industry and encourage production of alternative fuels. Today, the US is the world’s leading producer and consumer of ethanol. In fact, the US now produces enough ethanol to export it to other countries, including other ethanol-producing countries such as Brazil.

The debate surrounding ethanol and other biofuels has long centered around three issues: 1. food vs. fuel (does the use of crops for fuel raise food prices?); 2. trade distortion (do subsidies and tariffs, such as those in place in the US, constitute unfair trade-distorting practices?); and 3. environmental effects (as more crops are needed to meet demand for both food and fuel, will this lead to more deforestation and higher emissions worldwide?). How will the end of US subsidies affect these issues? More specifically, what impact will the end of government subsidies have on the US ethanol industry, and by extension on other ethanol-producing countries and on national and global food security?

IFPRI Senior Research Fellow David Laborde has extensively studied biofuels policies and their impact on food security and the environment. He reaches the following conclusions:

  1. The ethanol mandate is not the sole driver of the high level of ethanol consumption in the US; with current high oil prices, ethanol will remain attractive to consumers, and thus profitable for producers. Therefore, ending subsidies should have no substantial effect on the US ethanol industry (and by extension, the maize market).
  2. Research has shown the overall impact of ethanol production on US food prices to be very weak, meaning that the end of subsidized production will not act to reduce food prices.
  3. Other ethanol-producing countries will benefit by the removal of the trade-distorting subsidies and tariff.
  4. While subsidies may end, the ethanol mandate will continue and could pose a bigger threat to food prices and food security.

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Watch David Laborde discuss US ethanol subsidies in more detail.