The U.S. government has subsidized ethanol production since 1978, starting with the Energy Tax Act of 1978, which provided a tax exemption of 40 cents per gallon on gasoline blends containing more than 10% ethanol. Since then, the subsidy has varied between 40 and 60 cents per gallon, with the current federal subsidy around 51 cents per gallon
. This subsidy was initially motivated by energy security concerns during the 1970s oil crises, aiming to reduce dependence on foreign oil and support domestic agriculture. Over time, the subsidy helped establish ethanol as a fuel additive, especially in the Corn Belt, by making ethanol production economically viable despite fluctuating oil and corn prices
. With the advent of affordable electric cars, policymakers are now considering whether to allow this subsidy to expire. If the subsidy were removed, the supply curve for ethanol would likely shift leftward (decrease), reflecting higher production costs and reduced profitability for ethanol producers. This would result in a higher equilibrium price and lower quantity of ethanol sold in the market. In summary:
- The ethanol subsidy began in 1978 at 40 cents per gallon and has ranged up to 60 cents per gallon, currently about 51 cents
- It was designed to promote energy security and support domestic corn farmers.
- Removal of the subsidy would decrease ethanol supply, raising prices and reducing quantity demanded.
- The rise of electric vehicles challenges the need for continued ethanol subsidies.
This economic reasoning aligns with the typical market response to subsidy removal, where supply contracts and prices adjust accordingly.
