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A BETTER WAY TO BUILD WHITE ELEPHANTS

October 03, 2006

Tax Analysts has an article today by Martin Sullivan called "A Better Way to Subsidize Ethanol" ($link). To my mind that sounds like "a better way to pound your thumb with a hammer," but the article actually has some good history and analysis of the tax subsidies, science and economics of ethanol.

The article notes that ethanol from cellulose is much more likely to be economical; it also asserts that cellulose ethanol will be better for the environment than corn ethanol.

While the author sees this as reason to change tax subsidies to favor cellulose ethanol instead of corn, I see it as reason to not have tax subsidies at all. Inevitably politics come into play -- in fact, the entire ethanol industry is a creature of politics, and if Mr. Sullivan is correct, it's all headed down a dead end. The corn ethanol plants popping up around the state will become white elephants one cellulose ethanol comes into wide production.

Meanwhile, the sudden demand for corn for ethanol, driven by misguided tax breaks, is distorting grain markets and causing problems for livestock producers and other traditional corn users. These are users Iowa will want to still have around once the shiny new corn ethanol plants are shuttered in 10 years or so.

We likely don't know what the ultimate replacement for gasoline is. Maybe it's cellulose ethanol; maybe it's a technology that is just now bubbling up in a laboratory in Ames. In any case, tax credits just create constituencies for politically well-connected technologies, making it harder to change from them when something new and better comes along.

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