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Program Evaluation Divsion Image

Ethanol Programs

Summary

In comparison to other midwestern corn-producing states, Minnesota has pursued an aggressive, multifaceted strategy to promote the production and use of ethanol as an automotive fuel. Since the mid-1980s, Minnesota has developed a sizable ethanol industry that, by October 1996, had the capacity to produce about 92 million gallons of ethanol per year. Additional production facilities are now in planning or under construction.

This study, requested by the Legislative Audit Commission, addresses the following questions:

How much do Minnesota's ethanol programs cost?
Have the programs succeeded in promoting the establishment and growth of an ethanol industry?
What are the economic and environmental benefits of ethanol production and use?
What are the major risks to the future viability of ethanol production in Minnesota?

In carrying out this study, we interviewed officials in the Minnesota Department of Agriculture (MDA) and other state agencies. We visited the six major Minnesota ethanol plants in operation during the summer of 1996 and talked to managers about their experiences in building and operating the plants. We also reviewed the national literature relating to environmental and economic issues of ethanol production and examined other states' ethanol programs.

Ethanol Programs

Over 95 percent of ethanol in Minnesota and in the nation is produced from corn. Minnesota is the nation's fourth leading corn producer, and like many major corn-producing states Minnesota promotes the use of ethanol as an automotive fuel through various activities. The state also operates a fleet of about 270 flexible-fuel vehicles that can use up to 85 percent ethanol mixed with gasoline.

Like some other states, Minnesota offers subsidized loans for development of ethanol production facilities. However, Minnesota goes beyond other states in the scope of its support of the ethanol industry. Minnesota currently provides a 5 cent per gallon tax credit, called the "blender's credit," to distributors of "gasohol" (ethanol mixed with gasoline at a concentration of 7.7 to 10 percent<$FThe credit is 5 cents per gallon of pure ethanol, not per gallon of ethanol-gasoline mix.>), and it pays a subsidy of 20 cents per gallon for ethanol produced in Minnesota. Minnesota also requires the use of oxygenated gasoline year round in the Twin Cities area, and statewide starting next October.<$FThe federal Clean Air Act requires the use of oxygenated gasoline in areas that are out of compliance with federal air quality standards. The Twin Cities Area is out of attainment with carbon monoxide standards and is required to use oxygenated gasoline from October through January. Ethanol is the only oxygenate currently in use in Minnesota.>

Ethanol production has also been promoted through several subsidized loan programs, including economic recovery grants administered by the Department of Trade and Economic Development, and two programs administered by the Minnesota Department of Agriculture that provide loans to producers and to farmers who wish to purchase shares in ethanol-producing cooperatives. The largest state loans are those to producers through the Ethanol Production Facility Loan Program; this program provides low-interest loans of up to $500,000 per plant.

Program Costs

The producer payment program pays ethanol producers 20 cents per gallon up to a maximum of $3 million per plant and a statewide limit of $30 million. The payments last until 2000 in some cases, and, in others, 10 years from the start of production or expansion of production. In fiscal year 1996, two plants reached the $3 million limit. Producer payments totaled $22.1 million in the three year period, fiscal years 1994 through 1996. The Minnesota Department of Agriculture estimates that annual producer payments will reach about $26 million in fiscal year 1999.

As the producer payment is expanded, the blender's credit is being phased out. The blender's credit cost $61.2 million in foregone tax revenue in fiscal years 1994 through 1996, but will end in October 1997, and is projected to cost $8.7 million in fiscal years 1997 through 1999.

The cost of the mandate to use oxygenated gasoline, which becomes a statewide requirement in October 1997, will be borne by consumers paying higher prices at the pump. The exact size of the premium is difficult to determine. Nevertheless:

We estimate that the retail price of gasohol will exceed the price of conventional gasoline by about 2 to 3 cents per gallon over the next several years.

Our estimate of the higher cost of gasohol considers retail prices in October and December 1996 and January 1997, and wholesale prices 1994 through 1996. Over this period, oxygentaed gasoline has generally cost at least 2 to 3 cents more than nonoxygenated gasoline nationally, regionally, and in Minnesota, as far as the numbers can be determined from available data.

Minnesotans use about 2 billion gallons of gasoline each year, so each penny of additional price is equal to $20 million in costs attributable to the oxygenated fuel requirement. But since the Twin Cities area (about half the state's population) is under a federal Clean Air Act requirement to use oxygenated gasoline from the first of October through January each year, the cost of the state requirement is only five-sixths of $20 million for each additional penny that oxygenated fuel costs. If we take this into consideration, and if we split the difference between two and three cents per gallon:

We estimate that the statewide requirement to use oxygenated gasoline will cost consumers about $42 million each year.

The programs just described were designed to promote the production of ethanol in Minnesota, and the evidence suggests that:

Minnesota's ethanol industry has come into existence