Ethanol, Food Prices, and Greenhouse-Gas Emissions

April 8, 2009

Over the past several years, spurred by both rising gasoline prices and long-standing subsidies for producing ethanol, the use of ethanol as a motor fuel in the United States has grown at an annual average rate of nearly 25 percent.U.S. consumption of ethanol last year exceeded 9 billion gallons--a record high. CBO released a paper today that discusses the relationship between ethanol, greenhouse-gas emissions, food prices, and federal spending on nutrition programs.

Most ethanol in the United States is produced from domestically grown corn, and the rapid rise in the fuels production and usage means that roughly one-quarter of all corn grown in the U.S. (nearly 3 billion bushels) is now used to produce ethanol. The demand for corn for ethanol production has exerted upward pressure on corn prices and on food prices in general. CBO estimates that the increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices between April 2007 and April 2008.

In turn,increases in food prices will boost federal spending for mandatory nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) andthe school lunch program by an estimated $600 million to $900 million in fiscal year 2009. The Special Supplemental Assistance Program for Women, Infants, and Childrenbetter known as WICisa discretionaryprogram that provides a specific basket of goods to recipients rather than a set cash benefit, sochanges in food prices in 2008 had an immediate impact on costs for the program. Under the assumption that the effects are much the same, increased production of ethanol would have added less than $75 million in fiscal year 2008 to the cost of serving the same number of WIC participants as in 2007.

Last year the use of ethanol reduced gasoline usage in the United States by about 4 percent and greenhouse-gas emissions from the transportation sector by less than 1 percent. The future impact of ethanol on greenhouse-gas emissions is unclear. Research suggests that in the short run, the production, distribution, and consumption of ethanol will create about 20 percent fewer greenhouse gas emissions than the equivalent processes for gasoline.In the long run, if increases in the production of ethanol led to a large amount of forests or grasslands being converted into new cropland, those changes in land use could more than offset any reduction in greenhouse-gas emissionsbecause forests and grasslands naturally absorb more carbon from the atmosphere than cropland absorbs. In the future, the use of cellulosic ethanol, which is made from wood, grasses, and agricultural plant wastes rather than corn, might reduce greenhouse-gas emissions more substantially, but current technologies for producing cellulosic ethanol are not yet commercially viable.