Welfare Changes from the U.S. Ethanol Tax Credit: The Role of Uncertainty and Interlinked Commodity Markets

Mindy L. Baker
December 2008  [08-WP 483]

A model of the corn, soybean, and wheat markets calculates welfare effects of the U.S. ethanol tax credit. Crop yields are uncertain, and demand consists of feed, food, energy, and exports. Modeling uncertainty in crop yields allows the valuation of deficiency payments as options. Disaggregating demand records who benefits from the tax credit and by how much; incorporating linked crop markets captures indirect effects important for determining the transfer from consumers to producers. There is $600 million in net welfare loss, increased taxpayer liability, and a large transfer from consumers to farmers. A brief comparison of recent literature is included.

Keywords: biofuel, commodity, ethanol, tax credit, uncertainty, welfare.

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