Economic and policy implications of public support for ethanol production in California's San Joaquin Valley

The US Environmental Protection Agency requires that only oxygenated gasoline may be sold in regions that are not in compliance with national air quality standards. Several non-attainment regions are located in California, and most of the gasoline sold there is oxygenated with methyl tertiary butyl ether (MTBE). California is planning to discontinue the use of MTBE in gasoline by January 2004. This policy will generate greater demand for ethanol, which is the leading substitute for MTBE. Most of the ethanol required in California will be imported from other states, unless California develops an ethanol production industry. The costs of producing ethanol in California may exceed the benefits, unless substantial value is attributed to non-market, public goods, such as maintaining agriculture and reducing unemployment in rural areas. We examine the firm-level economics of using corn and other agricultural products to produce ethanol in California, and the potential regional economic impacts of building and operating an ethanol plant. The cost of production is greater than the current price of ethanol for all of the feedstocks we consider. Production generates economic activity, but at current prices for inputs and outputs, substantial subsidies will be required to encourage firms to produce ethanol in California.