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Chapter 13



Ethanol (ethyl or grain alcohol) is a renewable fuel used to power vehicles and other internal combustion engines. Ethanol is currently made from feedstock crops such as corn, barley and sugarcane that contain significant amounts of sugar, or materials that can be converted into sugar, such as starch.

About 90 percent of ethanol in the U.S. is made from corn, due in large part to federal subsidies to encourage the production and consumption of corn-based ethanol.

About 90 percent of ethanol in the U.S. is made from corn, due in large part to federal subsidies to encourage the production and consumption of corn-based ethanol.1 Cellulosic ethanol, by contrast, is produced from wheat straw, corn stalks (called stover), sawdust, rice hulls, paper pulp, wood chips, energy cane, sorghum, miscanthus grass and switchgrass, all of which contain cellulose and hemicellulose, which can be converted into sugars and then fermented into ethanol.

At present, corn is much easier and cheaper to process into ethanol than cellulosic biomass. However, compared to corn, cellulosic biomass crops require less energy, fertilizer, pesticide and herbicide to grow.2 Cellulosic ethanol production may not become economically feasible for a number of years, although the basic technology has existed for more than a hundred years.

Ethanol can be used as an alternative to gasoline and could help reduce America’s dependence on imported oil. In early 2007, President George W. Bush announced his goal to reduce U.S. gasoline consumption by 20 percent in 10 years. Furthermore, the 2007 federal energy bill sets a goal that the U.S. will produce 15.2 billion gallons of renewable fuels annually by 2012 and 36 billion gallons by 2022.3In addition to the Renewable Fuel Standard (RFS), ethanol production also benefits from federal tax credits.

In addition to federal policies encouraging ethanol production, relatively low grain prices and high crude oil prices contributed to the industry’s growth. In January 2007, corn sold for $3.05 a bushel, although by March 2008 increased demand for corn to produce ethanol had driven the price up to $4.83 a bushel, a 58 percent increase in just over a year.4

Like all industries, ethanol production can spur job growth and increase local tax revenues. Ethanol production can contribute to local economies.


At this writing, Texas has two operational ethanol plants.

Ethanol has been used as a source of energy for almost 200 years. The 1908 Ford Model T was designed to run on a mixture of gasoline and alcohol. Ethanol use increased during the 1970s and 1980s when gasoline supplies decreased and became more expensive.5 Currently, ethanol is used as a gasoline additive in mixes of up to 85 percent ethanol.6


Ethanol can be used as an engine fuel by motor vehicles as well as some lightweight aircraft.

It can be blended with gasoline to produce a fuel called E85 – 85 percent ethanol and 15 percent gasoline. This fuel has a high oxygen content, and burns cleaner than other motor vehicle fuel. But ethanol has a lower energy content than gasoline and thus is less efficient; vehicles running on ethanol get fewer miles per gallon. On average, a vehicle consumes 1.4 gallons of E85 for every gallon of regular gasoline.7

E85 is used in flexible fuel vehicles (FFVs) that are specifically designed to use it. (All cars built after 1970 can run on E10, a fuel that is 90 percent gasoline and 10 percent ethanol.) Except for minor engine and fuel system modifications, FFVs are identical to gasoline models. FFVs have been produced since the 1980s, and many models are available, though there remain few filling stations that sell E85.

Ethanol also can replace Methyl Tertiary Butyl Ether (MTBE), a fuel additive derived from natural gas used to increase gasoline’s octane rating and prevent engine knocking. In 2006, several major oil companies announced that they would replace MTBE with ethanol in all of Texas’ “non-attainment” cities – areas that have failed to meet federal standards for ambient air quality. These include Dallas-Fort Worth, Houston-Galveston-Brazoria, Beaumont-Port Arthur, San Antonio and El Paso.8 MTBE replacement alone will create a demand in the state for 400 to 500 million gallons of ethanol per year.9

MTBE is being replaced with ethanol because MTBE is water-soluble, is not biodegradable and has been found leaking into some groundwater supplies.10

Ethanol in Texas

At this writing, Texas has two operational ethanol plants, and two more under construction with others planned. Texas has a limited number of fueling stations for E85. Ethanol thus has only a limited impact on Texas and much of the discussion that follows focuses on ethanol’s impact nationally, with some discussion of the existing or potential impact on Texas.

Economic Impact

According to the Renewable Fuels Association, the ethanol industry created 147,000 jobs in all sectors of the U.S. economy in 2004, and provided more than $2 billion in tax revenue to all levels of the government. The U.S. Department of Energy (DOE) estimates that for every 1 billion gallons of ethanol produced, 10,000 to 20,000 jobs will be added.11

A Texas ethanol plant producing 100 million gallons per year could create about 1,600 new jobs in all sectors of the economy. These jobs may be created in other states, since feedstocks for producing ethanol could come from outside Texas.12


Top U.S. Ethanol Producing States, 2007
State Number of
Production Capacity
(millions of gallons)
Iowa 28 1,862.5
Nebraska 18 1,017.5
Illinois 7 881.0
South Dakota 13 607.0
Minnesota 16 604.6

Source: National Corn Growers Association.


In 2006, the U.S. demand for ethanol was about 5.4 billion gallons. U.S. production of ethanol that year was only 4.9 billion gallons, prompting the nation to import 653 million gallons.13 The U.S. Energy Information Administration has estimated that Texas motorists used 29 million gallons of ethanol in 2005. Leading the nation, Californians used 918 million gallons of ethanol in the same year.14 Some states are requiring oil companies to replace the MTBE in gasoline with ethanol, and some companies are doing so voluntarily; this is expected to increase national demand for ethanol.

The U.S. Department of Agriculture (USDA) estimates that by 2010, 30 percent of U.S. corn production will be required to meet the increased demand for ethanol. Even at this rate, USDA estimates that only 8 percent of the nation’s annual gasoline consumption will be displaced.15 The long-term survival of the ethanol industry depends upon a continuing supply of low-cost feedstocks such as corn, or a transition to cellulosic ethanol, using sources such as sorghum, switchgrass or wood.


One bushel of corn (56 pounds) can produce up to 2.8 gallons of ethanol.16

As of April 2008, the U.S. had 147 operating ethanol plants, 55 plants under construction and 6 existing plants undergoing expansions.17 The majority of these plants are located in the Midwestern Corn Belt (Exhibit 13-1). Texas has two operating ethanol plants. The U.S. has no commercial cellulosic ethanol plants, but DOE has funded six pre-commercial scale plants for demonstration, none of which are in Texas.

U.S. ethanol production has increased rapidly over the past five years. In 2007, U.S. ethanol production reached 6.5 billion gallons (Exhibit 13-2).


Ethanol can be made from corn by either of two processes: dry milling and wet milling. Ethanol plants also yield a number of other commercially valuable co-products, such as livestock feed and carbon dioxide.

Dry milling works by grinding the corn into flour and then adding water to create mash. The mash then is mixed with enzymes to convert the starches to sugars. At this point, yeast is added to convert sugar to ethanol and carbon dioxide. Dry mills also produce distillers’ dried grain with solubles (DDGS) and carbon dioxide. The livestock industry uses DDGS as a high-value feed, and the carbon dioxide can be sold to beverage makers for carbonation (Exhibit 13-3).18

In wet milling, corn is soaked in water and acid to separate the various grain components. Grinders then separate the corn germ from the fiber, gluten and starches. The starch and water from the mash are converted into ethanol. Other components of the corn can be used to produce corn gluten meal, corn gluten feed, cornstarch, corn syrup and corn oil (Exhibit 13-4).

Cellulosic Ethanol

Three primary polymers exist in the walls of plant cells – cellulose, hemicellulose and lignin. To convert cellulose to ethanol, the chains of cellulose molecules must be broken into sugars and then fermented into ethanol using yeasts (Exhibit 13-5).

Cellulose can be converted into ethanol by two different methods – the sugar process or the thermochemical process. Acid hydrolysis and enzymatic hydrolysis, in turn, are rival processes used to produce ethanol via the sugar process.

Sugar Process:

In this process, biomass is processed at the ethanol plant. Biomass is ground up resulting in smaller pieces. Pretreatment is needed to separate the cellulose from lignin in order to make the cellulose available for hydrolysis. Some pentose sugar molecules are freed during pretreatment. Pentose can be fermented into ethanol in limited quantities. The cellulose is hydrolyzed using either acids or enzymes.

Acid Hydrolysis

In this process, two different types of acid are used: dilute acid and concentrated acid. To produce ethanol from plants, a “traditional” process using acid was developed in the 1930s.19 This process has several drawbacks, however, since the acid must be recycled, and the high processing temperatures can degrade the sugar and lower the ethanol yield.20

Enzymatic Hydrolysis

Before the enzymes can work to break down the molecules, a pretreatment process breaks down their crystalline structure. The enzymes can come from many sources, such as elephant dung and termite or cow intestines. This process appears to have promise if prices for the enzymes continue falling.

The hydrolysis of cellulose results in the formation of glucose – a sugar. Glucose is then fermented into ethanol by yeast or bacteria.

Thermochemical Process:

In this process, biomass is gasified into synthesis gas, or “syngas.” The gasification process employs different combinations of temperature, pressure, water and air to convert the cellulosic matter into gas. The syngas then is passed over a catalyst and converted to ethanol.21 Research at several laboratories across the country is attempting to use thermo-catalytic processes to produce higher-value fuels more closely resembling gasoline and diesel.

Producing ethanol from cellulosic material currently is more expensive than corn-based ethanol, since it can involve many different enzymes as well as genetically engineered organisms (Exhibit 13-6). The enzymes used in the sugar process are expensive, although their price has dropped considerably in the past five years. In 2001, the enzyme cost per gallon of ethanol produced was about $5; by 2005, this cost had fallen to between 10 cents and 18 cents per gallon.22 Many ethanol companies are working with major chemical companies to genetically engineer new types of enzymes and microorganisms, such as bacteria or fungi, for ethanol production.

Another economic barrier to commercial production of cellulosic ethanol is the fermentation step. Currently, the yeasts used for this step cannot process some of the sugars (five-carbon sugars) generated by the breakdown of hemicellulose. Research is being conducted to increase ethanol yields by overcoming this challenge.23

The U.S. Department of Energy (DOE) is pursuing the world’s most aggressive cellulosic ethanol initiative. On February 28, 2007, DOE announced funding of up to $385 million in all to construct six cellulosic ethanol plants expected to produce more than 130 million gallons of ethanol per year. None of these DOE-funded plants are in Texas. The funding will last through fiscal 2010. These facilities are expected to produce commercial quantities of ethanol once completed.


Ethanol cannot travel in pipelines because it is water-soluble, and as a result will mix readily with any water present in a pipeline. Water often enters pipelines at the terminals, and ethanol that absorbs too much water during transport is unsuitable for use. As a result, ethanol must be transported by truck, train or barge, resulting in higher transportation costs. Most ethanol plants, therefore are situated near major highways or rail lines to ensure efficient movement.

Transportation of corn also can entail costs, and most ethanol plants are located near areas where corn is grown. (To date, the majority of ethanol plants are located in the Midwest because of this constraint.)

The largest corn-producing states are Iowa, Illinois, Minnesota and Nebraska. While Texas produces a significant amount of corn, it is not in the top tier for production, ranking 11th nationwide in 2007, with 296 million bushels of corn grown.35 In fact, Texas is a net corn importer, using more corn than is grown.

Some ethanol plants, called “destination plants,” are located close to feed yards and dairies, because the by-products of milling (distiller’s wet grain and dry distiller’s grain) are then fed to livestock. Manure from feed yards also can be used as fuel for the plant, as with the plant currently under construction in Hereford, Texas.

The largest ethanol plants planned for Texas will be located in the Panhandle, close to feedyards and as close as possible to Midwestern corn farms (Exhibit 13-7). There are more than 1 million head of cattle and 100,000 dairy cows within a 100-mile radius of Hereford, the current home of one completed ethanol plant and one under construction, which could benefit from grain residue.36


Currently, storage of the corn feedstock is becoming a concern due to the extraordinarily large corn harvest expected this year in the U.S. This will be an ongoing problem until more permanent storage sites can be constructed. Once the ethanol is produced, it is stored in above-ground storage tanks where it waits to be transported to a blender.


In Texas, ethanol (E85) is available to the public as a motor fuel at only 26 locations.37

E85 is available at the H.E. Butt Grocery Company (H-E-B) at eight public E85 fueling sites in Schertz, Austin, Killeen, Buda, Waco, Kyle, Mission and Laredo. The Kroger Co., a supermarket chain, operates 17 E85 fueling sites located across Texas. CleanFuel USA, a fueling equipment manufacturer has one E85 fueling site in San Antonio.

In addition, some federal facilities such as military bases in Amarillo, Houston, San Antonio and Wichita Falls have E85 pumps, but these are not open to the public. The Texas Department of Transportation is a national leader for alternative fuel vehicle use in fleet management and is considering using E85 in some of its vehicles. Exhibit 13-8 shows E85 fueling stations in Texas.38

Cellulosic ethanol could greatly increase the volume of ethanol fuel that can be produced and made available to consumers. A 2005 report conducted by the U.S. Department of Energy and the U.S. Department of Agriculture determined that the U.S. could have more than 1.3 billion dry tons of available biomass potential each year by 2030, about 27 percent of it from forest resources and the remaining 73 percent from agricultural resources. If all of this were used to produce biofuels, about a third of the country’s transportation fuel needs would be met.39

Costs and Benefits

Ethanol fuel (E85) costs less per gallon at the pump than gasoline, due to the federal ethanol blender tax credit of 51 cents per gallon, but it is less efficient because, as noted earlier, it contains less energy than traditional gasoline. Thus a gallon of E85 cannot take a vehicle as far as conventional gasoline would, and depending on current market prices, it can be more expensive to use.

Both the price of E85 and motor gasoline have risen dramatically since 2000. In April 2000, the price of E85 was $1.44 per gallon ($1.80 in gallon of gasoline equivalents). Since then, the national average price has risen to $2.51 per gallon ($3.55 in gallon of gasoline equivalents). The price of E85 has been consistently higher than the price of motor gasoline (Exhibit 13-9).40

Typically, the price of building an ethanol plant depends largely on the amount of ethanol it will produce. In other words, the larger the production capacity of the facility, the more it costs to build. For example, a plant that could produce 220 million gallons of ethanol per year would cost about $300 million.41 A plant that could produce 115 million gallons of ethanol per year would cost only $120 million.42

Ethanol and Corn Prices

Demand for ethanol and biodiesel crops has driven up the price of commodities such as corn, palm oil and sugar.

Due to increased demand, in March 2008, the price of corn reached a 10-year high at $4.83 per bushel.43 The average annual corn price has been volatile since the 1980s, but has risen steadily and rapidly since the Renewable Fuel Standard was established in 2005. Oil and gasoline prices also have risen during this period. The average annual farm price for corn reached $4.30 per bushel in 2007. In 2007, 23.7 percent (3.1 billion bushels) of the domestic corn crop was used for ethanol production; this is up from 0.5 percent (35 million bushels) of the corn crop in 1980 (Exhibit 13-10).44

Production Costs

Many factors enter into calculating the production costs of ethanol. In 2005, Dr. David Pimentel, a professor of entomology at Cornell University, and Dr. Tad Patzek, a professor of civil and environmental engineering at the University of California at Berkeley, estimated that it costs about 42 cents per liter, or about $1.59 per gallon, to make ethanol from corn. These costs include costs of corn feedstock, transportation, electricity to run the plant and the cost of waste disposal, among others. They, however, do not include the value of co-products, the market value of which might reduce the net costs of ethanol production.52 It also should be noted that Pimentel and Patzek used a corn price of 28 cents per liter of ethanol produced. This equates to about $3 per bushel, assuming 2.8 gallons of ethanol produced per bushel of corn. At this writing, corn prices are $4.83 per bushel. This increased feedstock cost would add about 67 cents per gallon to the cost estimated by Pimentel and Patzek.

In 2005, Dr. Hosein Shapouri, an agricultural economist at the USDA, and Dr. Paul Gallagher, a professor of agricultural economics at Iowa State University, estimated that it cost about $0.96 per gallon to make ethanol from corn in 2002. Unlike the Pimentel and Patzek study, these costs include money made from the sale of co-products.53 Similar to Pimentel and Patzek’s study, the feedstock cost is much lower than current costs. In this study, the cost of corn was assumed to be $2.14 per bushel. As noted above, corn prices are $4.83 per bushel at this writing. This increased feedstock cost would add about 96 cents per gallon to the cost estimated by Shapouri and Gallagher.

Demand for ethanol and biodiesel crops has driven up the price of commodities such as corn, palm oil and sugar, contributing to food-price inflation, including beef, eggs and soft drinks.54 In the U.S., food-at-home prices rose 4.2 percent in 2007, although it is difficult to determine exactly how much of this increase is attributable to ethanol’s impact on corn.55 Many other factors contribute to the cost of food, including transportation, advertising and other costs associated with the food industry. The increased demand for corn for ethanol has affected the livestock industry as well, by increasing feed prices and cutting into livestock feed supplies.

Cellulosic Ethanol

In the absence of any commercial cellulosic ethanol plant, it is not possible to estimate the cost per gallon of ethanol from this process. Experts such as Dr. Bruce Dale, a professor of chemical engineering and materials science at Michigan State University, believe that cellulosic ethanol can be produced for about $2.50 per gallon today. In about five years, using advancements made through DOE funding, Professor Dale anticipates that the price of producing cellulosic ethanol could fall to $1.20 per gallon.56

Growing corn requires a significant amount of water, fertilizer and pesticides.

Environmental Impact

Supporters of the ethanol industry say that its use helps the environment by reducing air pollutants. No conclusive studies have shown this to be the case, however. And while alternative fuels, such as ethanol, can reduce America’s dependence on foreign oil, the U.S. simply does not have enough acres of farmland to replace most of its gasoline with corn ethanol.

Air Quality

Ethanol supporters also say that its production and consumption are carbon-neutral (Exhibit 13-11).

A report by DOE’s Lawrence Livermore National Laboratory identified several environmental concerns regarding the use of ethanol as a substitute for MTBE in gasoline:

  • When ethanol replaces MTBE, the major concerns are the production of acetaldehyde (a toxic air contaminant) and peroxyacetyl nitrate (an eye irritant).
  • Ethanol is shipped by truck or rail. Additional transportation needs could slightly increase the nation’s total emissions due to heavy-duty truck and train engines.

Even so, areas of the country with air pollution problems are focusing on ethanol to help meet the Environmental Protection Agency’s (EPA’s) clean air standards. According to the Texas State Energy Conservation Office, adding ethanol to gasoline helps it to burn more completely and significantly reduces vehicle emissions. Carbon monoxide emissions are cut by up to 30 percent, Volatile Organic Compounds by about 12 percent and particulates by about 25 percent.57

In October 2002, the EPA, U.S. Department of Justice and state of Minnesota settled with 12 Minnesota ethanol manufacturing plants for alleged Clean Air Act violations. The New Source Review provisions of the Clean Air Act require such sources to install pollution controls and undertake other pre-construction obligations to control air pollution emissions. The Minnesota plants were required to install air pollution control equipment to reduce emissions of harmful VOCs, carbon monoxide, nitrogen oxides, particulate matter and other hazardous air pollutants produced during the manufacturing process.58

Water Use

Growing corn requires a significant amount of water, fertilizer and pesticides, which can have a negative impact on the environment. On average, farmers use about 134 pounds of nitrogen fertilizer per acre of corn each year.59 Each irrigated acre of corn also requires about 1.2 acre-feet of water (391,021 gallons). By comparison, wheat requires 1.5 acre-feet of water per acre and soybeans require 0.8 acre-feet.60

According to a March 2007 Wall Street Journal article, critics of ethanol say, “Ethanol plants deplete aquifers, draw heavy truck traffic, pose safety concerns, [and] contribute to air pollution.”61

According to the U.S. Department of Energy, depending upon climate conditions, corn-based ethanol requires between 2,500 gallons and 29,000 gallons of water per million Btu of energy produced, primarily for crop irrigation; cellulosic crops require significantly less water.62 A study by the U.S. Department of Agriculture found that water use to irrigate corn averaged 784.6 gallons of water per gallon of ethanol, which equates to more than 9,000 gallons of water per million Btu of energy produced.63 By comparison, crude oil production and refining can require between one gallon and 2,500 gallons of water per million Btu of heat energy produced, depending primarily on how much water was required to extract crude oil from underground sources.64 In 2002, water use at ethanol plants averaged 4.7 gallons per gallon of ethanol produced.65 Biodiesel production typically requires less water than ethanol.

Land Use

The food versus fuel debate has generated increased interest in cellulosic ethanol.

Since cellulosic ethanol can be made from any type of plant material, some critics fear that wider use could affect the environment due to tree cutting and additional water use to grow cellulosic materials. It should be noted that some potential cellulosic energy crops can be drought-tolerant and use less water than corn. In 2003, almost 16 percent of the nation’s cropland in the U.S. was not being cultivated. This amounts to 58 million acres of land that could be used to grow low-input, drought-tolerant crops for making cellulosic ethanol.66

Ethanol is biodegradable, so accidental spills pose few risks to the environment.

To date, the EPA has not studied the overall environmental impact of both producing and consuming ethanol. A March 2007 DOE study found that greenhouse gas emissions from corn-based ethanol are 18 to 28 percent lower than those from gasoline, while cellulosic ethanol greenhouse gas emissions are 87 percent lower. This study did not take into account the environmental effects of producing ethanol, however.67

Other Risks

Ethanol corrodes rubber, steel and aluminum, and most vehicles are not designed with this in mind. Ethanol has a higher freezing temperature than gasoline and cannot travel in pipelines because it absorbs water.

A diverse and growing group of detractors, from ranchers to some environmentalists, oppose expanded use of corn-based ethanol, prompting a “food versus fuel” debate as the cost for corn spirals upward due to high demand. The National Cattlemen’s Beef Association, National Chicken Council, National Turkey Federation and National Pork Producer’s Council all testified before Congress in March 2007 to end corn ethanol subsidies.68 In August 2007, the National Cattlemen’s Beef Association sent a letter to Congress in opposition of increasing the Renewable Fuel Standard.69

The National Corn Growers Association maintains that:

  • increased demand is being met with increased production, which should allow corn growers to satisfy both domestic and export demand;
  • the ethanol process creates useful livestock feed and food products; and
  • corn demand has no noticeable impact on food prices.70

Tyson Foods, however, the world’s largest processor and marketer of chicken, beef and pork, has warned that ethanol-driven corn prices will push up the cost of chicken and beef for American consumers.71

In Texas, Dr. David Anderson, a Texas Cooperative Extension economist, stated that as ethanol production grows, livestock producers should consider the following possibilities:

  • higher feed costs;
  • feeder cattle and calf prices adjusted to the price of corn;
  • reduced production in terms of cattle weights and profitability; and
  • a livestock industry that is less competitive in the world market.72

The food versus fuel debate has generated increased interest in cellulosic ethanol. Due to the complexity of the process, however, only relatively small-scale production has been possible to date. Cellulosic ethanol research continues to be conducted in Texas.

State and Federal Oversight

The federal Clean Air Act and Clean Water Act both affect ethanol plants.

On April 12, 2007, EPA set emissions rules for ethanol plants. Ethanol plants that use carbohydrate feed stocks such as corn are not required to count “fugitive” emissions (those not coming from stacks or vents) to determine if they exceed emission limits.

EPA now allows new ethanol plants to emit up to 250 tons of regulated pollutants per year in certain areas, not including non-attainment areas.73 Previously, these plants were permitted to emit only 100 tons of regulated pollutants per year; many think the new limits will mean more pollution and cause breathing problems for residents located near the plants.

The largest federal ethanol subsidy is the blender tax credit of 51 cents per gallon of ethanol.

The Texas Commission on Environmental Quality (TCEQ) grants permits for air and wastewater quality. It typically takes a year to obtain an air permit for a new ethanol facility in Texas. It can also take about one year to obtain a wastewater permit from TCEQ. These timelines can encounter significant delays, however, depending on public meeting requests or contested case hearings.74

Subsidies and Taxes

The largest federal ethanol subsidy is the volumetric Ethanol Excise Tax Credit (VEETC) of 51 cents per gallon of ethanol. The incentive reduces the amount of excise tax the blender has to pay on a dollar-for-dollar basis. If a blender uses the ethanol to make E85, the tax credit amounts to 43.4 cents per gallon of E85 produced (0.85 * $0.51 = $0.434). Congress has extended this incentive through 2010. Often, the blender is the oil company that produces the gasoline.

In 1980, Congress placed a 2.5 percent tariff on foreign-produced ethanol. According to the Wall Street Journal, this tariff was designed “to protect prices for U.S. corn growers in Farm Belt states.”75 Brazil produces ethanol for much less than the U.S. can because Brazilian ethanol is sugarcane-based. (Again, producing ethanol from sugar removes the starch-to-sugar step of the production, making production costs lower than ethanol produced from corn.)

The import duty on ethanol, currently 54 cents per gallon, has kept the price of Brazilian and other foreign ethanol higher than domestic production. A so-called “Caribbean Loophole” to the law, however, provides an exception for ethanol imported through or from the Caribbean islands, up to a total equivalent to 7 percent of U.S. production. Lawmakers from some farm states want to close this loophole.

Most states offer tax incentives related to ethanol, including exemptions, deductions, credits and loans. Each state’s program is different. In South Carolina, producers of corn-based ethanol receive a production tax credit of 20 cents per gallon and producers of ethanol from other feedstocks receive 30 cents per gallon. In Indiana, ethanol producers can claim a credit of 12.5 cents per gallon.76

Additionally, some states offer retailer tax credits. For example, Indiana provides E85 retailers a credit against state gross sales tax of 18 cents per gallon of E85 sold. In New York, E85 used to operate motor vehicles is exempt from state sales and use taxes entirely.

Cellulosic Ethanol

In addition to the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007 contains several incentives focused on the research and development of ethanol derived from cellulosic biomass.

In June 2007, DOE announced $375 million in funding grants for three cellulosic ethanol research centers. The centers will be led by Oak Ridge National Lab in Tennessee, the University of Wisconsin in Madison and the Lawrence Berkeley National Laboratory in California.77

The Tennessee center will attempt to genetically engineer plant cell walls and new bioenzymes to break down plant cell walls, particularly in switchgrass and poplar trees. The Wisconsin center will work to improve the characteristics of feedstock plants, feedstock processing and the conversion of feedstocks to fuel, focusing on switchgrass and poplar trees as well as corn stover (stalks). It will also educate farmers and society as a whole on current technology related to biofuels. The California center will focus on developing specially designed feedstock crops, increasing the activity of enzymes and studying the microbes used in the ethanol distilling process.78

In July 2007, Texas Governor Rick Perry awarded $5 million out of the Texas Emerging Technology Fund for biofuels research, particularly for research into cellulosic ethanol.79 The grant went to Texas A&M University’s Agriculture and Engineering BioEnergy Alliance, a partnership between AgriLIFE Research (formerly the Texas Agricultural Experiment Station) and the Texas Engineering Experiment Station.80

More information on subsidies and incentives for ethanol can be found in Chapter 28.

Other States and Countries

Brazil is the world’s largest producer of sugarcane and the largest producer of ethanol. In 2006, Brazil shipped 3.4 billion liters (898 million gallons) of ethanol out of the country. About half of Brazil’s ethanol exports went to the U.S.83

To support the ethanol industry, the Brazilian government places large sales taxes on gasoline and subsidizes ethanol production. Achim Steiner, the head of the United Nations Environment Program, has expressed concerns that ethanol production in Brazil will further harm the Amazon rainforests, due to an increased need for farmland.84

Columbia and China also have significant ethanol programs. In June 2007, the Associated Press reported that China was banning the production of ethanol from corn and other food crops because authorities are worried about food-price inflation. China is considering switching to cassava, a plant native to South America but grown throughout the world, or other types of biomass such as sorghum.85

Outlook for Texas

Availability of E85 remains an issue, especially in Texas. Two ethanol production facilities were recently completed and there are two ethanol production facilities currently under construction. But Texas has only a handful of E85 pumps.

Heavy federal subsidies have resulted in a rapid and large expansion of ethanol production throughout the U.S. As a result, an increasing percentage of the U.S. corn crop is being devoted to ethanol production.

An increasing percentage of the U.S. corn crop is being devoted to ethanol production.

Controversy has arisen regarding the amount of energy needed to produce ethanol compared to gasoline. Numerous studies on this question have yielded varying results. A 2005 study by Dr. David Pimentel of Cornell University and Dr. Tad Patzek of U.C. Berkeley concluded that producing ethanol from corn requires 29 percent more fossil energy than is contained in the resulting product.86 A 2004 study by Dr. Hosein Shapouri of the USDA, however, concluded that producing ethanol with corn creates a 67 percent net energy gain.87 The debate over energy conversion efficiency continues, but higher production efficiency processes are emerging.

An article produced by Oxford Analytica, an international consulting firm representing both private businesses and governmental agencies, cautions that the ethanol boom in the U.S. requires careful management because heavy federal subsides and import barriers may distort trade, which could prompt challenges by the World Trade Organization. At present, ethanol depends upon high oil prices and subsidies to be economically feasible.88

As noted above, EPA has not studied the overall environmental impact of producing and consuming ethanol, but many experts across the nation are concerned about both.

High corn prices are good for farmers, but bad for livestock producers and consumers, because so many products are made from corn. Texas has a large livestock industry, and high feed prices affect it. Consumers are likely to feel some impact of high corn prices through increased food costs, even though many other factors may have a greater effect on prices at the grocery store.

Many different choices are needed to meet the growing demand for fuel in Texas. Ethanol can play a role in reducing dependence on foreign oil, but corn-based ethanol clearly is not the only answer to the nation’s fuel problems. The nation simply does not grow enough corn to meet its energy needs. Even if the entire U.S. corn harvest in 2007, 13.1 billion bushels, were turned into ethanol, it would have produced only 36.6 billion gallons of ethanol, enough to replace about 30.2 percent of U.S. gasoline consumption in 2007.93

It is, of course, not feasible to devote the entire U.S. corn harvest to producing ethanol. If it is to make a significant impact on the U.S. fuel supply, ethanol must be imported from other countries or cellulosic ethanol production must be improved and made more cost-efficient. Possible alternative feedstocks include sorghum, energy cane, wood chips and switchgrass, among others.

Scientists have been working to make the cellulosic process economically feasible for commercial production for years, and it is still too expensive to be a viable fuel option. But Texas A&M University recently has shown initiative in this research, forming a four-year partnership with Chevron to study lignocellulosic biofuels. The partnership aims to identify and optimize production of non-food and non-feed energy feedstocks for biofuels; develop harvest, transportation and storage systems for energy feedstocks; and develop technology for biofuels processing.94

The ethanol industry in Texas will continue to grow over the next several years. With the promise of federal subsidies and the recently increased federal Renewable Fuel Standard, ethanol production will continue to increase and there will be a noticeable impact to local rural economies.


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