By Craig Cox, Environmental Working Group Midwest vice-president.

Growth Energy, a corn ethanol lobby group, is grossly exaggerating the economic benefits that a higher ethanol blend in the nation’s fuel supply would bring.

The group claims that granting its petition to increase the amount of ethanol blended into gasoline from 10 percent to 15 percent would create an additional 136,101 “green jobs.”

Our analysis shows that only 12,000 to 27,000 jobs would be created at a cost to taxpayers of between $195,000 and $446,000 per job per year for a total cost of $ 5.4 billion per year. Other independent analysts suggest that 38,000 jobs would be created at the cost of $139,000 per job per year.

Growth Energy is calling its petition to the Environmental Protection Agency (EPA) to waive the requirements of the Clean Air Act and allow higher blends of ethanol the “Green Jobs Waiver.”

The groups’ jobs’ claim is based on a March 4, 2009 study. The research done by the Windmill Group is the latest in a string of corn ethanol industry-commissioned studies. In contrast, independent academic economists have shown that the corn ethanol industry’s estimates of new jobs are far larger than any credible analysis produces.

Background on Input-Output Economic Analysis

Input-output economic analysis is the tool that industry consultants and academic experts use to estimate job creation. Economists use these analyses to calculate the impact that a particular industry has on the economy of a county, state, region or nation. Input-output analysis is based on economic data maintained by the U.S. Bureau of Economic Analysis (BEA).

Those data are used to estimate how much input is required to produce a unit of output from a particular economic sector. The total impact of a corn-ethanol plant or the corn-ethanol industry as a whole ripples through the local or national economy based on how much economic activity is generated in the businesses that supply everything needed to produce the corn-ethanol. The economic impact can be reported as an increase in gross domestic product in value added, or, in this case, in jobs.

Input-output analysis estimates three kinds of job creation: direct, indirect and induced. Direct jobs are the ones created at the ethanol plant itself. Indirect jobs are the ones created in businesses providing materials or services to the ethanol plant. Induced jobs are created when the people holding the new jobs spend their earnings to purchase goods and services. The ratio of inputs to outputs is used to estimate “multipliers.”

It takes a additional economic analysis and insight to adjust the multipliers BEA estimates for large sector of the national economy to fit the unique input requirements of a particular industry such as a corn-ethanol plant. Most important, the analysis of new jobs created must subtract the jobs and economic activity that was already going on before the ethanol plant came on-line. To do this, independent analysts – in contrast to the industry-for-hire consultants – spend a great deal of time collecting additional data and fine-tuning their economic models.

This is particularly important in studies of the economic impact of corn-ethanol. The BEA collects no data specific to the industry. In BEA’s data and its multipliers, corn-ethanol is subsumed under the much larger “organic chemicals” category. Taking off-the-shelf multipliers for organic chemicals and using them to analyze the corn-ethanol industry, as Growth Energy does, leads to inflated estimates of job creation that don’t stand up to independent analysis.

Another serious misstep is assuming that there was no activity among the input supplier industries until the arrival of corn-ethanol. The most egregious example comes in studies sponsored by another ethanol lobby group, the Renewable Fuel Association (RFA).² The RFA consultant allows corn-ethanol to take credit for all the economic activity generated by growing corn, which was happening in commercial bulk long before the advent of ethanol. Over half (53%) of the jobs credited by the RFA consultant as being created by the corn-ethanol industry are in fact jobs that already existed for growing the corn that was already being produced for food and feed. Independent analysts rightfully criticize the RFA for dramatically over-estimating the employment impacts of their industry.

Growth Energy’s latest claim that an expanded ethanol industry will create 136,101 jobs does not include jobs associated with growing corn, although Growth Energy cites the RFA studies in other areas. But the Growth Energy estimates are still exaggerated compared to those of independent analysts.

David Swenson, an economist at Iowa State University and an expert in input-output analysis has reviewed multiple studies of job creation produced by ethanol industry consultants. His conclusion:

“In short, there are claims to economic outcomes associated with ethanol production that seasoned analysts cannot swallow, but that proponents and politicians will certainly tout as gospel unless confronted with better (or, for the most part, actual) research. The gap between sensible analysis and outright nonsense is huge.”³

Growth Energy Green Jobs

The Growth Energy consultants base their analysis on the following assumptions:

• E15 would require ethanol production of 20.4 billion gallons per year (BGY).
• Current ethanol production capacity is 10.3 billion BGY, with 1.9 BGY offline, 1.5 BGY under construction and 0.6 BGY currently available for expansion.
• Getting to 20.4 BGY of ethanol production would require new capacity equivalent to building 96 new 100-million-gallon-per-year (MGY) plants.

Growth Energy consultants estimate the job creation from a single 100 MGY plant and then multiply by 96 to get to their final job estimate for the impact of increasing ethanol production to the supply the E15 blend level nationwide.

Growth Energy Job Estimate Is 5-to-10 Times Too High

The Growth Energy consultants state that a single 100 MGY corn-ethanol plant would employ 45 people. This is line with independent analysts’ estimates. Modern technology allows even very large corn-ethanol plants to run with comparatively few workers.

The consultants estimate that those 45 jobs and the total economic activity they represent would result in 1,418 jobs across the economy. That translates to 31.5 jobs for each job at the prospective ethanol plant¾a highly questionable multiplier. Unfortunately, the Growth Energy report provides none of the specific data and details about the model parameters and assumptions they used to produce their estimate. That makes it impossible to determine why the discrepancy between their results and those from independent analysts is so large.

Independent analyses show that the Growth Energy job creation estimates are likely 5 to 10 times too high (see Table 1) compared to similar analyses by independent, academic economists.

Table 1: Growth Energy Job Multipliers 5 to 10 Times Too High

The estimates from independent analysts consider economic impacts at the county- or state-level, whereas the Growth Energy study considers impacts at the national level. That could explain a small part of the wide discrepancy between independent analysts and the Growth Energy consultant. A December 2007 study by David Swenson estimates a national-level job multiplier of 5.26 for a U.S. ethanol industry producing 14.6 billion gallons a year and of 5.63 for a U.S. ethanol industry producing 29.1 billion gallons a year.⁶ Moreover, Mr. Swenson indicated that increasing the county or regional job multipliers by only one job would likely account for the extra jobs created in the national economy – still far lower than the multiplier used by Growth Energy. Using his model he determined that the extra 12 billion gallons needed to supply enough ethanol for a 15 percent blend with gasoline would create 38,850 jobs – 3.5 times fewer than Growth Energy’s job creation claims.⁷

In another March 2009 report, this one from the Iowa Department of Revenue, state officials sounded this warning about industry predictions regarding jobs created by corn-ethanol:

“Several papers have attempted to estimate the number of direct and indirect jobs created by the ethanol industry. There is a wide range of estimates for the number of indirect jobs created by the biofuels industry. On the high side, a 2008 report prepared by Urbanchuk for the Renewable Fuels Association (RFA) found that a 50 MGY plant creates 40 direct jobs and 578 indirect jobs, and a 100 MGY plant creates 50 direct jobs and 1,087 indirect jobs. On the low end, Swenson (2006) found that a 50 MGY plant creates 35 direct jobs and just 75 indirect jobs. The discrepancy is due to differences in assumptions made and consequently the estimated multiplier used. The actual number is likely modest and closer to Swenson’s estimate.”⁸

Cost Per Job

According to the Growth Energy consultants, current annual production of ethanol is 8.4 billion gallons per year. Supplying enough ethanol to achieve a 15 percent blend with gasoline would require annual production of 20.4 billion gallons, an increase in production of 12 billion gallons. The federal blender’s tax credit (VEETC) is $0.45 per gallon of ethanol. That means the additional 12 billion gallons needed to get to E15 would come at a cost to taxpayers of $5.4 billion every year.

The following table shows how much it will cost taxpayers every year in tax credits for each job produced by expanding corn-ethanol production to 20.4 billion gallons a year. The table shows the taxpayer cost or subsidy per job for direct jobs and for total jobs using multipliers estimated by independent economists using the multiplier used by Growth Energy.

Table 2: Cost to Federal Taxpayers of Each Corn-Ethanol Job Created.

• Direct jobs at the ethanol plants themselves come at a cost of $1.25 million each year.
• Using the multipliers in the previous table that were calculated by independent analysts, total jobs (direct, indirect and induced) come at a cost of between $195,000 and $446,000 per job per year.
• Even using the Growth Energy overestimation of job creation, those jobs come at a cost of $40,000 per year.

The February 2009 study commissioned by RFA indicates that hourly wages in the chemical industry were $19.56 in 2008, which works out to an annual salary of $40,600 at ethanol plants. Using the RFA estimate, this means that:

• Taxpayers fund 31 times the annual salary for each direct job created.
• Taxpayers fund between 5 and 11 times the annual salary for each total job created.
• Even using Growth Energy’s estimate of total jobs, the tax subsidy each year is equal to the annual salary of each worker in an ethanol plant.

What this shows is that subsidizing corn-ethanol is an inefficient way to create jobs, even using the industry’s inflated estimates.

Sarah Low and Andrew Isserman in a 2009 peer-reviewed study of the economic impact of corn-ethanol plants in Illinois published in the journal Economic Development Quarterly concluded that:

“The ethanol plant leads to 250 jobs under the most favorable assumptions for job creation in the most complex economy with the highest farmland values. …Its economic contributions are small enough to merit a careful look at the demands a plant would place on local services, infrastructure, and resources and to recognize the uncertainties that surround the ethanol industry and the viability of a particular plant.”⁵

References

¹ Hodur, N., F.L. Leistritz, and D. Senechal. Economic Impacts of Increasing the Ethanol Blend Limit. Report prepared for Growth Energy by the Windmill Group, LLC. March 4, 2009. http://www.growthenergy.org/2009/reports/03-05-09 Jobs Study.pdf

² Urbanchuck, J.M. Contribution of the Ethanol Industry to the Economy of the United States. Prepared for the Renewable Fuels Association by LECG LLC. February 23, 2009. http://www.ethanolrfa.org/objects/documents/2187/2008_ethanol_economic_contribution.pdf

³ Swenson, D. Input-Outrageous: The Economic Impacts of Modern Biofuels Production. Paper originally prepared for the Mid-continent Regional Science Association and the Biennial Implan National Users Conference, Indianapolis, IN. June 2006. http://www.econ.iastate.edu/research/webpapers/paper_12644.pdf

⁴ Swenson, D. Understanding Biofuels Economic Impact Claims. April, 2007. http://www.econ.iastate.edu/research/webpapers/paper_12790.pdf

⁵ Low, S. and A.M. Isserman. Ethanol and the Local Economy: Industry Trends, Location Factors, Economic Impacts and Risks. Economic Development Quarterly 2009: 23 (71). http://edq.sagepub.com/cgi/content/abstract/23/1/71

⁶ Swenson, D. Estimating the Future Economic Impact of Corn Ethanol Production in the U.S. December, 2007. http://www.econ.iastate.edu/research/webpapers/paper_12864.pdf

⁷ David Swenson, personal communication. November 30, 2009.

⁸ Jin, Z. and B. Teahan. Iowa’s Tax Incentive Programs Used by Biofuel Producers: Tax Credit Program Evaluation Study. Tax and Research Program Analysis Section, Iowa Department of Revenue. March 2009. http://mpra.ub.uni-muenchen.de/14795/