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Kernel-nomics: Big Ethanol's Inflated Job Claims

Monday, November 30, 2009

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

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