Continuation of policy support for the U.S. corn ethanol industry will depend upon the
greenhouse gas (GHG) effects of the industry, and its economic viability. The
environmental and economic performance of ethanol plants is determined by the
productivity of new technologies and, in addition, by the efficiency with which
technologies are used (technical efficiency) and output and inputs are combined
(economic efficiency). This study estimates the technical and economic efficiency of
seven recently‐constructed ethanol plants in the North Central region of the US during
2006-2007. It uses nonparametric data envelopment analysis (DEA) and investigates
both the drivers and implications of inefficiency differentials. In terms of drivers, results
are consistent with the hypothesis that economic (profit) efficiency of productive units
tends to be positively correlated with their size. Regarding implications results show that,
on average, the maximum feasible reduction in Greenhouse Gases (GHG) emissions that
can be achieved by these ethanol plants, when comparing across plants, is very limited
(7,769 milligrams). We calculate that, by eliminating inefficiency, plants can achieve a
17% increase in returns over operating costs per gallon of ethanol produced, or about 12
cents a gallon. Therefore, plants can potentially increase their returns improving their
economic viability. By enhancing economic viability, public policies can profoundly
affect survival of this industry.
