Efficiency of New Ethanol Plants in the U.S. North-Central Region

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.