I passed by the gas station earlier today and they had a big sign up saying something like, "Save the world! Use ethanol fuel!" It made me wonder, does ethanol fuel actually help the environment? I decided this is the subject of a slightly scientific inquiry (by slightly scientific I mean not very scientific, but whatever).
First off, let's take a rate of increase of CO2 in the atmosphere, r. If ethanol burns cleaner than gasoline (according to Wikipedia it does) then there will be a decrease in r: Δr1 < 0. However since it is not pure ethanol being burned and simply an additive to gasoline, Δr1 would not be as large as it would be if it were pure ethanol being burned.
So from this first glance, ethanol is good for the environment (assuming a reduction in the r is good). However let's dig into the economics a little bit. If ethanol burns cleaner than gasoline and the price isn't that high in comparison, it will increase demand for ethanol. This is a demand shift, which results in an increase in both the equilibrium price and quantity. So price of ethanol increases. This now causes an increase in supply, because ethanol is now more profitable. This causes an increase in demand for the inputs of ethanol, which at this point in time is mainly corn. So the price of corn will increase too.
There are many effects of an increase in the price of corn, two of which I will look at. The first is that the quantity supplied will increase. This requires more land to grow the corn on. While a good chunk of this is done in the US and the EU from subsidized farmers, another good chunk is done in Brazil and other places where there is a lot of forest. The forest gets cut down to make room for cornfields. Since forest is one of the big things that reduces CO2 in the air, we will end up increasing r by chopping down forest: Δr2 > 0. This is probably not a big number, but is there nonetheless and changes the net effect on r.
Another effect is, well the increase of price in corn. How many people eat corn worldwide? Also an increase in the price of corn will increase the price of corn alternatives (price of corn increases, people want to buy alternatives, increase in demand for alternatives, increase price of alternatives). That will impact people who don't even eat corn!
This second effect is why I find that people who want to both save the rainforest and save the starving kids in Africa can't really get both of what they want. Due to scarcity, these two causes are often at odds with one another. We can make things better for the environment, at the cost of social welfare, or we can increase social welfare at the cost of the environment.
One more thing to look at is something like moral hazard. Here is where incentives come in. The issue here is that since ethanol burns cleaner, people may feel less guilty about driving. So they drive more, offsetting some reduction in r that they may have added by using ethanol instead of pure gasoline. It may or may not be a concern, but it is still something to think about. So this means that Δr1 is larger (read: less negative) than we originally thought above and could even be positive.
Let's take a look: net effect Δr = ΣΔri
Since all the changes could be positive, it is possible that the net effect could be positive. However making a guess at the values of the Δrs, I'll say that the net effect is negative, but not that negative. Using ethanol may reduce r, but it is not as much as you would think from an initial look at the problem. Furthermore it may not actually make r negative, which would be necessary to offset any damage humanity may have done.