how is root beer fermented without producing ethanol? or does it?

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It does produce ethanol. If you're talking about naturally carbonating, the amount is pretty minimal...I would guess similar to the amount that's present in a vanilla milkshake made with vanilla extract. If you let it keep going (instead of chilling after proper carb is reached) you could get fairly high alcohol levels...although I think it'd probably taste like crap...likely cidery.
 
I've made soda in a two liter bottle using active dry baking yeast and 1 cup sugar. The instructions for the recipe stated that if you let it ferment until the soda bottle is hard (roughly 3 days at room temperature) and then cold-crash it, it would only have .5% ABV, if even. I think if I were to make an alcoholic root beer I would ferment water and sugar using a yeast you would use for a sweeter beer, then after fermentation I would add root beer extract and lactose to sweeten and then go through my normal bottling routine.
 
Short answer...it isn't...but your kids would be vomiting from consuming so much root beer before they ever got a decent buzz off it.
 
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