Let Wasteful, Redundant Ethanol Tax Credits Expire July 22, 2010

Background information about corn ethanol, including a discussion of its pros and cons, is contained in this separate post.

Oil has rightly dominated recent energy-related news coverage, but if you’ve been watching closely, you may have noticed that corn ethanol has crept back into the news hole.

Early last week, Sen. Amy Klobuchar (D-MN) introduced a bill (S. 3576) that is essentially a wish list from the corn ethanol industry; it is no surprise that the bill’s legislative text was available on the industry’s website before anywhere else.

Why is this bill being introduced now?  Because federal subsidies for corn ethanol – to the tune of $6 billion annually – are set to expire at the end of the year.

The main component of these subsidies is the “Volumetric Ethanol Excise Tax Credit” or VEETC: a $0.45 tax credit for marketers and fuel benders paid for each gallon blended with any ethanol.  “Small producers” get an additional $0.10 for their first 15 million gallons, and there is also a tariff on imported, foreign-produced ethanol.  This program began in 2005 as part of the Bush administration’s American Job’s Creation Act of 2004.

While propping up demand for corn ethanol helps the ethanol industry, this tax break largely benefits Big Oil: BP is one of the largest recipients of the VEETC, and is slated to claim about $600 million in corn ethanol credits this year.  It is estimated that over the program’s lifetime, $21 billion in credits have been funneled to Big Oil.

The Renewable Fuel Standard is doing a good enough job propping up corn ethanol demand. We don't need to throw more money at this unnecessary policy objective. Especially if that money is just going to BP.

Not only does this tax credit give even more money to oil companies, it is largely redundant.  The Renewable Fuel Standard (RFS) created in 2005 and expanded in 2007 mandates that American gasoline must include 15 billion gallons of ethanol by 2015 and 36 billion gallons by 2022.

The Center for Agricultural and Rural Development at Iowa State released a study about corn ethanol this week. According to that report:

“The Renewable Fuel Standard is the primary driver of ethanol demand. The tax credit prompts blenders to use about 900 million gallons of ethanol each year above mandated levels. This costs taxpayers some $6 billion annually (or almost $7 per gallon). Ending the subsidy would save that amount.”

We already have a government system propping up ethanol demand.  Why do we need two?  Heck, we shouldn’t even really need one; corn ethanol causes a whole host of environmental and social problems!

The corn ethanol industry has been around for decades.  It is mature and does not need a second layer of support.  This is an easy $6 billion/year of taxpayer money to save.

The corn ethanol industry claims that allowing the subsidy to expire could wipe out nearly 40% of the U.S. ethanol industry. Those not in the ethanol industry find that assertion dubious.

The Iowa State study refutes that claim.  NRDC’s Sasha Lyutse has a great post explaining the study.  These are her major summary points:

• Allowing the VEETC and import tariff to expire would have almost no impact on U.S. corn ethanol markets in 2011.
• If the purpose of the VEETC is to push ethanol consumption beyond mandated levels, the magnitude of the costs greatly outweighs any benefits.
• Eliminating the VEETC would not have major implications for U.S. employment and any jobs created by the VEETC come with at unacceptably high price tag.

In regard to the third point, the ethanol industry has issued alarmist claims that without this annual $6 billion in taxpayer money, 160,000 jobs will be lost.  Sasha finds that hard to believe when, according to the industry, the average corn ethanol plant employs only 45 people.  I tend to agree with her:

“Babcock [the lead researcher] finds that the decrease in U.S. ethanol production in 2011 caused by allowing the VEETC to expire would result in the loss of only 407 direct jobs. At a cost of nearly $6 billion, this is nearly $15 million per direct job.”

This report is the second major dose of reality to hit the corn ethanol industry in two week.  Lawmakers wanted to know what benefits American taxpayers really derive from the VEETC program, so Sen. Jeff Bingaman (D-NM) instructed the Congressional Budget Office (CBO) to conduct an analysis.

That report was released last week, and it was not good news for the industry.  The CBO report found that the VEETC rewards the corn ethanol industry for producing roughly the same amount of ethanol that they would produce without the subsidy because of the Renewable Fuel Standard.  According to the CBO, we’ve wasted $6 billion each year since 2005 and have no reason to waste another $31 billion the same way.

The argument against corn ethanol is strong.  In fact, the only argument for corn ethanol is a political one: corn producers have a lot of clout in the sparsely populated Midwestern states, which gives them outsized influence in the Senate.  Additionally, Iowa is a major corn producer, and because Iowa is the permanent location for the first presidential primary, opposing such a major demand of corn producers is political suicide for a presidential candidate.

But Bob Dinneen, president of the Renewable Fuels Association, knows the truth about why we environmentalists oppose this senseless subsidy: “a lot of the problem with the environmentalists is that they just don’t like corn…” Hey, I love corn.  It’s yummy. “…and don’t want it used for fuel.”  …There’s the ticket.  Using food for fuel is not a solution to any problem.

I hope that Congress can side with the American people on this issue and overcome the administration’s stated support for corn ethanol.