Corn Ethanol Subsidy Under Siege from Many Quarters, Renewal in Question

Efforts to continue a lucrative tax subsidy for the corn ethanol industry, a longtime golden child in Washington, are failing in the face of mounting evidence that it may not be worth the money.

The 45-cent-per-gallon credit, which is set to expire in December 2010, didn't make it into Senate Majority Leader Harry  Reid's (D-N.V.) skeletal oil spill and energy bill this week. Earlier legislation would have preserved the subsidy for five years at an annual cost of up to $6 billion.

The current House counterpart in the Ways and Means Committee sponsored by Rep. Sander Levin (D-Mich.) would keep it around for just one year at 36 cents per gallon.

But even a single-year extension could fail as the subsidy comes under unprecedented siege from all quarters.

"It's becoming increasingly unlikely," Brendan Bell, a senior Washington representative for the Union of Concerned Scientists (UCS), told SolveClimate News.

In particular, two new studies circulating in Congress are stirring up concern that the volumetric ethanol excise tax credit (VEETC) — called the "blender's credit" – is not so helpful after all.

2 Studies, 1 Corny Idea?

The credit gives oil companies $0.45 for each gallon of ethanol they blend with gasoline. It went into effect in 2005 under the Bush administration's American Jobs Creation Act.

A report in mid-July by the non-partisan Congressional Budget Office (CBO) said the subsidy is something of a boondoggle in part because a gallon of ethanol delivers two-thirds the energy content of a gallon of gas.

"Because 1.48 gallons of ethanol are required to provide as much energy as a gallon of gasoline, the 45 cent credit for each gallon of ethanol is equivalent to paying blenders 67 cents for each gallon of gasoline that ethanol displaces," it said.

In all, taxpayers pay $1.78 for every gallon when fuel is made from corn, CBO said.

The study was carried out at the request of Sen. Jeff Bingaman (D-N.M.), chairman of the Senate Energy and Natural Resources committee. In response to the results, Bingaman, a long-time ally of corn ethanol producers, called for a "critical" examination of the tax credit's renewal.

"The VEETC will cost the American taxpayer $7.6 billion this year alone," Bingaman told the Associated Press. "That high price tag makes the VEETC by far our Tax Code’s largest subsidy for renewable energy. And this annual price tag comes on top of the $41.2 billion in current dollars that U.S. taxpayers have already spent since 1980 on tax-based subsidies for ethanol."

A study by Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University, drew a similar conclusion.

He found that if the tax credit is eliminated it would "impact markets modestly" while saving the nation billions. Ethanol production would drop by an average of about 700 million gallons in 2011, the study said. But producers would still churn out 14.5 billion gallons by 2014, driven by mandates under the Renewable Fuel Standard (RFS), which took effect on July 1.

The RFS requires the ethanol industry to mix 15 billion gallons of ethanol into the nation's gas supply in 2015 and 36 billion gallons by 2022. Blenders are slapped with federal fines if they fail to oblige.