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

Study finds elimination of 'blender's credit' would have little market impact and save taxpayers billions

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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.

“Elimination of the tax credit would shift the burden of meeting mandates from taxpayers to blenders and consumers. Taxpayers would save more than $6 billion through elimination of the tax credit, or almost $7.00 per gallon of ethanol produced in excess of mandated amounts,” the study said

Further, Babcok said that “no more” than 300 jobs would be lost if the VEETC is eliminated.

In a sharp rebuttal, agricultural economist John Urbanchuk refuted that claim. He said that the incentive would cut domestic ethanol output by 38 percent, threatening 112,000 jobs and exporting a potential growth industry abroad.

Some of the big media, at least, aren’t being swayed. In the wake of the CBO and Iowa studies, the New York Times, the Washington Post, the Wall Street Journal and the Chicago Tribune  – in ethanol’s home ground of the Midwest  – called on Congress to end the subsidy. 

“Biofuels have always sounded better during the Iowa caucuses than they have performed in reality,” the Chicago Tribune wrote.

For environmental groups, the VEETC is nothing more than a giveaway to big oil. They claim the tax credit has funneled $21 billion into oil firms.

BP, the fourth largest U.S. ethanol blender, could end up getting $600 million this year from the subsidy, according to reports.

“When [lawmakers] finally sat down to say, ‘Okay, where do we find the money to extend this,’ it became hard to justify spending that much money on something that clearly has no benefits,” Bell said.

Industry Feels the Heat 

The signs are that the industry is feeling the pressure.

Growth Energy, a lobby group, which had recenlty launched a first-ever $2.5 million television ad campaign aimed at boosting corn ethanol’s battered image, changed its tune from a long-term extension of the credit to a gradual phase outthat woud redirect the funds into ethanol infrastructure, such as pumps and pipelines.

“They’re facing pressure from all across the spectrum — from environmental groups to the Grocery Manufacturers Association to some livestock producers to conservative tax groups,” Bell said. “There’s really not anyone other than the corn ethanol industry that likes this.”

Even biofuel companies are dropping support. Gene Edwards, an executive vice president at Valero Energy, the Texas-based oil refiner and nation’s no. 1 ethanol producer, called the subsidy “almost irrelevenat,” during an earnings call this week with investors.

“You would not see blending down one barrel because of the credit being gone,” Edwards said.

But that doesn’t mean it’s final demise is a guarantee.

“There are certainly opportunities that Congress can still move it before the year,” Bell said, adding, however, that “it’s getting increasingly difficult given the midterm elections.”

Reid is expected to declare early next week that no amendments would be allowed to his energy bill. The nomination of  Elana Kagan to the Supreme Court and Congressional elections will take over in the fall.

Bell said the most likely chance of VEETC’s extension is an 11th hour tax-extender bill before year-end.


See also:

Battle Over Extension of $31Bn Corn Ethanol Subsidy Heats Up

Ethanol Production Follows the Subsidies

Will Extending the Ethanol Tax Credit Slow Progress Toward Advanced Biofuels

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Algae Emerges as DOE Feedstock of Choice for Biofuel 2.0

Airlines Could Be Flying on Biofuel Within 5 Years