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Biofuel or Bust? Ethanol Subsidies Should be Dropped

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Biofuel or Bust? Ethanol Subsidies Should be Dropped

The long struggle to make ethanol a viable and relevant auto fuel in America got a boost recently from the Environmental Protection Agency, but allowing tax measures that artificially prop up the market to expire would have a far greater impact.

The EPA's recent ruling that 15 percent blends of ethanol (E15) can now be sold for automobiles built after 2006, an increase from the 10 percent blend currently used in most vehicles, should help Farm Belt corn growers. But the decision came amid considerable controversy.

Gas stations are wondering how they will afford costly new tanks and pumps for ethanol. Automobile manufacturers are concerned that they might be held liable if consumers accidentally use E15 in engines that cannot handle it.

A ruling for E15 use in vehicles made after 2000 is expected later this year.

The EPA decision will help the ethanol industry, though it isn't game-changing. What the industry is really fighting for is the extension of two significant protections: the ethanol blenders' tax credit called the Volumetric Ethanol Excise Tax Credit and a tariff on imported ethanol. Both measures are set to expire at the end of 2010, and they should be allowed to expire. Good riddance.

The tax credit is not given directly to ethanol producers, but to the much maligned oil companies that blend the ethanol into fuel. Just who exactly benefits from this tax credit is highly debated. ExxonMobil, a large blender, stated this fall that it believed the benefits flowed primarily to consumers through lower gas prices and would be fine with its expiration. If you believe that only consumers benefit, the tax credit is frivolous at best because the government is writing checks to subsidize gasoline consumption paid for by taxpayers.

It is also possible that ethanol producers benefit, directly or indirectly, from the tax credit. It would explain the millions of dollars spent pushing for its renewal. Indirectly, support for the tax credit might be part of a strategic plan to extend the tariff on sugarcane ethanol, a competitor to corn ethanol, from expiring at the end of the year. The existence of the tax credit provides support for this otherwise senseless tariff. Without a tariff, the tax credit could potentially subsidize foreign biofuel producers.

An end to ethanol subsidies

The road to a biofuel future has not been a smooth one. The two largest ethanol trade associations, Growth Energy and the Renewable Fuels Association, parted ways this summer over government support for the industry. Growth Energy abandoned the tax credit in favor of government investments in ethanol infrastructure and mandates that new vehicles be made flex-fuel compatible, meaning they can run on higher blends of ethanol. The Renewable Fuels Association continued to support an extension of the tax credit.

Having noticed their division might cause the industry to lose much of its government support, the two groups recently came to a compromise: They would just ask for everything — an extension of the tax support and government funding for infrastructure investments. Though they resolved their differences, neither group seems willing to admit that the industry has matured and can survive without taxpayer support, from which it has benefited for more than 30 years.

Outside the ethanol industry, support for its extension is essentially nonexistent. Environmental organizations, the meat and grocery industry, and anti-poverty groups have all come out against the ethanol subsidies. And despite the industry's claims of bipartisan support for ethanol legislation, few members of Congress outside of the Farm Belt are in favor of continued taxpayer support.

Claims are far-fetched

So what arguments are put forward in support of ethanol? The domestic ethanol industry has made a number of claims, few of which stand up to closer scrutiny.

The first is that the expiration of the tax credit will cause massive job losses. In a time of low economic growth and high unemployment, the prospect of even thinner payrolls is terrifying to voters. The ethanol industry has capitalized on this, claiming that job losses could exceed 100,000.

In reality, however, expected job losses are minimal because jobs in the ethanol industry are protected by the Renewable Fuels Standard. The standard, which mandates annual biofuel production, will remain in place and continue to increase over the next 10 years. Bruce Babcock, an agricultural economist at Iowa State University, recently completed a study concluding that potential job losses resulting from an expiration of the tax credit and tariff would be fewer than 500.

The second is that ethanol is an immediately viable alternative to gasoline and can compete only if given equal access to the market. Given the recent spike in corn prices, ethanol is again more expensive than gasoline when you account for the fewer miles per gallon ethanol provides.

And what the biofuel lobby is advocating for is anything but a level playing field. It has suggested that the government mandate all new vehicles be made flex-fuel compatible and requested billions of dollars in government infrastructure support.

Finally, it is beyond irresponsible to advocate keeping foreign ethanol out of the United States.

Sugarcane ethanol produced in Brazil is a much cleaner fuel and has been produced historically at a much lower cost. Brazil has a competitive advantage; sugar grows much easier in warmer climates south of the equator and yields more fuel per acre. Banning foreign imports of ethanol does little more than keep the domestic price of ethanol inflated.

I don't mean to overly disparage the industry. The ethanol industry continues to make significant productivity improvements and is finding new ways to use the residuals from production. It may one day prove itself as a useful fuel. But it should do this free of taxpayer money and without the support of protectionist tariffs on foreign energy sources.

Remember that no government mandate, no matter how stringent, can impose by fiat more efficient energy sources. And using tax money to gamble with new technology is not any government's strength.

Innovative technologies are best left to investors who, aside from being uninfluenced by lobbyists, face the loss of their hard-earned savings.