Ethanol Subsidies: Down But Not Out

At the end of last year’s legislative session, Congress let two of corn ethanol’s market-rigging policy gimmicks—the 45-cents-per-gallon tax credit (VEETC) and the 54-cents-per-gallon ethanol import tariff—tumble into history’s dustbin.

This was good news for taxpayers and consumers. The VEETC added $5-6 billion annually to the federal deficit and the tariff propped up domestic ethanol prices by blocking competition from Brazilian sugarcane ethanol.

The demise of the VEETC and tariff is the ethanol lobby’s first loss of corporate welfare benefits in more than 30 years. As the Wall Street Journal noted, “Congress created ethanol subsidies in 1978, expanded them in a 1980 bill, and then rinsed and repeated in 1982, 1984, 1988, 1990, 1992, 1998, 2004, 2005 and 2007.”

But not in 2011: Congress declined to renew the subsidies just two weeks before the caucuses in Iowa, where pandering to Iowa corn farmers had been a staple of American politics for decades.

Several factors converged to kill those once sacrosanct policies: the federal debt crisis, the Tea Party movement (an Iowa Republican poll found that caucus goers were more likely to support candidates who opposed ethanol subsidies), and research by Bruce Babcock of Iowa State University refuting ethanol lobbyists’ hysterical claims that terminating VEETC would destroy 112,000 or even 160,000 rural jobs. Only about 1,000 ethanol-related jobs would disappear over the next five years, Babcock estimated. Renewing VEETC would add $30 million to the national debt for each ethanol job “saved.”

Perhaps the key factor turning the tide against the ethanol lobby was the formation in 2010 of “No2VEETC,” a coalition of business associations, hunger and development organizations, agricultural groups, environmental groups, budget hawks and free marketers.

Green groups like Friends of the Earth, Environmental Working Group, and ActionAid USA, limited-government groups like Taxpayers for Common Sense, National Taxpayers Union and Competitive Enterprise Institute, and business groups like Grocery Manufacturers Association, National Turkey Federation and National Restaurant Association worked together to expose VEETC as a costly, polluting, food-price-inflating special-interest giveaway.

The coalition was also vigilant in opposing schemes to replace VEETC with Solyndra-like loan guarantees for construction of ethanol pipelines and tax credits for installation of pumps to sell E-85 (motor fuel made with 85% ethanol) at service stations.

The final critical ingredient was the emergence of legislative champions, such as Representatives Jeff Flake (R-AZ), Joseph Crowley (D-NY), Bob Goodlatte (R-VA), Earl Blumenauer (D-OR), Wally Herger (R-CA), and Pete Stark (D-CA), and Senators Tom Coburn (R-OK) and Dianne Feinstein (D-CA), who worked across party lines to end VEETC and oppose pipeline and blender pump subsidies.

The really good news is that the most coercive ethanol policy—a Soviet-style production quota called the “renewable fuel standard” (RFS), a.k.a. the ethanol mandate—is now vulnerable to political challenge.

Created by the 2005 Energy Policy Act (EPA) and expanded by the 2007 Energy Independence and Security Act (EISA), the RFS establishes a guaranteed market for ethanol producers, forcing refiners to blend and consumers to buy ethanol whether they want to or not.

Under EISA, sales of renewable fuels are to increase from 9 billion gallons in 2008 to 36 billion in 2022, of which 16 billion gallons are to be “cellulosic”–ethanol made from wood chips, prairie grasses and other fibrous plant matter. Ethanol from corn maxes out at 15 billion gallons in 2015. But cellulosic is proving to be a spectacular flop, and the ethanol lobby is pushing to have corn ethanol qualify as “advanced” biofuel to take up the slack.

Many of the reasons persuading Congress to drop the VEETC and tariff apply in spades to the mandate. The mandate diverts massive quantities of corn from food to fuel production, making food more costly for the world’s poorest and hungriest people. It inflates U.S. corn prices, undercutting the competitiveness of U.S. cattle, hog and poultry producers. It ramps up production of water-and-fertilizer-intensive corn, expanding aquatic “dead zones” in the Gulf of Mexico and the Chesapeake Bay. It induces land-use conversions that can increase net greenhouse gas emissions.

By expanding supply relative to demand, the mandate has pushed the per-gallon price of ethanol below that of regular gasoline.

Nonetheless, gasoline is still a better buy, because ethanol contains one-third less energy by volume. According to the American Automobile Association’s Daily Fuel Gauge, for example, on Jan. 16, 2012, the mpg-adjusted price of E-85 was $4.014/g—higher than regular gasoline ($3.387), premium ($3.663), and diesel ($3.871).

Even more telling, according to, a Web site jointly administered by the Department of Energy and EPA, flex-fuel vehicle owners will spend up to $750 a year more for fuel if they fill up with E-85 rather than regular gasoline.

Reporters, debate moderators and citizens who want to have some fun in the silly season should ask presidential and congressional candidates: If ethanol is such a great bargain, why do we need a law to make us buy it?