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Big ethanol is using bad jobs numbers to push bad tax credit

Nathanael Greene

Posted April 6, 2010 in Moving Beyond Oil, Solving Global Warming

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Big ethanol has gone into high gear lobbying for the extension of the Volumetric Ethanol Excise Tax Credit (VEETC). This article summarizes the basics. At the top of their list of dire warnings are claims that allowing the subsidy to expire at year end will hurt domestic ethanol producers and spell major U.S. job losses. But these predictions of gloom and doom don’t hold water. Not only does the VEETC support little marginal ethanol production above and beyond the Renewable Fuels Standard, but job creation claims being touted by corn ethanol industry groups like Growth Energy and the Renewable Fuels Association (RFA) are hugely inflated. Finally—and I’ll come back to this later and in future blogs—we can get a lot more domestic green jobs using the $30+ billion that a 5 year VEETC extension would cost U.S. taxpayers in smarter ways.

I’ve written before about how the VEETC is redundant when we have the RFS, which already requires oil companies to buy and blend to 12 billion gallons of ethanol into our gasoline this year and 15 billion gallons in 2015. The industry counters that the oil companies buy more corn ethanol than the RFS requires because of the VEETC and that without the VEETC and the tariff that keeps the VEETC dollars at home, U.S. corn ethanol would have to compete with international ethanol. Neither of these claims particularly plucks at my heartstrings, but if this is what the industry thinks tax payers should pay for, why on earth should we subsidize every single gallon? Why pay the old, fully amortized plant the same amount as the new plant creating construction jobs and struggling to pay off debt? I calculated the cost of marginal ethanol production driven by the VEETC at $4.18 per gallon. The VEETC, which pays oil companies $0.45 per gallon to buy any old ethanol, has to be the least cost-effective way to get just about anything you might want to get from the biofuels industry. Unless you’re just trying to line the pockets of the oil companies and big ethanol.

Beyond the redundancy and inefficiency of the VEETC, the industry is also making ridiculous jobs claims. Estimating the jobs impact of investment in any industry is difficult, but it is particularly difficult in an industry like ethanol, for which well-established industry-specific “job multipliers” are not readily available. Job multipliers take into account three distinct effects of investment: direct jobs created at a new ethanol plant; indirect jobs created in industries that supply the materials needed to produce the ethanol; and induced jobs, which are generated when those new workers spend their earnings. Only the first of these categories is based on ground up data. The other two are calculated by multiplying the first by a job multiplier, so is easy to see how even a slightly over-optimistic multiplier can easily inflate estimates of indirect job creation in the broader economy and, conversely, how assumptions about job multipliers can easily be manipulated to make outlandish claims about job creation.

For an example, we need look no further than this Growth Energy study, which estimates that an average 100 million gallon per year (mgy) ethanol plant will generate 1,417 jobs across the national economy. Given Growth Energy’s own assumption that such a plant would only require approximately 45 employees, this implies that for every worker directly employed at an ethanol plant, a whopping 31.5 additional new jobs are created across the economy!

Growth Energy uses off-the-shelf Bureau of Economic Analysis (BEA) multipliers to estimate the jobs created as initial expenditures for the construction of a single 100 mgy ethanol plant ripple through the economy. However, while the total impact of a corn-ethanol plant on the local or national economy is based on how much economic activity is generated in the businesses that supply everything needed to produce the final product, as Craig Cox points out in his piece on Big Ethanol’s Inflated Jobs Claims, estimating a credible job multiplier to fit the unique input requirements of the corn ethanol industry would involve additional, industry-specific analysis and careful adjustments to existing BEA multipliers:

“The BEA collects no data specific to the [corn ethanol] industry. In BEA’s data and its multipliers, corn-ethanol is subsumed under the much larger “organic chemicals” category. Taking off-the-shelf multipliers for organic chemicals and using them to analyze the corn-ethanol industry, as Growth Energy does, leads to inflated estimates of job creation that don’t stand up to independent analysis.”

And here’s the great twist on these numbers: many of the jobs claimed by the industry are associated with the key input, growing corn. RFA trumpets this supposed job creation loud and clear in this 2009 study. But when it comes to concerns about the supply of food and emissions from land-use change, the industry is fast to disavow these same jobs, claiming that it has little or no impact on the market for corn products. If we are to accept the ethanol industry’s own arguments on ILUC, then it is bogus for RFA to take credit for the creation of the industry’s up-stream supply linkages and any associated jobs—big ethanol simply cannot have it both ways.

The reality is of course more complicated. Neither of the industry’s extreme claims (all the jobs, but none of the land impacts) is right. A lot of the feed value is preserved through the distillers grains and would have been there for corn farmers even in the absence of a corn ethanol industry (by some estimates, fully 2/3rds to 3/4ths of the jobs were already there). But US farmers would have been growing crop any way thanks to domestic agricultural subsidies and just exporting more than we do today. Thus if there’s any significant job creation in agriculture, it’s probably internationally where farmers are trying to make up for the higher level of exports our farmers would have been able to supply.

At $0.45 per gallon of ethanol the VEETC will cost taxpayers nearly $5.4 billion this year—money that could be better spent on emerging and more competitive energy technologies with greater potential to create the green jobs we need. Scarce taxpayer dollars should be allocated across competing resources on the basis of sound analysis about potential economic gains, not exaggerated industry claims about job creation. A greener, technology-neutral biofuels tax credit, such as I’ve written about before, would pay domestic renewable fuel producers for real environmental performance, speed the transition to advanced biofuels that can make a real contribution to our energy security and thus do more to generate both reinvestment and new investment than the current VEETC. A cleaner environment, more security and more jobs! That’s a smarter way to use tax payer money. (Stay tuned for more on the jobs benefits of a greener biofuel tax credit in upcoming posts.)

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Comments

Ron SApr 6 2010 04:47 PM

Nathanael,

Good post, but you missed an important part of Urbanchuk's analysis for the RFA: in order to arrive at his estimate of 112,000 job losses, he assumed that, in the absence of the VEETC and an import tariff, there would have been 4 billion gallons less produced in 2009. But that, of course, ignores the fact that there was a Renewable Fuels Standard which would have prevented such a sharp reduction. By contrast, the FAPRI projections looking forward suggest that domestic production of biofuels without the VEETC and the import tariff would be only 1.4 billion gallons a year less over the 2011-15 period than they would be with the continuation of these policies. (And in both scenarios, domestic production of corn-ethanol continues to grow). So, even assuming Urbanchuk's approach is correct (which I do not), the gross "job-difference" figure that the RFA should be claiming would be on the order of 42,000, not 112,000.

Of course, such an approach assumes that none of those people would have been able to find jobs elsewhere in the economy, which is a rather heroic assumption.

But lets, for the sake of argument, take the 42,000 figure as valid. Divide $6.75 billion a year (the average paid out through the VEETC under FAPRI's projections with a continuation of the VEETC and import tariff) by 42,000 and that works out to over $160,000 per job "created" per year -- or 4 times the nation average salary.

As the saying goes, nice job if you can get it!

Ron

Ron SApr 6 2010 04:53 PM

Correction -- I rounded downwards: the FAPRI numbers show 1.5 billion a year less produced domestically, not 1.4 billion a year less. But the calculations are still correct (112* 1.5/4.0 = 42).

LeroyApr 6 2010 09:54 PM

The ethanol industry claims that ethanol is significantly reducing our dependence on foreign oil. Annual U.S. corn ethanol production is currently about 12 billion gallons and is projected to increase to 15 billion gallons. Ethanol produces about two-thirds as many miles-per gallon as gasoline; therefore, 15 billion gallons of ethanol can effectively replace only 10 billion gallons of gasoline.

Ethanol production consumes significant amounts of energy. This includes the fossil fuels used to produce fertilizer, power farm equipment, and process corn into ethanol. Estimates of the actual amount of energy contained in corn ethanol compared to the energy used to produce it generally range from less than 1 to 1 to as high as 1.67 to 1. Even at the higher 1.67 to 1 ratio, 9 billion gallons of the 15 billion gallons of ethanol to be produced would be required to replace the energy used in production. The remaining 6 billion gallons of ethanol could effectively replace about 4 billion gallons of gasoline or about 3.3% of the estimated 120 billion gallons of gasoline used annually in the U.S.

The oil reserves in Alaska’s Arctic National Wildlife Refuge (ANWR) are estimated at 4.3 billion barrels or more. While this amount of oil is insignificant in comparison to our overall energy consumption, it dwarfs the amount of energy gained by converting massive amounts of food into ethanol. Each barrel of oil yields about 19 gallons of gasoline, 9 gallons of diesel fuel and several gallons of heating oil, jet fuel and other petroleum products. The 81 billion gallons of gasoline produced from 4.3 billion barrels of oil would replace the energy gained from producing 15 billion gallons of corn ethanol per year for 20 years. Some estimates of the ANWR oil reserves are as high as 16 billion barrels or enough gasoline to replace the energy gained from ethanol production for almost 75 years.

The ethanol lobby claims that ethanol holds down the price of gasoline. The wholesale price of ethanol is currently around $1.55 per gallon compared to $2.20 per gallon for wholesale gasoline. However, since ethanol achieves only two-thirds the mileage of gasoline, it should sell for two-thirds the price of gasoline or only about $1.47 per gallon. To replace a gallon of gasoline with ethanol, consumers pay for 1.5 gallons of wholesale ethanol, 25 to 50 cents per gallon retail markup on 1.5 gallons, and taxes to offset the 45 cents per gallon blender tax credit on 1.5 gallons of ethanol for a minimum total of about $3.40. Is that holding down the retail price of gasoline which is around $2.60?

Some experts estimate that the world has one billion hungry people. The 280 billion pounds of corn needed to produce 15 billion gallons of ethanol equals 280 pounds of corn per person for one billion people. U.S. chicken producers can convert less than two pounds of feed into a pound of chicken. The 280 billion pounds of corn could be used to produce 140 pounds of chicken per person for one billion people. Are we willing to let one billion people go hungry while we use such massive amounts of food to make an insignificant high-priced addition to our fuel supply?

Ethanol advocates claim that using corn to produce ethanol does not cause significant increases in food prices. They especially like to remind us of how little of the cost of a box of corn flakes is attributable to the corn content. Pilgrim’s Pride, a large U.S. chicken producer, filed for bankruptcy protection in late 2008. A major contributing factor was an increase of almost $1 billion per year in its feed costs. Producers of other animal proteins such as pork, beef, milk, and eggs have also suffered from increases in feed costs. These producers, out of absolute financial necessity, have significantly reduced production in an effort to force food prices high enough to offset their increased feed costs.

What demands will the production of 15 billion gallons of corn ethanol and the planned production of 20 billion gallons of cellulosic ethanol make on available crop land and fertilizer supplies (nitrogen, phosphorus, and potash) needed to replenish plant nutrients in the soil? World fertilizer prices have shown wide fluctuations since 2005 when the Government mandated the increased use of corn ethanol. The production of nitrogen fertilizer requires large amounts of natural gas. Phosphorus is produced by mining phosphate rock, and potash is produced from mineral salts obtained primarily from deep mines. While the U.S. has ample supplies of natural gas and phosphate rock, it has relatively small known reserves of potash and imports large quantities from Canada. Does the U.S. have the resources needed to indefinitely produce great amounts of crops for ethanol production while preserving the resources that will be needed by future generations to produce food?

A recent study commissioned by the ethanol industry concludes that the elimination of the tax credit would cause a 38% drop in ethanol production and reduce household income by $4.2 billion. The $4.2 billion decrease in household income could be more than offset by decreasing taxes on households by the amount of the $5.4 billion in tax credits currently granted to blenders for using ethanol. The study is available at:
http://www.ethanolrfa.org/objects/documents/2790/importance_of_veetc_to_the_u.s._economy_and_the_ethanol_industry.pdf

The ethanol lobby warns of the loss of a great number of jobs if ethanol production is cut. The study cited above states that ending the tax credit could cause the loss of more than 112,000 jobs. Ethanol production is not labor intensive. The typical 100 million gallon per year ethanol plant hires fewer than 50 people. The current production of 12 billion gallons of ethanol could be accomplished by 120 plants hiring fewer than 6,000 people. A reduction of 38% in that workforce would be approximately 2,280 people. How does the loss of 1 job put 48 other people out of work? Hopefully, some of those lost jobs include chain-saw and bulldozer operators employed in converting forest into crop land, engine mechanics repairing the damage done by ethanol, and grave diggers burying those who have starved. Pilgrim’s Pride has reduced its workforce from about 55,000 to 41,000 since it began struggling with higher feed costs. Did those 14,000 job cuts result in the elimination of 672,000 other jobs?

The $5.4 billion tax credit represents $900,000 for each of the 6,000 people needed to produce 12 billion gallons of ethanol. It represents $48,000 per person for each of the total 112,000 people who would lose their jobs according to the claims of the ethanol industry. That is not a one-time credit that creates a lasting job but is given each and every year. This seems to be a terribly expensive way to create jobs. The elimination of the tax credit would mean that big oil companies would be paying $5.4 billion more in taxes every year that could replace an equal amount of the tax burden now shouldered by low and middle income taxpayers. The additional spending by those taxpayers is likely to provide a greater economic contribution than would additional profits for big oil companies and dividends for their stockholders.

As demanded by the ethanol lobby, the EPA will almost certainly approve the sale of 15% ethanol blends for most if not all engines sometime this year. The ethanol lobby claims that science shows that ethanol blends higher than the currently allowed 10% will not harm engines. Many mechanics, engineers and manufacturers do not share that confidence. Automobile manufacturers have not agreed to honor warranties for vehicles using the higher blends, nor have the U.S. Government or the ethanol industry stepped forward to offer protection for consumers against possible damage.

Even with Government subsidies since 1978, the ethanol industry has not significantly increased the U.S. fuel supply nor has it achieved economic viability without subsidies and protective tariffs. While ethanol producers should have the freedom to produce and sell their product, the U.S. Government should not dictate the diversion of massive quantities of food to the production of expensive low-quality fuel. Let’s stop the mandates and subsidies and let the fate of ethanol be decided by the marketplace. Consumers should have the opportunity to make their own buying decisions rather than having those decisions made for them by the U.S. Government and the ethanol lobby that seems to exert such great influence on that Government.

tom koehlerApr 7 2010 02:57 PM

Looks like Big enviros are out of touch. How come you don't spend anytime or energy going after big oil's subsidies which dwarf the subsidies that renewables like ethanol, wind and solar get? Why are you trying to pick winners and losers among renewables? we need them all.
How come you don't recognize the oil displacement and carbon reductions that today's current ethanol from corn is providing? Reductions by the way that are recognized by both ARB and EPA in spite of the dubious policy of iluc. As a life long environmentalist and supporter it really makes me scratch my head and wonder... what has happened to Big enviros?

Ron SApr 7 2010 04:40 PM

@Tom Koehler: And why are you trying to question the integrity of the messanger instead of addressing the message?

You are also being presumptuous in asking how come "big enviros" don't soend "any time or energy" going after big oil's subsidies. They certainly are.

But since you are asking questions, how come the ethanol industry doesn't spend more time lobbying for a carbon tax, or for higher taxes on gasoline, instead of devoting so much energy lobbying for a subsidy that isn't needed (given that it already has the RFS), and would still be expensive (per incremental gallon of production or use generated) as a way to reduce carbon even if it produced ZERO net carbon emissions. (See Nathanael's previous posting on the VEETC.)

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