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Nathanael Greene’s Blog

Corn ethanol tax credit: most expensive way to create jobs ever?

Nathanael Greene

Posted April 7, 2010 in Moving Beyond Oil, Solving Global Warming

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Today, in yet another example of ethanol industry spin, the Renewable Fuels Association released a state-by-state version of its highly inflated jobs study. This is just another part of big ethanol’s effort to make the case for extending the Volumetric Ethanol Excise Tax Credit (VEETC)—a massive, taxpayer-funded subsidy for corn ethanol—on top of both blending mandates under the Renewable Fuels Standard (RFS) and stiff border tariffs to protect domestic ethanol producers from foreign competition. I wrote yesterday about some of the reasons why the industry’s jobs numbers are way off, but given RFA’s release, it seems worth getting into more of the details.

There are three basic points here:

  1. Inflated jobs multipliers: As I discussed yesterday, big ethanol is using wildly inflated job multipliers. For every direct job created at an ethanol plant, the industry group Growth Energy is claiming 31.5 additional new jobs are created throughout the economy. For studies that try to be realistic and specific about jobs in the ethanol industry, a multiplier of about 6 is aggressive. A job multiplier of 3-4 is much more realistic, especially since big ethanol claims to have little to no impact on food and feed production or prices and therefore cannot take credit for somehow magically creating thousands of corn growing jobs that would have existed anyway.
  2. Inflated economic impact: To get to their inflated jobs numbers, big ethanol is also claiming that it will take a big economic hit from the loss of the VEETC and the associated import tariff. Unfortunately, they play fast and loose with the economics. (To get close to their numbers you have to assume that the industry is wildly uneconomic.) More on this below, but adjusting their numbers for a bit of reality and the hit is half to one quarter of what they claim. Estimates from the Food and Agricultural Policy Research Institute (FAPRI) come in at about a quarter. That means the direct jobs impact is 1/4 of industry estimates even before we get to a more realistic jobs multiplier.
  3. Just about any other use of $31 billion would create more jobs: If we start with a more realistic economic impact and the resulting, much smaller direct jobs impact and then use a more realistic jobs multiplier, we end up with a job impact of about two thousand. A five year extension of the VEETC will cost over $31 billion in taxpayer dollars. That means using the VEETC to keep about two thousand people employed for the next 5 years will cost of about $2.5million per job per year. I’ve written about NRDC’s proposal for a Greener Biofuels Tax Credit and obviously believe that would create more jobs, more security and more environmental benefits, but the reality is just about anything would be more cost effective than simply extending the VEETC in its current form.

So now to some of the wonky numbers behind points 2 and 3 above. The analysis in RFA’s study starts with the claim that if the VEETC and tariff expire, the price of ethanol will drop by the full $0.45 per gallon value of the VEETC. The premise here is that industry has fully internalized this incentive and so their marginal costs fully reflect it. For this to be true we have to accept the notion that corn ethanol is wildly uneconomic and needs this $0.45 simply to survive—meaning that neither the industry nor the oil companies are profiting at all at the taxpayers’ expense. While big ethanol likes to claim that its margins are razor thin, this implies that we’ll have to subsidize them forever. A more realistic assumption is that the oil companies are pocketing most if not all of the VEETC value. After all, the demand and supply have been a bit above the RFS mandated levels every year, which means the oil companies are setting the demand level and thus the price levels. Big oil gets to keep big ethanol’s prices low and keep the VEETC as profit.

This is a key assumption because the initial price hit of removing the VEETC triggers shifts in demand, which trigger further shifts in price and thus supply based on elasticities of supply and demand. The net result is a smaller change in the price and supply of ethanol.

[Since I had to remind myself, here’s a quick refresher on elasticity of demand and supply: the former refers to how demand in the market for a good changes in response to changes in price, whereas the latter refers to changes in the supply of the good as a result of price changes. When demand is perfectly inelastic, even large changes in price will not cause a decrease in demand. Perfectly inelastic supply—i.e. supply that is fixed no matter what the price—means that regardless how high a price people are willing to pay, no more supply of a specific good will be produced].

RFA notes that the elasticity of demand for ethanol, as with gasoline, is relatively inelastic, with fairly consistent published estimates (between -0.37 and -0.43, meaning a 10% decline in the price of ethanol would result in a 3.7 to 4.3% increase in demand). In the case of the elasticity of supply, however, the range of published estimates is much wider: from 0.37 on the low end to 4.0 on the high end. This large a discrepancy in estimates should prompt further discussion or perhaps the use of ranges and/or scenarios in an analysis such as RFA’s. Instead, RFA chooses the dubious route of simply averaging available supply elasticities to arrive at a magic estimate of 1.375 (meaning that a 10% decline in ethanol prices would result in a much higher 13.8% decline in production).

The results of their full calculation can be seen in this table from RFA’s study:

clip_image002

Combining this averaged elasticity of ethanol supply with their earlier assumption that removing the VEETC would cause a $0.45 per gal drop in the price paid to ethanol producers, RFA estimates that producers will see a net drop in ethanol prices of 37 per gal or 22.5%, forcing them to cut supply by nearly 38%.

If we repeat RFA’s calculation with more modest assumptions—a $0.225 per gal drop in the price of ethanol with the removal of the VEETC (half the VEETC value assuming that the other half goes into the pockets of the oil companies) and lower-end estimates of the elasticity of supply to changes in ethanol prices (0.37 to 0.75)—the result is ethanol prices that are only 7 to 12% lower without the VEETC and a reduction in supply of only 5 to 10%.

Base Ethanol Price (cts/gal)

164

164

Price change with removal of VEETC (cts/gal)

-22.5

-22.5

Net Ethanol Price (cts/gal)

141.5

141.5

Percent Change

-13.7%

-13.7%

     

Ethanol Demand Elasticity

-0.43

-0.43

Potential Change in Ethanol Demand

5.9%

5.9%

Ethanol Supply Elasticity

0.37

0.75

Potential Change in Ethanol Production

-5%

-10%

Price Elasticity of Ethanol Supply

-0.37

-0.75

Increase in Price from Reduced Production

1.9%

7.7%

Net Change in Ethanol Price

-12%

-6%

Ethanol Price after VEETC Removal (cts/gal)

144

153

Tellingly, the results of the FAPRI study that I wrote about a few weeks ago fall right into this range. In the FAPRI analysis of what would happen if the VEETC and tariff both expired, domestic production of corn ethanol still increases in every year, but between now and 2015, it grows by about 10% less than the baseline. The price also drops by $0.19 per gallon or 10% from the baseline.

So, what happens if the supply only changes by about 10% rather than RFA’s hysterical 33%? Well to start, a lot less direct job loss. At 45 employees per 100 million gallon per year plant, 1.4 billion gallons would require about 630 people to produce. With a jobs multiplier of 3 to 4, that’s just 1,890 to 2,520 jobs in the entire economy that are being driven by the VEETC at a cost of about $5.5 billion per year. That’s $2.1-2.9 million per job every year just to retain those jobs!

What this demonstrates is that the VEETC is widely wasteful—by paying for every gallon, we grossly overpay for any marginal benefits. There is a huge loss incurred by U.S. taxpayers when our scarce public resources are used this inefficiently to support mature technologies instead of investing in new, better performing advanced biofuels. Given the billions of dollars at stake to support a subsidy that generates little ethanol production above and beyond quantities already mandated by the RFS, Congress needs to seriously weigh the costs and benefits of extending the VEETC and ask themselves: should we really be subsidizing corn ethanol forever? Is there a better way we could be spending scarce taxpayer resources that would help bring new, more competitive biofuels to market, create more jobs, give us more security and deliver better environmental performance? The answer, I think, is a resounding yes. NRDC’s Greener Biofuels Tax Credit would pay for environmental performance, support innovation, and speed our transition to a clean energy economy with next generation biofuels that can make a real contribution to the environment, our energy security and the U.S. economy.

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Comments

James ThurberApr 7 2010 06:45 PM

The largest component of the cost of producing corn ethanol is the cost of the corn itself, and the largest component of the cost of cutivating corn is acreage rental.

The point is that the principal effect of the VEETC is not to improve the profitability of producing corn ethanol, but to artificially incrase land values. The principal effect of cutting the VEETC would be to reduce acreage rentals and land prices, which in turn would reduce corn prices and the cost of producing ethanol. That is why agricultural landowners oppose it so bitterly.

The VEETC is just a mechanism by which to confiscate money from taxpayers and funnel it to landowners, under the guise of promoting energy production. The VEETC is not an incentive to produce energy, nor was it ever intended to be one.

Bill_USAApr 7 2010 08:00 PM

Without the domestic ethanol production infrastructure how much longer will it take to bring cellulosic to commercial viability?

According to Francisco Blanch, Chief Commodities strategist at Merrill Lynch, ethanol is holding the price of gas and petroleum down approx 15%. If gas was 15% higher what affect would that have on the economy and jobs? Petroleum cost affects everything in the economy either as a commodity component or through transportation charges or both. Gasoline and petroleum 15% higher would have an affect on the cost of everything and a depressing affect on the economy. It could be the "big ethanol" (get real "big'?..LOL) estimates on jobs could be quite conservative.

At any rate, without the reduction in GHGs being achieved with ethanol, CO2 would just be accumulating that much quicker.

It will take 20 years for electric cars to be numerous enough to achieve 20% to 30% GHG reductions. Global warming is accelerating. That much reduction in 20 years without other reductions (accomplished much sooner) will not be enough to make a difference.

We need ethanol and efficiency improvemens and anything else we can think of to reduce GHGs in the near and intemediate term if we are to have any hope of controlling Global Warming.

Electric cars won't be enough soon enough to make a difference (by themselves).

Get realistic and grow up.

Bill_USAApr 7 2010 08:38 PM

update: Here is an IMF report on how Oil Prices affect economies around the world.

http://www.imf.org/external/pubs/ft/oil/2000/#III_A

It seems to show that a 20% increase in oil prices lowers GDP in the U.S. about -.3%.
(see; Table 2. Permanent $5 per Barrel Increase in the Price of Oil: Baseline Scenario)
Now, how many fewer jobs that would mean I don't know but it can't be good.

Since ethanol is decreasing the price of gas and oil approx 15% one would think this would have a benefical impact on the economy (money spent for work and product domestically produced as opposed to imported) and jobs.

Bob IowaApr 7 2010 10:59 PM

I have no connection to farming or ethanol, I am a city boy. But I swear this blog puts out an incredible amounst of disinformation. First of all, ethanol is not a jobs program, it is a huge step towards producing alternative fuels and putting us on a path to being free of middle east oil. That is worth a ton of money. All the ethanol money stays home - it is not shipped out to that great sucking sound overseas like many manufacturing jobs. Ethanol right now is 80 cents a gallon CHEAPER than gasoline. You can't get to cellulosic ethanol without corn ethanol. Technology has its steps and right now corn ethanol is viable, job-producing and is not dependent on overseas wars.

Ron SApr 8 2010 06:07 AM

Congratulations on an excellent article, Nathanael. Surely the attention it has gotten from the ethanol industry is testament to how close you must be getting to some uncomfortable truths.

As for the "analysis" by Francisco Blanch to which Bill_USA refers, which Mr. Blanch made in response to a journalist's question during an interview for the Wall Street Journal a couple of years ago, it was a back-of-the-envelope calculation. The math is this: assume that biofuels decrease world petroleum use by 1.5%. Assume a very low short-term-elasticity of demand of -0.05. Divide the two and get 30%. That does not sound realistic, so divide by half to be conservative.

No serious energy economist has produced any kind of similar estimate of the effects of ethanol, or biofuels, on oil prices, and numerous ones have questioned the approach. (See, for example, "Indefensible Biofuels", by Marlo Lewis, Jr. and William Yeatman). Most importantly, Blanch's calculation involved dividing a long-term change at the global level (it took many years for biofuels to reach 1.5% of total liquid fuel supply) by the elasticity of demand in the very short term, and not taking into account the elasticity of supply (lower prices means lower supply), nor the behaviour of oil exporters. So the kind of conclusions that Bill_USA and other subsidized-ethanol proponents draw about the marginal effects of additional U.S. ethanol production on world gasoline prices rests on what can charitably be called an extremely flimsy foundation.

Sam salamyApr 8 2010 09:54 AM

Small is the new big. Big oil and big ethanol is controlled by big corporations. The true solution uses sugar energy crops and sweet sorghum is the finest example. When harvested on small farms and ethanol is produced on-site, the process is clean, jobs are created locally and the farmer shares in the profits. EPEC has the economic development model which will bring ethanol back in favor.

Ron SApr 8 2010 09:55 AM

EPEC?

Caroline_DApr 8 2010 10:54 AM

Great post.

The Nebraska Corn people have blogged about the loss of jobs at http://nebraskacorn.blogspot.com/2010/04/not-extending-ethanol-tax-credit-would.html.

Maybe you could do a side by side post debate.

Sam SalamyApr 8 2010 12:14 PM

Www.epecholdings.com

John UrbanchukApr 9 2010 12:20 PM

Ah, the sweet irony of the environmental movement and big oil teaming up against renewable fuels! Where to start.

1. Mr. Greene accuses me of using “inflated” jobs multipliers and suggests that “… a multiplier of 6 is aggressive. A multiplier of 3-4 is more realistic …” I used the RIMS II final demand employment multipliers for supplying industries calculated by the U.S. Bureau of Economic Analysis. These are used to estimate the total employment impact in jobs for every $1 million of final demand (output) delivered by a supplying industry. Moreover the methodology employed is consistent with that specified by BEA. Mr. Greene provides no basis or support for his “more realistic” jobs multipliers.

2.Mr. Greene claims that we take credit for “magically creating” thousands of corn growing jobs that would have existed anyway. Our analysis estimates the number of jobs in the corn sector supported by ethanol and at risk if the VEETC is eliminated. The loss of 4 billion gallons of ethanol is the equivalent of 1.5 billion bushels of corn, or about 11% of total corn utilization. Mr. Greene assumes that if corn demand is reduced by lower ethanol production, corn growers will continue to plant and produce the same amount of corn regardless. Supply and demand, Mr. Greene … supply will adjust to lower demand … fewer acres and bushels translates to fewer jobs to plant, treat, harvest, transport corn … not to mention to provide all of the ancillary tasks on the farm. Moreover, during the whole international land use change debate the environmental community said if we weren't growing corn for ethanol, all that land would "revert to nature." It now appears that the claim is that if we weren't growing corn for ethanol, we'd be growing the same amount anyway for some other else. In other words and to parody a famous movie “if you grow it, they will buy it”! You can't have it both ways.

3.I believe the FAPRI analysis underestimates the potential impact on corn and ethanol demand and production by failing to assume a more realistic increase in ethanol imports (and displacement of U.S. production). I don’t recall FAPRI providing an employment impact in their analysis; moreover they provide little discussion of their underlying assumptions and how they arrived at their projections.

4.We started off assuming that removal of the 45 cents per gallon VEETC would cause ethanol market prices to decline 27.4% and that the adjustment of supply and demand would limit the decline to 22.5%. Mr. Greene assumes that only half of the VEETC would be eliminated under the assumption that half goes into the pockets of oil companies. In fact the entire VEETC is claimed by the person who buys ethanol for blending with gasoline. As Mr. Greene knows these are, in large part, oil companies! This doesn’t change the documented fact that the VEETC has become imbedded into market ethanol prices and its removal would reduce these prices!

5.Mr. Greene randomly selects an ethanol supply elasticity for his analysis (with no explanation) to “estimate” a 10% decline in ethanol production in the VTTEC is eliminated. He then assumes direct employment of 45 jobs per 100 million gallon plant and applies his mythical 3-4 jobs multiplier. In fact, no one tracks direct employment in the ethanol industry so we really don’t know how many jobs are in the industry. May be higher lower depending on plant size, vintage, technology, so the application of a direct jobs multiplier will provide misleading results. Moreover, we don’t know what the direct jobs multiplier for an ethanol plant really is. BEA estimates a direct employer of 13.2648 for the other organic chemical manufacturing industry (of which ethanol is a part), and a final demand employment multiplier of 14.7073, both considerably higher than Mr. Greene’s mythical multipliers.

The next generation biofuels industry will be built on the foundation of the conventional grain-based industry. Mr. Greene, how confident will investors evaluating new generation biofuels feel when they see Congress eliminate the most significant Federal support for biofuels? Moreover, given the slow pace of development, the conventional ethanol industry will remain a vital force for meeting the aggressive RFS mandate. Or would Mr. Greene and NRDC prefer to see new investment dollars for biofuels flow to Brazil and other potential foreign suppliers, the U.S. export another manufacturing sector industry and their jobs, and increased dependence on petroleum? One wonders!

Charlie StaffApr 9 2010 02:23 PM

It is unfornate that Mr. Urbanchuk failed to include in his calculations the loss of distillers grains with reduced production of ethanol. Less distillers grains means higher feed costs when higher priced corn and soybean meal have to be used,therefore higher food costs.

John M. UrbanchukApr 9 2010 03:26 PM

Charlie:

We did incorporate the reduction in distiller's grains into the economic and employment impacts. You are correct that a reduction in ethanol production prompted by removal of the VEETC will also reduce distillers grains production resulting in higher prices that will impose higher feed costs on the livestock and dairy industry.

THOMAS ELAMApr 10 2010 10:17 AM

The rebuttals to Nathanael's post are so wrong it is hard to know where to start. Let me blow some holes in a just few.

1. Would VEETC elimination cause an increase in distillers grains (DDGS) prices? Absolutely not, in fact distillers grains prices will go down if the VEETC is eliminated, and if there is any negative effect on ethanol production.

Ethanol proponents seem think that you see little or no net loss of feeding value as a result of this use of corn. In fact, the losses are huge.

DDGS is used mainly by cattle as a substitute for corn. In cattle rations, corrected for moisture content, it replaces about 1 metric ton of corn for every ton fed. BUT, in ethanol production only about 30% of the corn used is converted to DDGS. The other 70% is the water in the corn (typically 14%), the ethanol and CO2 that comes off the distillation. It is totally lost to livestock feeding.

Every billion gallons of ethanol produced uses about 360 million bushels of corn (at 2.8 gallons/bushel) The process produces the DDGS equivalent of 107 million bushels of corn. The other 253 million bushels is lost to feeding and other uses.

That is, if you don't produce that billion gallons of ethanol there would be, net of the DDGS production lost, 253 million bushels more corn available for feeding, export, and other uses. Clearly corn prices would have to go down to clear the market. Corn prices and DDGS prices are very highly correlated, well over 0.9 over the last 10 years.

SO, a 1 billion gallon reduction in ethanol production would free up more corn for feeding, and reduce both corn and DDGS prices.

2. Job Creation: Urbanchuk ignores a few facts in his so-called analysis.

The BEA organic chemicals multiplier is absolutely, totally, wrong for this application. Organic chemicals are intermediate feedstocks for a wide variety of other value-added products and processes. Ethanol is a final product with very little value-added past the point of production. Other than trucking, ethanol produces no jobs past the plant gate. I would also argue that the input sectors for ethanol production would see very little job creation from this activity.

Also, ethanol production is not a net addition to energy production. It is a substitute for a product that we were going to use anyway - gasoline. It is simply wrong to assume that a job multiplier for a net addition to national production such as organic chemicals can be applied to a product that is substituting for something we are already producing.

Also, by reducing the amount of corn for feeding uses, ethanol has contributed to the 2008-2010 decline in production and employment in the livestock and poultry sectors. Nowhere does Urbanchuk account for these losses.

The Urbanchuk numbers also ignore another simple fact about land use and employment. Urbanchuk assumes that ethanol production creates more acres of corn, and more jobs on farms and with farm suppliers. That is only true to a small extent.

The fact is there has been little or no additional total acreage farmed as a result of the ethanol expansion. Since the ethanol expansion started in 2006, corn acreage has increased. HOWEVER, reductions in other crops have almost exactly offset that increase. All ethanol has done to farming is to switch cropping patterns. As a result we have less wheat, sorghum, oats, rice and other crops. There has been zero effect on on-farm jobs. Since corn uses more fertilizer then other crops there might be a small effect there. Otherwise, offsets from losses in other crops would negate the impact of increased corn acreage.


Luckily, John Urbanchuk has gone so far with his amateurish efforts to exaggerate the economic effects of ethanol that he is losing credibility. I look forward to engaging him as this critical debate proceeds in 2010.

THOMAS ELAMApr 10 2010 10:33 AM

One more comment:

Urbanchuk states "Moreover, during the whole international land use change debate the environmental community said if we weren't growing corn for ethanol, all that land would "revert to nature." It now appears that the claim is that if we weren't growing corn for ethanol, we'd be growing the same amount anyway for some other else. In other words and to parody a famous movie “if you grow it, they will buy it”! You can't have it both ways."

This statement is simply wrong, and misleading. I think that most on the anti-ethanol side of this argument agree that total U.S. farmed acreage will see little effect from ethanol production. We farm essentially all of our productive acres, and have for many years. If ethanol production were to drop we in the U.S. would simply reduce corn acres and plant more wheat, sorghum, barley, oats and other alternative crops.

The argument centers on what happens outside the U.S. where there are large amounts of marginal lands that cold be brought into production. There is the very real possibility that those lands can be converted to agriculture as a result of U.S. ethanol production and the increase it causes for grain demand.

Mr. Urbanchuk's reasoning minimizes a very important debate. Yes, you can have it both ways.

Russ FinleyApr 10 2010 01:41 PM

Sorry I'm so late to the party.

The RFA is analogous to a lawyer who has been retained to defend a client right or wrong. Their client is corn ethanol and they have spent millions lobbying congress. Ubanchuch is, for lack of a better definition, their for-hire analyst.

We all know that consensus evaporates as soon as a second "economist" steps into a room. Our present economic melt down is all you need to know that economics have limited predictive capability. Number crunching aside, if you have to place a bet you would be a fool to bet the lobbyist is presenting the more accurate analysis.

How do you know when a politician is lying? His lips move. We all understand that deception is what politics are all about. The goal is to convince voters that what is good for the politician's reelection bank account is good for them. That bank account is funded by corporations who also hire lobbyists. The best way to secure votes in this economy is to claim you are creating jobs, which is why the RFA has correctly concluded that the best way to garner support is to claim that corn ethanol creates lots and lots of great jobs.

All you have to do now is direct your analyst to cobble together some kind of analysis to support this, and here we are.

Russ FinleyApr 10 2010 02:37 PM

Below, I take a crack at parsing Urbanchuk's comment.

".. Ah, the sweet irony of the environmental movement and big oil teaming up against renewable fuels! Where to start. .."

Ah, the sweet irony, indeed. Where to start? How about the disingenuous link between environmental organizations and big oil? Because roughly four-fifths of the energy contained in a gallon of ethanol came from a combination of coal, oil, and natural gas, "big corn ethanol" is essentially a combination of big coal, big oil, and big natural gas.

In addition, profitability is guaranteed to oil company blenders because all oil companies have to blend it, creating a level playing field where any costs can simply be passed on the consumer without imparting a competitive disadvantage. Oil companies could care less about what liquid fuel their profits come from.

And the critiques are not leveled at "renewable fuels." They are leveled at corn ethanol, which can hardly be called renewable because, as stated previously, roughly four-fifths of the energy contained in a gallon of ethanol came from a combination of coal, oil, and natural gas.

Using renewable fuels as a Trojan horse to hide corn ethanol in is a tactic employed by the RFA (a corn ethanol front group pretending to be a renewable fuels lobby organization) to great effect.

Wow! All that from just his opening sentence.

Russ FinleyApr 10 2010 05:07 PM

".. during the whole international land use change debate the environmental community said if we weren't growing corn for ethanol, all that land would "revert to nature. .."

?? What land would "revert to nature," ecosystem carbon sinks that have been plowed up to plant corn?

Here is a recent smear by the RFA on the National Wildlife Federation titled:

Green Activists Continue Ethanol Smear Campaign

The report they smear can be found here.

God love 'em. Everybody is out to get corn ethanol, livestock producers, grocers, environmentalists, big oil, and now wildlife conservationists, when all they want to do is give 30 billion American tax dollars to oil blenders over the next five years to create jobs for Americans ...hold on, I've got something in my eye ...

Russ FinleyApr 10 2010 05:24 PM

Oh, an before I forget, I've fixed the link to the Trojan horse reference above.

Walter G.Apr 10 2010 06:18 PM

Why is the corn ethanol industry so intent on supporting a tax credit for big oil? The ethanol industry claims that if the tax credit is eliminated, the price of ethanol will decline by over 20%. Is that not good for consumers? Would that not encourage the blending and consumption of more ethanol? I do not believe for a minute that the blenders reduce the price I pay for a gallon of ethanol by the 45 cent tax credit that they receive. I may have been born at night but it wasn’t last night. I fully believe that I am paying the same price for a gallon of ethanol as I pay for a gallon of gasoline which produces 50% more gas mileage than the gallon of ethanol. In addition, I get the great honor of paying more income taxes to support the Federal Government which is not making the oil companies pay their fair share. The Government is requiring the blenders to use a certain amount of ethanol. Is the tax credit just an additional bribe that the politicians are paying to get the political support of corn farmers, oil companies and ethanol companies? Is this a great country or what?

Walter G.Apr 10 2010 09:03 PM

If, as stated in the post above, nobody knows how many people work in the ethanol industry, how can we be so sure that such great numbers of people will lose their jobs. From looking at information on ethanol producer websites and other publicly available information it is apparent that most modern 100 million gallon per year ethanol plants hire somewhere between 40 and 50 people. Shutting down 40 of those plants would eliminate between 1,600 and 2,000 jobs.

Corn farmers have received government subsidies for many years and probably continue to receive some government payments. In the past, the government payments allowed farmers to produce at high levels and provide cheap food to this country and keep world grain prices low to the benefit of hungry people in other countries. The ethanol industry converts massive quantities of corn that could be used for food or animal feed into expensive low quality fuel that makes a minimal addition to the U.S. fuel supply. Based on most predictions about world population growth, future food needs, and future availablility of the nonrenewable natural resources needed to produce plant fertilizers, the odds appear high that the U.S. Government's obsession with biofuels is taking us down an unsustainable and possibly dangerous path. This country already imports large quantities of fertilizers and future supplies would seem to be a good topic for objective study before we go head over heals into ethanol production.

Greg IndependentApr 13 2010 10:31 AM

Give 'em a tax break to make ethanol, make jobs and reduce the consumption of foreign oil. That's a heck of lot better than taking MY tax dollars and spending them on a bogus stimulus package that didn't creat jobs. The federal government spent $2.5 million dollars on the roadside signs to advertise ARRA stimulus projects..that's sickening...$2.5 million on signs for a failed program. And then spent $2 million for a commercial to fill out your census forms during the Superbowl..!!! Heck, give 'em the tax credit...any money kept out of the federal government's clutches will be better spent in the private sector than spent by those pigs feeding at the taxpayer trough. If the health care bill travesty didn't wake us up to the fact that we are being raped by the government, then we are in sad shape. Vote them Out!

Randy DuttonApr 13 2010 11:46 AM

Wrong. Ethanol creates many more jobs particularly in China, where most replacement equipment for motors damaged or destroyed by ethanol are made.

Ethanol in the fuel is responsible for 40% of the small engine repairs according to an MSNBC poll. More jobs.

Read the Outdoor Power Equipment Institute report at www.opei.org/ht/a/GetDocumentAction/i/1926. There it talks about damage and safety issues created by ethanol.

Ethanol creates jobs in the fire fighting foam production business, since ethanol fires have to be fought differently than pure gasoline, otherwise firemen's lives are at risk. More jobs!

Too bad the press doesn't look past the press releases. They used to actually do research.

Tim WApr 15 2010 12:49 PM

Walter G asks an interesting question: why does the ethanol industry support a tax credit for the oil industry?

The tax credit history goes back to the late 1970's when ADM championed creating the industry. For most of the next 25 years ethanol production in the U.S. was quite low - about 1% of gasoline - and ethanol prices were typically well above gasoline prices (30-45 cents per gallon). During this period nobody would have argued oil companies received the benefit and ethanol producers did not. Oil companies were willing to pay a premium price for ethanol because the taxpayer essentially gave them a refund, but clearly the benefit was going to the ethanol industry.

Ethanol mandates essentially changed the game: investment poured into the industry following the 2005 energy bill, ethanol prices spiked during the conversion away from MTBE but then collapsed as ethanol production capacity coming on stream exceeded the Renewable Fuel Standard mandate volume.

So back the ethanol industry went to Congress asking for an even higher ethanol mandate and they got it with the 2007 energy bill. But, demand will still take a few more years to catch up to all the new production capacity and so ethanol is currently trading well below gasoline.

Somewhere along the way the ethanol industry began to argue that the tax credit actually went to the oil companies. Technically it does. But, the ethanol industry's lobbying strategy was risky. Critics were bound to ask: why should taxpayers subsidize oil companies for blending ethanol when oil companies are mandated to use ever growing amounts of ethanol?

To answer Walter's question, the ethanol lobby talks about the tax credit going to oil companies, but deep down they believe the benefit really goes the the ethanol industry just like it always did. Otherwise, why would they fight so hard to defend it?

Bill BrandonApr 16 2010 01:19 PM

The underlying question in this original post is: should we extend the VEETC in its present form, some modified form, or do away with it completely. Unfortunately in this and other blogs and responses there to, we are getting more political spin than objective discussion. Some comments, both pro and con have made good points but still lack a comprehensive perspective. Others are just factually incorrect.

VEETC is obviously not a ‘jobs bill’ but since jobs are an ‘in’ issue right now, RFA and Growth Energy have decided to hook their cart to that horse. It may or may not work but it certainly represents the ‘dumbing down’ of a complicated issue. Opponents have used similar tactics. Robert Rapier in his Blog associated corn ethanol production with problems in the Chesapeake Bay. Chesapeake Bay restoration is also a strong issue in Washington right now. The problem is that this was a cheap political spin that is factually incorrect because no corn grown in the Chesapeake water shed is used to make ethanol. Truth is the victim when both sides play is so loose with the facts.

My question to Robert Rapier was, and I repeat it here, what is VEETC? Is it an energy policy, an agriculture policy, a security policy, a jobs policy…? It has become imbedded in our policies and our economy and any change will have effects in many areas. What will it take to return to $20 billion a year corn support payments? What will it take for gasoline prices to increase 10% - 20%? What will be the effect on our balance of payments? Etc. etc.

Arguments about single dimension effects will not answer the comprehensive questions we should be addressing. Two sayings should be kept in mind here – “Figures don’t lie but liars figure” and “No model is correct, but some are useful”. I am not calling anyone here a liar but nothing has been written that would convince me that any particular person’s figures are correct (although some comments deserve further scrutiny). I might add: so what – the scope of discussion has been too narrow. We have also come to rely too much on computerized modeling whose value is rooted in the assumptions that go in to that model. These assumptions are often not transparent, based on theory or based on technology data that is rapidly changing.

What I think most can agree on is that the original rational for VEETC was to support needed infrastructure improvements to handle ethanol blends. This was at the blenders depot and to the extent that the blenders owned retail stations, it might have also supported changes in pumps and storage tanks. Today the retailer is independent or franchised and a retail station owned by an oil company is a rarity.

Ethanol producers are dependent on oil companies or blenders for the distribution of their product. The oil companies that allow only about an 8cent/gallon profit tightly control this market. The same truck can service one station at one price and roll on down the road to service another station at a significantly different price. This does not appear to me as a free enterprise system. Unlike Brazil where the government owned Petrobas has fully invested in an ethanol distribution system including retail blending pumps, VEETC money does not find its way into the pockets of the retailer who needs more profit (or out right grants) to improve his part of the distribution system. Instead it is distributed as increased profits and we are left with an incomplete distribution system barely capable of handling present US ethanol production let alone future RFS requirements.

When it comes to our vehicle fuels, there is no such thing as a free market and VEETC is just part of that mess and inconsistent government policies. The government limits the amount of ethanol that I can use in my vehicle. While I believe EPA should have the ability to regulate what comes out of my tail pipe I don’t think this should extend into what I put in my tank (I would like to use E30). I would certainly support continuation of VEETC for retail blenders. If this were done with direct government loans that would be repaid with VEETC credits, it would go a long way to quickly completing an effective ethanol distribution system.

Finally, I can’t wholly agree with your ‘Greener Bio-fuel Tax Credit’ proposal. I agree with the idea of an incentive for bio-fuel feed stock being rated on the positive environmental impacts they might have. I have suggest to several congressional staff that such a provision should be included in the Chesapeake Bay section of the upcoming Clean Water bill renewal. I had suggested merely defining such fuels as ‘advanced’ for the purpose of RFS2.

Osage Ethanol in Hopewell Va. is using winter barley and is a good example of a reasonable approach. Winter barley’s relatively low production/acre and the number of field passes required will work against its life cycle GHG calculations, but its mitigation of winter nutrient leaching and soil erosion is positive. Without some incentives, farmers may be tempted to use intensive efforts to maximize production without attention to negative impacts.

I disagree with a credit given on a BTU basis. There is more to a good fuel than BTU’s. Exxon’s recent investment in algae based bio-fuel research is pretty much aimed at development of ‘bio-crude’ which is then refined in their down stream assets. I don’t care if it is fossil gasoline or bio-synthetic gasoline; it is still a poor fuel incapable by itself of obtaining high thermal efficiencies in an IC engine. The present practice of stopping life cycle analysis at the fuel tank is a foolish delusion. We must account for thermal efficiency potentials to get an accurate evaluation. Near neet ethanol (95% ethanol/5% diesel) can get a better thermal efficiency than the 42% of a diesel in a conventional combustion ignition engine. The Ricardo engine shown in conjunction with Growth Energy last month at the Washington auto show is reporting a 58% efficiency on E85. This is compared to the 28% of a typical gasoline engine. Gasoline blends of E20 or better can get increased thermal efficiencies from most legacy vehicles. Although Robert Rapier thinks he has ‘debunked this as an urban legend’ there is empirical data and extensive individual personal experience to support this fact.

Efficiency is the first wedge of Joseph Romm’s methods for reducing GHGs. Why environmentalists seem to ignore this when it comes to bio fuels is beyond comprehension. I believe the key to Brazils success with ethanol is that it built out its distribution infrastructure ahead of supply. That infrastructure included government policy on use. The US has failed to promote a complete system and we are reduced to silly arguments as individual segments try to protect their interests in a government capped supply system.

Blender pumps are necessary because they allow for flexibility, freedom of consumer choice and automotive technical innovation. I think the EPA is regulating beyond its mandate. I say keep VEETC for retail blenders, phase out import tariffs at a rate linked to blender pump installations, get EPA to regulate based only on emissions and let the consumer decide on his fuel of choice, implications about his original warranty, adding minor engine modifications and secondary party warranty protection. In addition boat owners and small engine owners can use unleaded if they want.

Tom SerfassApr 19 2010 04:20 PM

While most of these comments are pretty enlightening, a few things seem to escape comment. First, substituting ethanol for gasoline shifts payments from largely foreign sources of petroleum to domestic production of corn. While refining is probably a wash jobs wise, pollution wise ethanol is far superior. Not only is the cost of imported oil saved, the ethanol infrastructure is strengthened, which seems a key element. One author argued that ethanol and gasoline were both inelastic in terms of demand. I disagree. There would likely be more substitution toward ethanol if the vehicles could use and obtain e-85 because of the price differential. To suggest the demand elasticity of ethanol is equal to gasoline pretty much ignores the substitution effect, if consumers could actually make the choice, they would demand considerably more cheaper ethanol. The other consideration concerning the equivalence of gasoline and ethanol is their place in the carbon cycle. Oil is a 100% net addition to the carbon burden of the environment, plus the fuel used to extract and ship it which is considerably more than needed with most domestic ethanol. Alternatively, most of the carbon in ethanol (after production inputs from petroleum) is existing carbon captured by corn plants therefore a recycling of existing carbon rather than an addition to our already overburdened biosphere. While burning any fuel is less optimal than a non carbon emitting option, let us not forget that decreasing the use of fossil fuel and by extension lowering the amount of NEW carbon into the biosphere is the first goal in combating GHGs. One last observation on agricultural feeding practice. It would be more environmentally friendly if, especially for beef feed lots,they used more grass and less corn. Numerous studies indicate that corn is less suited to cows digestive system and corn consumption increases pathogens and illness in the pens. The shift away from corn to grass fed beef would also allow marginal land to become useful in animal feed production, fixing nitrogen via alfalfa or clover and decreasing fertilizer use. Allowing cattle to graze would be even better but I digress. While this shift in feeding strategy will extend fattening time on the lot by some margin, it seems to have health and cost benefits in terms of less illness and death among cattle and fewer antibiotics needed to maintain them. Removing antibiotics from meat production would also have a salutary effect on germ resistance and ultimately human health care. Although technically externalities, I believe they are worth considering. Tom

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