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Sobering CBO report shows massive costs of corn ethanol tax credit

Sasha Stashwick

Posted July 15, 2010 in Moving Beyond Oil, Solving Global Warming

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Yesterday afternoon, the nonpartisan Congressional Budget Office (CBO) released its evaluation of the costs and benefits of federal biofuels tax credits, including the Volumetric Ethanol Excise Tax Credit (VEETC), the largest U.S. subsidy for renewable energy that goes almost entirely to corn ethanol.  The release comes against the backdrop of a full court press by corn ethanol industry lobbyists to push Congress to extend the VEETC and a disappointing attempt by Senator Amy Klobuchar to attach a 5-year extension of the corn ethanol tax credit to a Senate energy bill ostensibly supporting renewable energy, which we discussed here and the NRDC Action Fund discussed here.

The results of the CBO study, conducted at the request of Senator Bingaman, Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance, were sobering:

The CBO report estimated that roughly 11 billion gallons of biofuels were produced and sold in the U.S. in 2009, over 98% of which (10.8 billion gallons) came from corn ethanol. Tax expenditures (essentially foregone tax revenues) in support of this production were roughly $5.16 billion, including VEETC payments of $0.45 cents per gallon for blending ethanol (regardless of the feedstock) and the additional $0.10 cents per gallon that “small producers” receive on the first 15 million gallons they produce.

CBO finds that before they even pay at the pump, taxpayers incur a cost of $1.78 to replace a gallon of gasoline by substituting corn ethanol. This accounts for not only the cost of the VEETC per gallon, but the relative energy content differences between ethanol and gasoline (gasoline contains ~32% more energy than a gallon of ethanol, so 1.48 gallons of ethanol are required to replace one gallon of gasoline), and changes in the consumption of ethanol and gasoline that can be attributed to the tax credit. In other words, the taxpayer cost of using the VEETC to promote corn ethanol depends largely on the amount of corn ethanol that would have been produced if the credits had not been available. According to CBO, that’s the majority of it:

Based on the results of analysis done at the Food and Agricultural Policy Research Institute (FAPRI), CBO estimates that if no other policies were in place, eliminating the tax credit would reduce corn ethanol consumption by 32%. Importantly, FAPRI also estimates the impact of eliminating the tax credit if RFS mandates remain in place and finds that domestic production drops just 10% over five years, which we discuss here and in our Fact Sheet on the VEETC here. The redundancy is clear, but taxpayers continue to foot the multi-billion dollar bill.

And the costs to taxpayers of reducing greenhouse gas emissions through the corn ethanol tax credit?  CBO’s estimate excludes the emissions associated with land use change—i.e. the carbon dioxide that is released from forests or grasslands that are cleared and converted to farmland as a result of ethanol production—though the report notes that if those emissions were taken into account, the cost could increase substantially. Indeed analysis done by EPA shows that when you factor in the impacts of indirect land use chance, corn ethanol actually increases emissions relative to gasoline. However, even if we use CBO’s assumptions that ethanol produces greenhouse gas benefits, the cost is staggering: $750 for every carbon dioxide equivalent (CO2e) metric ton in reductions!

The conclusion could not be clearer: we are spending billions in scarce taxpayer dollars to prop up a decades-old corn ethanol industry and a mature, polluting technology – money that isn’t getting us where we need to go in terms of reducing greenhouse gas emissions and in many cases is setting us back. The good thing is key Congressional leaders are beginning to recognize the wastefulness of these policies and the opportunity we’ll miss if we don’t instead direct our support towards newer, cleaner and better-performing advanced biofuels. In response to the release of the CBO’s report, Senator Bingaman called on Congress to look seriously at the VEETC rather than just reflexively extending it:

“This report by the nonpartisan Congressional Budget Office provides further evidence that our nation’s biofuels tax incentives might not be appropriately calibrated.  In particular, CBO’s findings should prompt Congress to critically examine whether it is appropriate to extend the Volumetric Ethanol Excise Tax Credit (VEETC) at its current 45-cents-per-gallon level beyond the credit’s December 31 expiration.”

Calling corn ethanol a “mature technology whose market share is protected by an aggressive Renewable Fuel Standard”, he also reminded Americans of just how much corn ethanol subsidies have already cost us:

“According to the Congressional Research Service, the VEETC will cost the American taxpayer $7.6 billion this year alone.  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.”

Like the CBO, it’s time for Congress to talk a cold hard look at just how much the VEETC costs us and just how little we get in return and let the VEETC expire at year-end.

 

 

 

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Comments

John JamesJul 16 2010 10:51 AM

Why don't you and your fellow "environmentalists" spend time investigating how many tax dollars go to OIL? Seriously, OIL received over $70 Billion in the last six years. Why is it ok to subsidize the oldest and biggest cause of pollution in the world but not a clean, renweable energy, locally produced energy.

James ShupeJul 16 2010 03:29 PM

John, this money is going to oil. If you read the article and some of the links posted, you would know that VEETC doesn't help farmers or ethanol producers, the money goes in the pockets of the blenders (big Oil mostly).

Also, ethanol is helping for Energy security maybe, but calling it "clean, renewable energy" is pushing it with Corn as the feedstock.

David HsuJul 16 2010 04:33 PM

"Indeed analysis done by EPA shows that when you factor in the impacts of indirect land use chance, corn ethanol actually increases emissions relative to gasoline. "

Where in the analysis does it say that? On p. 427, there's a table showing that dry mills with coal heat and power increase GHGs, but almost all dry mills are run by natural gas. While corn ethanol has several problems, almost all life cycle greenhouse gas analyses say that corn ethanol reduces GHG compared to gasoline. EPA rule-making also allows natural gas dry mills to reach the -20% renewable fuel standard requirement, based on their analysis.

Pete LethebyJul 18 2010 05:49 PM

It's totally amazing that so many Americans continue to be hoodwinked by the scam known as corn ethanol. From the planting of the corn to the churning of the car engine, nothing -- NOTHING -- in corn ethanol benefits anything to do with the environment. Thank God the tide is finally turning against the corn ethanol boondoggle.

Geoff CooperJul 19 2010 09:44 AM

Sasha,

The CBO report's findings hinge on just three very important and highly debatable assumptions. Surely you noticed that out as you reveiwed the study. As CBO notes, making even minor changes to those assumptions alters the results tremendously.

The three assumptions that drive the results are:

**The share of the biofuel production that is attributable to existence of the tax credit. CBO assumes 32% of production is attributable to the tax credit, but they readily acknowledge that the figure may be "too low." Indeed, it can be argued that the industry would be tiny or non-existent today without the tax credits that allowed it to get a solid foothold in the fuels market in the 80s and fostered robust growth in the 90s and 00s. Changing this assumption from 32% to 100% or even 75% makes a HUGE difference.

**The energy adjusted value of the tax credit. Because a gallon of ethanol has 0.7 times the energy value as a gallon of gasoline, CBO adjusts the $0.45 tax credit to $0.67 per 125k BTU. This assumes that ethanol has value ONLY as a BTU replacement. Of course, we know that isn't true. Ethanol is the oxygenate used for reformualted gasoline (which makes up about 35% of our gasoline supply) and is the primary source of octane for refiners/blenders. So, normalizing the tax credit solely on the basis of energy content is wrong.

**The GHG reduction benefits of ethanol. CBO assumes corn ethanol reduces GHGs by 20% comapred to gasoline. This is an overly conservative estimate, ad most recent studies suggest the range of GHG reductions is in the range of 35-50% depending on process type and combustion fuel. Natural gas dry mills represent 85-90% of capacity in operation today and numerous analyses have shown GHG reductions of 40-50% for ethanol from this type of plant. Altering this assumption in CBO's analysis makes a BIG difference.

So, what happens to CBO's headline-grabbing numbers when more realistic alternative assumptions are used? Go here to find out: http://ethanolrfa.3cdn.net/7597991b19a4f1ddb3_bym6b9ehb.pdf

Geoff

Geoff CooperJul 19 2010 10:08 AM

Also, I'm interested in your response to David Hsu's comment. Nowhere in the RIA that you link to does EPA say that average corn ethanol increases GHGs relative to gasoline--even with hypothetical ILUC emissions. Please clarify.

Russ FinleyJul 19 2010 12:12 PM

Geoff said:

---"As CBO notes, making even minor changes to those assumptions alters the results tremendously."---

That's right. The results could be better or worse than what the CBO shows. We are betting the farm on a fuel that has such marginal positive net benefits that nobody can pin them down with certainty.

The USDA just reported that we have been consuming corn faster that we can grow it since 2006/7 even with record harvests for the last three years.

IDLUC impacts will increase as farmers plant even more corn to capitalize on the higher prices the supply deficit will create, adding more runoff to the Gulf of Mexico and on and on.

The more corn ethanol produced, the worse its negative ramifications become.


Russ FinleyJul 19 2010 12:24 PM

Geoff,

See Fun with numbers.

Be sure to read the comments as well. When the USDA and other pro-corn ethanol entities run the numbers they are deliberately cherry-picking assumptions.

The assumption that you can give an energy credit to corn ethanol for distiller's grains just because the corn passed through the refinery on the way to the feed lot is ridiculous if you bother to think about it.

Pete LethebyJul 19 2010 02:08 PM

Geoff's link to the RFA site is proof positive that pro-ethanol folks refuse to see both sides of the issue. The NRDC CARES about the ENVIRONMENT, so why would it put out anything simply to antagonize the pro-ethanol community? RFA cares about ETHANOL and nothing else. If it really cared about great energy solutions they'd have pushed us well beyond corn ethanol by now. But RFA is basking in the public's disillusionment about corn ethanol's benefits because it is an ETHANOL LOBBY GROUP. Saying RFA is neutral on ethanol's positives and negatives is like saying the Farm Bureau (the master of sound bites) is pro-environment -- you're getting laughed at all the way back to those pivot-irrigated cornfields out in the semiarid lands of the Plains. (Which points to another huge ethanol negative that rarely gets discussed: We are sucking the Ogallala Aquifer dry.) Let's get real here: Ethanol mandates are in effect to benefit farmers and rural communities alone. There is no need to justify them with these ridiculous environmental claims that melt under scrutiny. I also care much about farmers and rural communities -- Ilive amongst them and want them to thrive -- but we can help both in much better ways than this absurd corn ethanol folly.

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Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.

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