New study shows eliminating corn ethanol subsidy will save $6 billion and have little impact on U.S. ethanol production
On the heels of the CBO’s sobering report last week about the massive costs and meager benefits to taxpayers of existing corn ethanol subsidies, comes a new report today from Bruce Babcock at the Center for Agricultural and Rural Development at Iowa State University examining the costs and benefits of extending today’s corn ethanol policies, including a $0.45 cent per gallon Volumetric Ethanol Excise Tax Credit (VEETC) paid to marketers and blenders of fuel for every gallon of ethanol blended with gasoline, regardless of environmental performance, and the $0.54 cent per gallon import tariff on foreign produced ethanol.
With Growth Energy’s proposal to phase out the VEETC, it seems clear that the debate has shifted from what level to set the VEETC at to when it should end. Despite a massive lobbying effort by the corn ethanol industry to push Congress to extend the VEETC, the report adds evidence to a mounting consensus of just how much corn ethanol subsidies cost us, just how little we get in return, and just how inflated corn ethanol industry claims about job losses are.
So let’s take a look at Babcock’s key findings with respect to the impacts of eliminating the VEETC and ethanol import tariff on domestic ethanol production and consumption, taxpayer costs, and jobs:
Allowing the VEETC and import tariff to expire would have almost no impact on U.S. corn ethanol markets in 2011. Without the VEETC, domestic ethanol production would decline by an average of only 700 million gallons. The VEETC, Babcock finds, is not needed to meet biofuel consumption mandates since in the absence of the tax credits, oil companies will still be required to buy enough ethanol to meet RFS mandates.
If the purpose of the VEETC is to push ethanol consumption beyond mandated levels, the magnitude of the costs greatly outweighs any benefits. A one-year extension of the VEETC will cost U.S. taxpayers nearly $6 billion dollar and only eek out an additional 5% in domestically-produced ethanol above and beyond levels already mandated by the RFS. This means U.S. taxpayers would be paying a whopping $7 per incremental gallon. (That’s even more than taxpayers had to spend last year, which we put at $4.18 per extra gallon.)
Eliminating the VEETC would not have major implications for U.S. employment and any jobs created by the VEETC come with at unacceptably high price tag. Despite alarmist claims by the corn ethanol industry that allowing the VEETC to expire will result in 160,000 jobs lost, (a figure difficult to believe when according to the industry itself, the average corn ethanol plant only directly employs about 45 workers), Babcock finds that the decrease in U.S. ethanol production in 2011 caused by allowing the VEETC to expire would result in the loss of only 407 direct jobs. At a cost of nearly $6 billion, this is nearly $15 million per direct job.
In this time of mounting concern over our national debt, just about any other use of $6 billion in U.S. taxpayer dollars would be better than simply extending the VEETC in its current form. For more on that, see my colleague Nathanael Greene’s blog today.
The conclusion is clear: like CBO, Babcock finds that corn ethanol today is a mature, competitive industry, no longer in need of government subsidies and protection, especially in light of the fact that the Renewable Fuel Standard (RFS) already requires oil companies to blend increasing quantities of ethanol into U.S. transportation fuels every year. Key lawmakers on Capitol Hill are waking up to this reality and standing up to oppose a wasteful extension of the VEETC, as I’ve discussed here and here. It’s time for the decades-old corn ethanol industry to stand on its own two feet and it’s time for Congress to move on from subsidizing a mature, mainstream and polluting industry to supporting the transition we need towards newer, cleaner and more competitive advanced biofuels.