COUNCIL BLUFFS, IOWA -- Some enemies of ethanol subsidies celebrated as the ball dropped New Year's Eve, because one of the most venerable corporate welfare policies in the U.S. expired -- the Volumetric Ethanol Excise Tax Credit (VEETC).
Those who actually bought straight ethanol -- refiners, mostly -- were given a "tax credit" for blending the ethanol with gasoline. But it was as much a tax credit as it was a direct subsidy payment: you could get your VEETC in the form of a check, and you could get it even if you owed no excise tax.
To limit the subsidy taxpayers would provide foreign ethanol producers, we also slapped a tariff on imported ethanol. Now, both are gone
Michael Rosner from Friends of the Earth applauded in the New York Times
“The end of this giant subsidy is a win for taxpayers, the environment and people struggling to put food on the table,” Ms. Rosenoer said. “Production of ethanol, with its use of pesticides and fertilizer and heavy industrial machinery, causes soil erosion and air and water pollution. And it means that less land is available for growing food, so food prices go up.”
Jeff Flake said:
“With record deficits and a ballooning national debt, it was ludicrous to expect taxpayers to pay billions to prop up a mature industry that should be able to fend for itself.”
But here's the telling passage from the Times article:
Ethanol proponents eventually accepted expiration of the tax credit without putting up a big fight. “We may be the only industry in U.S. history that voluntarily let a subsidy expire,” said Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers. “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago. Ethanol is 10 percent of the nation’s gasoline supply.”
Why would an industry give up a subsidy? Maybe because it wasn't subsidizing the industry anymore. Thanks to the ethanol mandates in the 2005 and 2007 energy bills, ethanol demand is now driven by mandates rather than tax credits. I wrote this up back in July
The Congressional Budget Office recently wrote: "In the future, the scheduled rise in mandated volumes would require the production of biofuels in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included."
So if the ethanol blender subsidy doesn't increase ethanol demand, what does it do? It simply lowers the blenders' costs, resulting in a subsidy for blenders, gas stations, and even consumers. Ironically, because the subsidy lowers the price of a gallon of blended gasoline without boosting ethanol demand, it ends up spurring more driving, and thus subsidizing petroleum.
So it makes plenty of sense to end the tax credit. But if you're concerned about the ravages of ethanol, you need to end the mandate.
