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Ethanol Tax Credit Expires After Three Decades

After 30 years during which it was the subject of controversy and, thanks to the Iowa Caucuses, Presidential politics, the Ethanol Tax Credit died a quiet death at midnight on New Year’s Eve:

WASHINGTON — A federal tax credit for ethanol expired on Saturday, ending an era in which the federal government provided more than $20 billion in subsidies for use of the product.

The tax break, created more than 30 years ago, had long seemed untouchable. But in the last year, during which Congress was preoccupied with deficits and debt, it became a symbol of corporate welfare. Fiscal conservatives joined liberal environmentalists to kill it, with help from a diverse coalition of outside groups.

In the United States, most ethanol is produced from corn. The demise of the subsidy is all the more remarkable because it comes at the peak of the political season in Iowa, where corn is king.

“We are in a fairly prosperous period for agriculture,” said Dean C. Taylor, a former president of the Iowa Corn Growers Association. “Agriculture has not been as much of a touchstone for presidential candidates this time around.”

Mr. Taylor, who grows corn and soybeans in Prairie City, Iowa, east of Des Moines, said in an interview that the loss of the tax credit “will reduce the profit margin for a lot of people in the ethanol business.” But, he added, “It won’t be fatal as long as the demand for ethanol and gasoline remains strong.”

Nearly 40 percent of the United States corn crop goes to ethanol and byproducts, including animal feed.

The Government Accountability Office, an investigative arm of Congress, said, “The increasing demand for corn for ethanol production has contributed to higher corn prices.”

The higher prices have “created additional income for corn producers” but also appear to have increased costs to meat and poultry producers, big food companies, grocery shoppers and federal food programs, the Government Accountability Office said.

The tax credit, which cost the government nearly $6 billion in 2011, went to gasoline refiners that mixed ethanol with gasoline. The government has promoted ethanol and other biofuels as a way to reduce dependence on imported oil.

Michal L. Rosenoer, a policy analyst with the environmental group Friends of the Earth, said the end of the tax credit showed that “ethanol is no longer a sacred cow.”

“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.”

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.”

In response to a question about how the loss of the subsidy might affect prices and supply, Mr. Hartwig said: “We don’t expect the price of corn to fall or rise just because the tax incentive goes away. We will produce the same amount of ethanol in 2012 as in 2011, or more.”

Representative Jeff Flake, Republican of Arizona, 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.”

The end of this tax credit is long overdue, of course. Of all the alternative energy forms out there, corn-based ethanol is perhaps the less efficient in terms of the actual costs required to produce the product. In the long run, in fact, factoring in the production process leads to the conclusion means that corn ethanol is no more green than petroleum-based fuels, and perhaps less so.

Of course, this being Washington and crony capitalism being what it is, there’s another tax credit out there that is still alive:

What the industry doesn’t want to see, however, is an end to a separate tax credit for ethanol made not from corn but non-foodstuffs like switchgrass, wood chips and even the leaves and stalks of corn.

Known as cellulosic ethanol, no one is selling it just yet due to its higher R&D and production costs. But the industry hopes to soon, and the production tax credit is up to $1.01 per gallon.

The industry earlier this month asked Congress to extend that credit, set to expire on Dec. 31. 2012, for five years but lawmakers did not act before recessing last week.

Timothy Carney, meanwhile, argues that the expiration of the ethanol tax credit doesn’t really matter:

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.

Moreover, as Carney pointed out back in July, the elimination of the tax subsidy does nothing to eliminate the biggest subsidy to the ethanol industory, the Congressional requirements enacted during the Bush Administration that all American gasoline include mandated percentages of ethanol:

[T]he 2005 energy bill created an ethanol mandate, requiring refiners to use a certain amount of ethanol every year. The 2007 energy bill expanded the mandate, and in 2011, refiners are required to use 13 billion gallons of ethanol. This mandate now sets demand, with the tax credit having little or no effect. 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 the reason the industry isn’t complaining too much about the end of the tax credit isn’t because they have suddenly gotten religion and realized that they don’t need government help to push a product that nobody seems to want, it’s because they are now benefiting from the most powerful subsidy of all, mandated demand. It’s as if Congress decided that all fast food hamburgers sold in the United States must include a certain quantity of lettuce and then eliminated a tax credit to lettuce farmers. The industry wouldn’t complain because the new mandated demand subsidy is far more valuable to them, and far harder to repeal once it is enacted, than a tax credit.

The ethanol tax credit is gone, and that’s a good thing, the fact that it took 30 years to kill this monster is just another demonstration of how difficult it is get rid of these vestiges of crony capitalism once they’ve made their way into the law. While the tax credit may be dead, though, ethanol subsidies are still very much with us. Not only does that mean that we’ll continue producing an environmentally dubious product in the name of “energy independence,” it also means that we will continue to suffer the economic distortions that the subsidy creates. It’s already been fairly well established that artificially increasing demand for corn-based ethanol has increased the cost of corn. As James Joyner noted in September, this policy has had the effect of increasing worldwide grain prices, as well as the price of meat given the fact that corn is used as feed for cattle, pigs, and chickens.

How about this, how about we eliminate all the subsidies for all forms of energy and let them compete with each other and see what wins? Radical concept I know. And what would those poor K Street lobbyists do with their day?

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Davebo says:

    OTB has now become DougM night and day.

    It hasn’t really helped James. Quantity is not quality.

    Like or Dislike: Thumb up 2 Thumb down 4

  2. Hey Norm says:

    “…How about this, how about we eliminate all the subsidies for all forms of energy and let them compete with each other and see what wins?”
    If we were to somehow do that, sustainable forms of energy…solar, wind, geothermal, etc…would be the winner hands down. But it’s important to keep in mind that we subsidize fossil fuels in many indirect ways…health care costs alone, related to pollution caused by burning fossil fuels, are staggering. The indirect subsidies involved in burning fossil fuels far outweigh the direct subsidies. Goverment long ago chose the winner and losers in the energy sector.
    Funny that you admit the playing field is not level and that realistically isn’t going to change by eliminating subsidies…but you also are dead set against DOE loan guarantees for Green Energy…which could also serve to level the field. Clearly you are happy with the status quo despite your protestations.

    Like or Dislike: Thumb up 2 Thumb down 0

  3. JKB says:

    Well, given in scams like this, you should follow the money, I would guess that the subsidy was capping the price in some way while the mandate would force a price rise so the solution was to skip the subsidy. This should make gas prices rise, which is an Obama Administration goal.

    There’s still a few independent stations in my area that sell 100% gasoline. It was a few cents more but i figured you made that up in the increased MPG and avoiding repair costs. Most farm equipment and home outdoor power equipment don’t deal well with ethanol so there is a market for proper fuel. For chainsaws, you really need to invest in an additive to dry out the ethanol to avoid repairs or use real gasoline.

    Like or Dislike: Thumb up 0 Thumb down 4

  4. Things I don’t think you mentioned:

    1) Ethanol, as an MTBE substitute, improves air quality. This only requires small additions of ethanol, but it does mean that “regions with poor air quality” have a valid reason to use it.

    2) Cellulosic ethanol isn’t a very big production, but it is a bit of a holy grail, because it does use non-food sources. It’s silly to fault “regular” ethanol for pulling food, and “cellusosic” for pulling “switchgrass, wood chips and even the leaves and stalks of corn”.

    Like or Dislike: Thumb up 2 Thumb down 1

  5. Hey Norm says:

    “… This should make gas prices rise, which is an Obama Administration goal…”
    Yes…because everyone knows that high gas prices are always the key to political success.
    You can’t make up the foolishness fostered by blind hatred.

    Like or Dislike: Thumb up 6 Thumb down 1

  6. Tano says:

    How about this, how about we eliminate all the subsidies for all forms of energy and let them compete with each other and see what wins?

    Because the marketplace does not choose winners and losers using the appropriate criteria. As Norm points out, there are enormous externalities associated with fossil fuels that are never factored into the price.

    I find it mind-boggling that a well educated person who seems to have devoted a lot of time to thinking about economics, and who carries with him a well-formed ideology on these matters, seems oblivious to this obvious point. I guess that is the core fatal weakness of libertarianism – this bizarre notion that the only values that any society should respect are those that are imposed through the marketplace.

    Thus if an industry produces waste that causes huge devastation to people and the environment, but these costs only arise years after the industry makes its sales, then that is just too bad – we are obliged to suffer the consequences. Any sort of encouragement of safer alternatives is strictly verboten. Any sort of regulation of the industry is also a bad thing. If the market forces yield the reality that the industry, considered strictly on its own terms, is profitable, then we as a society have no right to do anything accept to lay back and enjoy the consequences.

    Sorry, but no thanks…

    Like or Dislike: Thumb up 14 Thumb down 0

  7. MBunge says:

    That people get so worked up over ethanol and not oil subsidies is pretty crazy. I mean, conservatives hate ethanol because the oil industry tells them to and liberals hate it because they hate any alternative energy source once it becomes more than theoretical because generating massive amounts of energy inevitably comes with negative side effects. What do you think liberals are going to do when we have to start putting up wind turbines all the places we’ll need to? (Hint: In 2010, wind power accounted for just 2.3% of generated electricity)

    Mike

    Like or Dislike: Thumb up 1 Thumb down 4

  8. Moss says:

    The unforeseen side effects of ethanol: higher food prices – especially popcorn, soft drinks, and other corn related products, gumming up engines.
    I have seen two energy saving devices that people are already using: hydrogen converters and a magnet powered motor that generates more power than it uses. Both of these are in use in homes and cars. Many of these and other breakthroughs are being done by private individuals in their shops, basements, garages, and small businesses. This is where the innovation is occurring, not in government or large corporations.

    Like or Dislike: Thumb up 0 Thumb down 1

  9. MBunge says:

    @Moss: “a magnet powered motor that generates more power than it uses.”

    And how much were you asked to invest in this miracle motor?

    Mike

    Like or Dislike: Thumb up 6 Thumb down 0

  10. Hey Norm says:

    @ Mike…
    You aren’ t wrong…there is a project in northern Vermont that is the perfect example of people not wanting huge turbine farms in their backyards…then there is the Cape Cod project.
    On the other hand our firm produces about 30% of our own energy through solar and hydro…plus we use geo-therm for heating and cooling.
    I have not made the investment yet but I will soon power my house off panels located on the roof.
    I have a cousin in VT who uses solar and wind and is 100% off the grid…not because he’s a hippie or a greenie…but because it makes good ol’ yankee sense.
    The point is that we don’t need to replace 100% of our generation capacity because a good deal of it can become de-centralized.
    And that is what energy producers do not want…and why they manipulate the market…

    Like or Dislike: Thumb up 3 Thumb down 0

  11. Vast Variety says:

    As an Iowan I’m glad the subsidy is gone.

    Like or Dislike: Thumb up 0 Thumb down 0

  12. How about this, how about we eliminate all the subsidies for all forms of energy and let them compete with each other and see what wins?

    Because the marketplace does not choose winners and losers using the appropriate criteria. As Norm points out, there are enormous externalities associated with fossil fuels that are never factored into the price.

    Actually, pricing the externality (taxing it) and then eliminating the subsidy, is a really good path.

    Our problem is that we always seem to use the carrot (subsidy) and never the stick (tax). I mean, when we pay ourselves to do every good deed, is it any wonder that deficit and debt ensue.

    Like or Dislike: Thumb up 1 Thumb down 0

  13. Hey Norm says:

    @ John Personna….
    Note that pricing the externality…cap and trade…was a Republican idea they now vote against.

    Like or Dislike: Thumb up 3 Thumb down 0

  14. Tano says:

    @john personna:

    Actually, pricing the externality (taxing it) and then eliminating the subsidy, is a really good path.

    It may be, but the latest fad amongst the ideologues is to disavow any use of the tax code for any purpose whatsoever other than strictly raising revenue in as simple and flat a manner possible.

    It always has to be some simple categorical rule, pushed to an extreme with these people. The one thing they are not is pragmatic.

    Like or Dislike: Thumb up 1 Thumb down 0

  15. @Hey Norm:

    Be careful to distinguish the two “stick” approaches. There is a simple tax (a gas tax, or a carbon tax) and then there is cap and trade.

    I’ve always hated the second approach. Econ types like it, because they think they can engineer a fair market for (decreasing) pollution by that path, but my opinion has always been that cap and trade is easier to game, to hide what’s really going on.

    I’m glad the last, worst, cap and trade failed. Why? Because it built it give-aways to the politically connected (coal interests) and had long since given up on being a fair market for decreasing pollution.

    A carbon tax has simple transparency, and should we ever have the dedication to do something, that should be our path.

    Like or Dislike: Thumb up 2 Thumb down 0

  16. (BTW, I do not believe in unilateral GHG regulation. It’s like the old nuclear disarmament days. We should only do what we can get as a binding international agreement. On-site inspection, for Chinese industry, not totally a joke.)

    Like or Dislike: Thumb up 0 Thumb down 0

  17. Hey Norm says:

    Yes…I agree…but keep in mind either is better than the status quo.

    Like or Dislike: Thumb up 0 Thumb down 0

  18. anjin-san says:

    which is an Obama Administration goal.

    You did see the part about this subsidy being 30 years old, no?

    So I guess we can just shorten your remarks to “blah, blah, blah, I hate Obama, blah, blah”…

    Like or Dislike: Thumb up 2 Thumb down 0

  19. JKB says:

    @Hey Norm:
    Are you in some way saying Obama didn’t come out for higher gas prices during the 2008 campaign? I did not make a qualitative statement about whether higher gas prices were a good idea, in general, or in the coming election context.

    @anjin-san:
    The subsidy being 30 years old does not have any impact on the stated Obama policy for higher energy prices. Removal of old subsidies is just one way to achieve higher gas prices, Others are to hinder US production, prohibit development of new sources and stopping pipelines from being built that would expand delivery of new sources.

    Like or Dislike: Thumb up 0 Thumb down 1

  20. @JKB:

    Removal of old subsidies is just one way to achieve higher gas prices

    Not in isolation, because the baseline, MTBE replacement, level of ethanol use is too low.

    Ethanol at 5-10% concentration is not a problem, either in an environmental or economic sense. The craziness comes (came?) from crazy E85 (85%) initiatives.

    Does anyone live in a place where those are still pushed? Where the little “flex fuel” badge on a car or truck still matters?

    Like or Dislike: Thumb up 0 Thumb down 1

  21. @JKB:

    To your broader subtext, higher energy prices are good in a global sense, but create bargaining problems with environmental and economic partners.

    It’s a common pattern. My eating raw tuna might be good for me, and bad for all of you.

    Like or Dislike: Thumb up 0 Thumb down 0

  22. Jay says:

    @Hey Norm: Interesting point. Any numbers/links for proof as to the external costs of fossil fuels?

    Like or Dislike: Thumb up 0 Thumb down 0

  23. anjin-san says:

    @ JKB

    I would guess that the subsidy was capping the price in some way while the mandate would force a price rise so the solution was to skip the subsidy

    Do you have any facts, or do you simply rely on guessing to support your existing bias against Obama? Are you ready to go on the record saying you support the subsidy?

    hinder US production

    Please provide evidence that production has declined under Obama.

    Like or Dislike: Thumb up 4 Thumb down 0

  24. Moss says:

    @john personna: The president needs to sit down yearly with small business owners and listen to their problems: taxes, regulations, etc. Then work out a plan to help them and give them relief. This could help and businesses could grow more, hire more workers, and give their workers a raise. We aren’t talking about billionaires or even millionaires here. Small businesses need a break.

    Like or Dislike: Thumb up 0 Thumb down 0

  25. @Moss:

    I think there should be a small-business Ombudsman who can take the case that some specific regulation has a poor cost-benefit to the appropriate agency.

    I’ve got to say though, that the issues that have made a high political profile, like holidays for the gas tax, or reinstatement for the incandescent light bulb, have gone the other way.

    This has long been the case. Remember when the right wanted Spotted Owl barbecues? Well, that was just about the time when all the old growth forests went away.

    Like or Dislike: Thumb up 0 Thumb down 0

  26. (Funny how CF blubs arrive in stores and are sold over the web without a single job or small business behind them!)

    Like or Dislike: Thumb up 1 Thumb down 0

  27. ponce says:

    The far right Republicans have begun to eat their base.

    Like or Dislike: Thumb up 1 Thumb down 0

  28. Here’s an interesting example of government meddling. Restaurants in Kuala Lumpur (the largest city in Malaysia) are now required to have Wi-Fi.

    Small business win or loss?

    Like or Dislike: Thumb up 0 Thumb down 0

  29. Hey Norm says:

    Jay…
    There’s a lot of research and studies out there. And the sources vary. The National Academy of Science did a report for Congress. Start there.

    Like or Dislike: Thumb up 0 Thumb down 0

  30. Rob in CT says:

    Actually, pricing the externality (taxing it) and then eliminating the subsidy, is a really good path.

    Our problem is that we always seem to use the carrot (subsidy) and never the stick (tax).

    THIS. It drives me nuts. The market is great, with certain blindspots. Correct the blindspot and let the market do the rest!

    But to be fair, correctly pricing the externality (setting the tax rate) is the devilish detail here.

    In a more perfect world, we’d have higher taxes on things like coal & oil and lower income taxes (well, maybe not lower than *current* income taxes, but perhaps that’s how you could rationally extend the Bush/Obama cuts).

    Like or Dislike: Thumb up 0 Thumb down 0

  31. @Rob in CT:

    The market is great, with certain blindspots.

    Socialist!

    Like or Dislike: Thumb up 0 Thumb down 0

  32. Rob in CT says:

    Got me!

    Like or Dislike: Thumb up 0 Thumb down 0

  33. matt says:

    @Moss: That would be a perpetual motion engine which most modern physicists consider impossible.

    BTW most motors are magnetically powered….

    Like or Dislike: Thumb up 0 Thumb down 0