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The Corn Ethanol Bridge has Become a Destination

The Corn Ethanol Bridge has Become a Destination

Tuesday, November 16, 2010

By Sheila Korth, Environmental Working Group Legislative and Policy Analyst.

Eight years ago, there were 61 plants producing ethanol to blend with gasoline in the United States; today there are about 200. Eight years ago, 13 percent of those plants used a feedstock other than corn; today, just 5 percent rely on alternatives like wood waste, sugar cane or cheese whey. Eight years ago, a bushel of corn cost $2.37; today the price has almost tripled to $5.86. Eight years ago, farmers owned more than 40 percent of all ethanol plans; today their share is just 16 percent.

How times have changed! Eight years ago, the ethanol industry was keeping up the pretense that corn ethanol served a “bridge” to advanced biofuels. But figures like these, derived from the Renewable Fuels Association’s (RFA) own Annual Industry Outlook, tell a different story. The corn ethanol “bridge” has now become a “destination.” The reality is that corn ethanol really is agriculture policy masquerading as energy policy.

So you’ve got to wonder about the other claims the industry is making.

How Corn Ethanol Got Where It Is Today

As Dave Loos from the Illinois Corn Growers Association brags, “In the world of corn-based ethanol, we’re always looking for a silver lining.” That “silver lining” has been largely a gift from taxpayers, who finance the corn ethanol industry in two ways.

First, the federal government subsidizes ethanol through a tax credit known as the Volumetric Ethanol Excise Tax Credit (VEETC) that pays refiners 45 cents a gallon to blend ethanol with gasoline.

Second, Congress passed federal energy legislation in 2005 that created the Renewable Fuel Standard (RFS). Updated in 2007, the RFS boosts renewable fuels consumption by 36 billion gallons by 2022. It requires corn ethanol production of 15 billion gallons by 2015, which remains in effect until 2022, and 21 billion gallons of “advanced biofuels” by 2022.

When is a Ceiling a Floor, and Vice-Versa?

Despite this support, the corn ethanol lobby has historically flip-flopped on its wants and needs. A consultant for RFA first called the RFS a ceiling for corn ethanol production, but then RFA and the National Corn Growers Association called it a floor. Essentially, these groups are worried that the ethanol industry will not be able to grow beyond 15 billion gallons because corn ethanol is not economically viable on its own.

But there’s a major redundancy when a tax credit is effectively subsidizing mandated production through the RFS. The Corn Growers and RFA still request VEETC extensions, while the Corn Growers want to make it permanent.

More modestly, RFA’s Bob Dinneen just wants Congress to “extend this tax incentive with, you know, a stroke of the pen, a little bit of Whiteout, just change the date” during the current lame duck session of Congress. After that’s done, he says, we can have a debate about the future of biofuels.

Wouldn’t we all like simply to solve our problems, especially a $6 billion-a-year one (the cost of the ethanol tax credit), with “a stroke of the pen?” Life would be so simple.

Who Are the Real Winners?

The direct beneficiaries of the VEETC are gasoline blenders like BP, Shell, and ExxonMobil that get the 45 cents per gallon tax credit. RFA made this clear in 2006 after passage of the 2005 energy bill:

“The focus now is on implementing a workable RFS that meets the needs of ethanol producers and gasoline refiners alike…

Notice who didn’t get mentioned? Not a word about local farmers, rural communities or consumers? The Association leaves no doubt what its priorities are.

Moreover, while in 2007 43 percent of U.S. ethanol plants were farmer-owned, today the percentage is just 19 percent. And the share of total ethanol production capacity that comes from farmer-owned plants is down from 40 percent to 16 percent.

The Tax Credit Hurts Growth

USDA’s Economic Research Service (ERS) recently analyzed the tax credit’s effect on the economy. If VEETC is renewed, ERS said, Gross Domestic Product (GDP) – one of the best measures of the overall economy – would actually shrink by $5.8 billion by 2022, assuming oil prices hover around $80 per barrel. By contrast, eliminating the tax credit would stimulate the economy by increasing real wages, consumption of goods and services and GDP by $6 billion in 2022.

Yes, but What About Job Creation?

The ethanol industry’s job creation claims are also inflated. EWG’s analysis shows that the ethanol lobby’s claims are 5-to-10 times too high, and that each job created costs taxpayers $139,000 to $450,000 a year. That’s a pretty inefficient way to create jobs.

It’s Time to Let a Bad Policy Die

The U.S. has limitless opportunities to meet its energy needs with wind, solar and geothermal energy, electric- and hydrogen-powered vehicles, public transportation, conservation, and a slew of others. Anchoring the nation’s energy future to corn ethanol through expensive and market-distorting subsidies and policies makes no economic or environmental sense. The time has come for Congress, in its current lame duck session, to let this wasteful tax credit die a peaceful death.

To read EWG’s new report, Will the Real Ethanol Beneficiaries Please Stand Up? and view references listed above, go here.

 

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