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Background

Ethanol’s Federal Subsidy Grab Leaves Little For Solar, Wind And Geothermal Energy : Background

January 8, 2009

ETHANOL’S FEDERAL SUBSIDY GRAB LEAVES LITTLE FOR SOLAR, WIND, AND GEOTHERMAL ENERGY

The Environmental Working Group (EWG) recently released a report detailing how much federal support was provided to different forms of renewable energy in 2007. The EWG report was based on a little noticed report from the Energy Independence Administration (EIA) published in April 2008. This report provides more detail on the data presented in the EWG report.

The EIA Report
The Energy Information Administration (EIA)¹  reported that the federal government provided just over $4.8 billion in support for renewable energy in 2007. The federal government supported renewable energy in four ways:

  1. Direct Expenditures—Federal programs that provide funds that ultimately result in a direct payment to producers or consumers of energy.
  2. Tax Expenditures—Tax credits, exemptions and other provisions in the federal tax code that reduce the tax liability of firms or individuals.
  3. Research and Development—Federal expenditures focused on a variety of goals such as increasing energy supplies and improving efficiency.
  4. Regional Electricity Programs—Federal support for electricity production through the Tennessee Valley Authority and the Department of Energy’s four regional power-marketing administrations.

A closer analysis of the data in the reports reveals that corn ethanol has captured most of the federal support for all forms of renewable energy.

Ethanol Captured Two-thirds of Federal Support for Renewable Energy
The federal government supports a variety of renewable energy sources to produce electricity, liquid fuels, and other forms of energy. The EIA study shows that corn ethanol captured two out of three federal dollars used to support all types of renewable energy in 2007 through tax benefits, research and development, regional electricity programs and direct payments to producers or consumers of renewable energy.

Wind energy received only 15 percent of all federal renewable energy support and solar energy only 4 percent. All renewable energy sources other than corn ethanol got a combined 36 percent of all federal support for renewable energy in 2007.
 

Energy Type $ Millions Percent
Total $4,802  
Ethanol ($3 Billion) $3,040 64%
Biomass/Biodiesel ($245 Million) $245 5%
Geothermal ($15 Million) $15 0%
Hydroelectric ($174 Million) $174 4%
Solar ($198 Million) $198 4%
Wind ($724 Million) $724 15%
Other Renewables ($406 Million) $406 8%


Ethanol Captured 75 Percent of Tax Benefits for Renewable Energy.
Tax benefits¾credits, rebates, and measures that reduce the amount of taxes a producer or consumer owes¾are by far the most important way the federal government supports renewable energy. Tax benefits made up 81 percent of the value of all forms of federal support for renewable energy in 2007.
The EIA study shows that corn ethanol captured 75 percent of all these federal tax benefits through the Volumetric Ethanol Excise Tax (VEETC). The VEETC is commonly known as the blender’s tax credit, because it affords oil refiners a tax credit of 51 cents for each gallon of ethanol blended with gasoline.²  In 2007, oil and ethanol interests claimed $3 billion in blender’s tax credits¾the single largest federal expenditure for renewable energy that year. In addition to the blender’s tax credit, ethanol producers claimed $50 million through the Alcohol Fuel Tax Credit.

The most important federal subsidy for wind, solar, geothermal and other renewable technologies to produce electricity is the Production Tax Credit. This credit provides a 1.5 cents-per-kilowatt-hour payment (adjusted annually for inflation) to private investors and investor-owned electric utilities that use renewable energy sources including wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation power, municipal solid waste, landfill gas, refined coal, Indian coal, solar energy and hydropower. Electric utilities claimed $690 million in tax credits for renewable energy in 2007, less than one-fourth of the tax credits for corn ethanol. Renewable electric energy production was also supported through the tax credits to holders of Renewable Energy Bonds, which help finance renewable energy projects. This tax credit was worth $60 million in 2007.

Biodiesel production was supported by three tax credits in 2007. A tax credit of 50 cents was provided for each gallon of biodiesel blended with conventional diesel. Another tax credit was available to businesses that use, sell, or trade biodiesel as a motor vehicle. That tax credit was $1 per gallon for biodiesel produced from agricultural crops and 50 cents per gallon for biodiesel produced from waste oils or other nonagricultural feedstocks. The total support for biodiesel from all three tax credits was $180 million in 2007.

Tax Credit $ Millions Percent
Total $3,970 100%
Ethanol Blender's Tax Credit $2,990 75%
Alcohol Fuel Tax Credit $50 1%
Production Tax Credit $690 17%
Renewable Energy Bond Tax Credit $60 2%
Biodiesel and Agri-Biodiesel Tax Credit $180 5%


Corn Ethanol Tax Subsidies Will More Than Double by 2015
The blender’s tax credit increase with each new gallon of ethanol produced. Moreover, the Energy Independence Act of 2007 requires that more and more corn ethanol be used each year until topping out at 15 billion gallons in 2015. This means the annual tax bill for taxpayers will also grow each year, from $3 billion in 2007 to almost $7 billion in 2015.

By 2010, ethanol will cost taxpayers more than $5 billion a year¾more than is spent on all U.S. Department of Agriculture conservation programs to protect soil, water and wildlife habitat. Meanwhile, intensification of corn production to supply the ethanol required by the 2007 Energy Independence Act threatens those same resources.

Year Ethanol Production Required
(Billions of Gallons)
Tax Bill
($ Billions)
2007   $2.99
2008 9.00 $4.59
2009 10.50 $4.73
2010 12.00 $5.40
2011 12.60 $5.67
2012 13.20 $5.94
2013 13.80 $6.21
2014 14.40 $6.48
2015 15.00 $6.75

 


¹ Energy Information Administration. Federal Financial Interventions and Subsidies in Energy Markets 2007. SR/CNEAF/2008-01. April 2008.
² The 2008 farm bill reduced the blender’s tax credit to 45 cents per gallon, beginning in 2009.