Ethanol’s Federal Subsidy Grab Leaves Little For Solar, Wind And Geothermal Energy
Thursday, January 8, 2009

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

As Congress and the incoming Obama administration plan the nation’s next major investments in green energy, they need to take a hard, clear-eyed look at Department of Energy data documenting corn-based ethanol’s stranglehold on federal renewable energy tax credits and subsidies. Solar, wind and other renewable energy sources have struggled to gain significant market share with modest federal support. Meanwhile, corn-based ethanol has accounted for fully three-quarters of the tax benefits and two-thirds of all federal subsidies allotted for renewable energy sources in 2007. A little noticed analysis buried in an April 2008 report from the federal Energy Information Administration (EIA)1 shows that the corn-based ethanol industry received $3 billion in tax credits in 2007, more than four times the $690 million in credits available to companies trying to expand all other forms of renewable energy, including solar, wind and geothermal power.

Ethanol Got 76% ($3 Billion) of All Federal Renewable Energy Tax Credits in 2007

Pie chard showing that ethanol received 76% of renewable energy tax credits in 2007 The federal bill for ethanol subsidies grows with every gallon of ethanol produced. By 2010, ethanol will cost taxpayers more than $5 billion a year -- more than is spent on all U.S. Department of Agriculture conservation programs to protect soil, water and wildlife habitat. Now the ethanol industry wants even more. In recent weeks, the corn ethanol lobby has pushed for billions in new federal subsidies as part of the economic stimulus package. Corn growers and ethanol companies are also pressing for dramatic increases in the amount of ethanol Americans will be required to put into their gas tanks—even if it results in worse fuel economy and more engine repairs. Once touted as the energy equivalent of a free lunch, corn ethanol has proved to be an over-hyped and dubious renewable energy option. Ethanol made from corn has extremely limited potential to reduce the country’s dependence on imported oil, and current production systems likely worsen greenhouse gas emissions. Moreover, despite billions in federal subsidies on top of a government mandate that forces motorists to buy ethanol, the industry’s financial outlook remains highly unstable. A fleeting few years of windfall profits and breakneck construction of ethanol plants gave rise to talk of “sheikdoms” springing up in the Midwest to rival those in the Middle East and a “rural renaissance" featuring hundreds of thousands of new jobs. But that was last year. Today, a glut of ethanol, abruptly lower gasoline prices and wild swings in the corn market have caused the ethanol industry's profit margins to evaporate, hammered its stock values, triggered major bankruptcies and shredded ambitious plans to construct dozens of new plants. Hence the latest burst of special pleadings from the ethanol lobby. Its spokesmen have floated a proposal for billions more in taxpayer handouts via the economic stimulus bill, and they want an expanded government fiat that would require drivers to use as much as twice the ethanol that Washington currently dictates. Even if Washington rejects the industry’s latest wish list out of hand, the nation will still be saddled with a lopsided incentive structure that has rewarded politically powerful, subsidy-dependent ethanol producers at the expense of a diversified and sustainable energy future. America can do better. The changes we need to make sustainable energy a reality:

  • Phase out tax credits for corn ethanol and subsidize other biofuels only if they show clear promise to meet strict climate and environmental protection standards.
  • Rebalance the U.S. renewable energy and energy conservation portfolio to favor options that do the most to reduce fossil fuel use, safeguard the environment, spur more widely-shared economic development and increase energy security.

 

1 Energy Information Administration, U.S. Department of Energy. Federal Financial Interventions and Subsidies in Energy Markets 2007. SR/CNEAF/2008-01. April 2008.

 

Background

 

 

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.

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