Ethanol. Henry Ford called it the “fuel of the future” in the 1920s. Decades later, policymakers put laws in place to increase the amount of ethanol in our fuel supply. Environmentalists and the Midwest sold it as a way to decrease American dependence on foreign oil and a way to reduce greenhouse gas emissions. But it’s accomplished neither and instead become an industry reliant on subsidies, mandates and protectionism. Washington needs to reverse these policies and Senator Coburn’s (R-OK) amendment to repeal the Volumetric Ethanol Excise Tax Credit (VEETC) is a good first step, but it should be coupled with offsetting rate reductions elsewhere.
The VEETC is a 45-cent blender’s credit that doles out $5-6 billion a year for petroleum refiners to blend ethanol into gasoline. Although some claim this is another handout for oil companies, the credit will be passed up the line to the ethanol producers and corn growers, or as the Wall Street Journal says, ethanol producers “can charge some 45 cents a gallon more than the market would otherwise bear.”
According to the supporters, the production of corn ethanol has caused rural employment to increase. It has, in the ten Midwestern states where most ethanol production occurs, but not in the other 40 states. Supporters of ethanol claim the loss of ethanol production will impact the economy negatively – through job loss particularly. However, “expected job loss is minimal because jobs in the ethanol industry are protected by the Renewable Fuels Standard.” In other words, because law requires production of 36 billion gallons of ethanol by 2022, the guaranteed share of the marketplace guarantees jobs. Even so, saving jobs isn’t a good reason to keep bad policy in place. If jobs related to ethanol production cannot survive without the government’s crutch, they should be reallocated to more efficient use. Broad economic growth creates jobs, not government policies that subsidize jobs and production at the expense of jobs and production elsewhere in the economy.
When you take into account the production mandate, there’s very little bang for the subsidized buck. Because there’s a production quota, the value of the blender’s tax credit is what additional ethanol will be produced with that money. A University of Missouri analysis pegs the cost at $4 per gallon for each additional gallon of ethanol produced as a result of VEETC. As the mandate ratchets up, your taxpayer dollar doesn’t even go that far. An Iowa State University study estimates that the VEETC will cost $7 per gallon of ethanol this year that if Congress continues to extend the VEETC, it will cost $30.40 per gallon.
To make matters worse, that’s not the end of the preferential treatment ethanol producers enjoy. We can’t even buy ethanol competitively. We could be importing Brazilian sugarcane ethanol, a fuel source that is less susceptible to crop disruption such as in the Midwest and is more environmentally friendly. Yet, there is a protective tariff against Brazilian sugarcane ethanol that eliminates a competitive market.
Then there’s the fact that corn ethanol actually produces a greater harm to the environment just from being created. “CO2-emitting fossil fuels are used to make fertilizer, operate farm equipment, power ethanol distilleries, and transport the ethanol to market.” On top of the damages from production there are the damages from the creation of production. In order to grow corn farmers must plow more land, the more land plowed not only means less area for trees but can also “release carbon previously locked up in soils and trees.”
Congress should get rid of all of three of these market-distorting policies. Senator Coburn’s amendment to eliminate the VEETC and consequently $6 billion in wasteful spending is a good place to start, but it should be offset with a broad tax cut to avoid any net tax increase.
Although it may be a catchy sound bite, America is not addicted to oil. As the Competitive Enterprise Institute’s Marlo Lewis says, “consumers will stop buying gasoline the moment a superior product comes along.” Ethanol and other biofuels may eventually be that superior product. Electric vehicles could as well. But it’s not the role for the government to force these sources of fuel and technologies into the marketplace.
In a free market, fuel producers and users should be allowed to make their own fuel decisions without federal bureaucrats and powerful special interests deciding that for them.
Sarah Murphy contributed to this post.