NCPA - National Center for Policy Analysis

Time To End Ethanol Subsidies

November 9, 1999

California's concern over groundwater contamination caused by methyl tertiary butyl ether (MTBE) has helped reenergize efforts to promote ethanol-blended gasoline, say analysts. But unless the ethanol tax credit is eliminated, we will not know whether ethanol or some other additive is an effective, economical alternative to MTBE.

Ethanol derived from corn is an alternative to MTBE -- an additive derived from natural gas that adds oxygen to gasoline, reducing air pollution. Ethanol-blended gasoline is supposed to reduce carbon monoxide emissions, but it also increases emissions of nitrogen oxides (NOx) -- a type of greenhouse gas implicated in global warming.

  • Gasoline marketers who blend ethanol with gasoline can receive an income tax credit amounting to $0.54 per gallon of ethanol or a partial excise tax exemption of 5.4 cents per gallon of gas.
  • Since 1980, ethanol has been subsidized by tax credits amounting to $10 billion.
  • California's contemplated switch from MTBE to an ethanol-blended gasoline represents 200 million bushels of corn, with an average of 2.525 gallons of ethanol produced from each bushel.
  • Thus the California market has the potential to use approximately 505 million gallons of ethanol.

Taxpayers, even in markets where subsidized ethanol isn't available, pay to subsidize ethanol production, say analysts.

If the subsidies were ended, MTBE isn't the only alternative. For example, methanol could be derived from industrial grade hemp grown by Iowa farmers. The only way to determine which is the best alternative is to remove the ethanol subsidy and let the marketplace decide.

Source: Arlan DeBlieck, "It's Time To End The Ethanol Tax Credit," Iowa Economic Scorecard, October 1999, Public Interest Institute at Iowa Wesleyan College, 600 North Jackson Street, Mt. Pleasant, Iowa 52641, (319) 385-3462.


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