Ethanol Subsidies Are Gone, but Not Forgotten

January 13, 2012

Congress finally put an end to the ethanol welfare program on December 31, 2011, when the $6 billion per year Volumetric Ethanol Excise Tax Credit (VEETC) was allowed to expire and the ethanol import tariff was slashed from the books.  However, those hoping that 2012 would be a fresh start are bound to be disappointed.  The true culprit of market intervention on behalf of ethanol was neither the VEETC nor the tariff, but the Renewable Fuel Standard (RFS), a mandate that requires a certain amount of ethanol be blended into gasoline every year at increasingly greater amounts, says Daniel Kish, the senior vice president for policy at the Institute for Energy Research.

  • Under the RFS, 15.2 billion gallons of renewable fuel must be blended into transportation fuel in 2012; this figure will eventually be 36 billion gallons by 2022.
  • Of the 36 billion, the United States must produce 16 billion gallons of cellulosic ethanol, 15 billion gallons of traditional corn-based ethanol, 4 billion gallons of advanced biofuels and 1 billion gallons of biodiesel.

This last breakdown presents numerous sources of friction.  Only one of these sources of renewable fuel (corn-based ethanol), is currently capable of keeping up with federally mandated quotas.  The industries required to produce cellulosic ethanol and biofuels are still grossly underdeveloped.

  • While Congress mandated 100 million gallons of cellulosic ethanol be blended into transportation fuel in 2010, the New York Times reported that not a drop was blended during the entire second half of the year.
  • The original mandate of 250 million gallons for 2012 will also almost certainly not be met: the U.S. Energy Administration estimates that only 3.94 million will be produced under the best circumstances.
  • The failure of production in these areas will prove costly, as the Environmental Protection Agency forced oil companies to pay about $10 million for waiver credits in 2010 and 2011 -- costs that are inevitably passed onto consumers.

These mandates are not only unfeasible, but also risky: the Obama administration has made available loan guarantees (similar to those made to Solyndra) for the development of cellulosic ethanol and biofuels ($237 million and $510 million, respectively).

Source: Daniel Kish, "Ethanol Subsidies Are Gone, but Not Forgotten," U.S. News and World Report, January 5, 2012.

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