NCPA - National Center for Policy Analysis

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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