Rajan Wilcox
The US federal ethanol subsidy has been a topic of controversy, with supporters arguing that it encourages the production and use of biofuel, reducing the need for foreign oil and promoting energy independence. However, critics highlight the inefficiency of ethanol as a fuel, its impact on food prices, and the availability of alternatives. Since the 1970s, the ethanol industry has received an estimated $45 billion in subsidies, with the Renewable Fuel Standard (RFS) mandate being the largest current subsidy. The tax credit provided for ethanol blending has been a point of contention, with some arguing for its removal to reduce market distortion and taxpayer burden, while others emphasize its role in supporting farmers and reducing reliance on imported oil. The discussion around the ethanol subsidy involves complex considerations of energy policy, environmental impact, and economic implications for various industries.
| Characteristics | Values |
|---|---|
| Total subsidy amount | $45 billion (since 1980) |
| Annual subsidy amount | $3 billion (as of 2020) |
| Cost per gallon | $4.18 |
| Total cost | "tens of billions of dollars" per year |
| Tax credit | 51 cents per gallon (initially) |
| Tax credit | 45 cents per gallon (as of 2008) |
| Tax credit cost | $30.5 billion (2005-2011) |
| Tax break | 30% |
| Tax rate | 18.4 cents per gallon |
| Production increase | 130% (2005-2008) |
| Production volume | 9 billion gallons per year (as of 2008) |
| Production volume | 12 billion gallons (as of 2010) |
| Production mandate | 36 billion gallons by 2022 |
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What You'll Learn
The US ethanol industry has received $45 billion in subsidies since 1980
The US ethanol industry has received an estimated $45 billion in subsidies since 1980. The federal government has nurtured and maintained the industry with a steady stream of subsidies, with taxpayers spending tens of billions of dollars over the last 40 years. The largest current subsidy for corn ethanol is the federal Renewable Fuel Standard (RFS) mandate, administered by the Environmental Protection Agency (EPA). The RFS requires a certain volume of biofuels to be blended with US gasoline and diesel each year. Approximately 15 billion gallons of ethanol are now blended with gasoline annually, roughly 10% of gasoline (E10).
The ethanol subsidy, commonly referred to as the "blender's credit," offers ethanol blenders registered with the Internal Revenue Service a tax credit of 45 cents for every gallon of pure ethanol they blend with gasoline. This particular subsidy cost taxpayers $5.7 billion in foregone revenues in 2011, according to the US Government Accountability Office. Supporters of the subsidy argue that it encourages the production and use of biofuels, thereby reducing the amount of foreign oil needed to produce gasoline, and thus promoting energy independence.
Critics of the ethanol subsidy, including US Sen. Tom Coburn, argue that it is unnecessary and a waste of taxpayer money. Coburn led an effort to repeal the subsidy in June 2011, stating that it had failed to achieve its intended goals of energy independence, with consumption remaining only a small part of the country's fuel use. The Volumetric Ethanol Excise Tax Credit cost $30.5 billion from 2005 through 2011, according to Coburn. However, his effort to repeal the subsidy failed in the Senate by a vote of 59 to 40.
The ethanol industry has also received support through various government programs and incentives. The Alternative Fuel Vehicle Refueling Property Credit provided a 30% tax break for gasoline stations or other facilities installing biodiesel or 85% ethanol (E85) blender pumps, although this expired at the end of 2020. The US Department of Energy (DOE) provides funding for research and development to convert algae into biofuels and aviation fuel through the Scale-Up of Integrated Biorefineries Program. Additionally, the US Department of Agriculture (USDA) has announced plans to subsidize biofuel industry losses in 2020 due to COVID-19-related economic losses.
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$19.99
The US government provides tax credits for ethanol production
The US government has provided tax credits for ethanol production since the creation of the domestic market for corn ethanol after the energy crisis of the 1970s. The federal government has nurtured and maintained the ethanol industry with a steady stream of subsidies, tax credits, and the Renewable Fuel Standard (RFS) biofuels mandate. The RFS was implemented to reduce the country's dependence on petroleum fuels, which saw a 76% increase in the global average price of a barrel of crude oil between 2005 and 2008.
The Volumetric Ethanol Excise Tax Credit ethanol subsidy became law on October 22, 2004, when President George W. Bush signed the American Jobs Creation Act. This law gave ethanol blenders a tax credit of 51 cents for every gallon of ethanol they mixed with gasoline. In 2008, Congress reduced the tax incentive by 6 cents per gallon as part of the Farm Bill. According to the Renewable Fuels Association, gasoline refiners and marketers must pay the full rate of tax, which is 18.4 cents per gallon on the total gasoline-ethanol mixture, but they can claim a 45 cents per gallon tax credit or refund for each gallon of ethanol used in the mixture.
The Alternative Fuel Vehicle Refueling Property Credit, which provided a 30% tax break for gasoline stations or other facilities installing biodiesel or 85% ethanol (E85) blender pumps, expired at the end of 2020. The US government also provides funding for research and development to convert algae into biofuels and sustainable aviation fuel through the Mixed Algal Program.
The US ethanol industry has received an estimated $45 billion in subsidies since 1980. However, critics argue that these subsidies have failed to achieve their intended goals of energy independence and reducing greenhouse gas emissions. In 2011, US Sen. Tom Coburn led an effort to repeal the ethanol subsidy, stating that it cost $30.5 billion from 2005 to 2011 and that ethanol consumption remained a small part of the country's fuel use.
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The impact of biofuel subsidies on food prices
Biofuel production has led to a significant increase in demand for certain crops, such as corn, which is the main feedstock used for ethanol production in the United States. This increased demand for corn has resulted in higher prices, not just for corn but also for other crops. As more land is used to grow corn, the acreage dedicated to other crops, such as soybeans, wheat, and rice, has decreased, leading to reduced supply and higher prices for these crops as well. This ripple effect throughout the food markets has contributed to rising food prices globally.
However, not all studies agree on the magnitude of the impact. An OECD economic assessment from July 2008 acknowledged the negative effects of subsidies but found that the impact of biofuels on food prices was smaller. It predicted that current biofuel support policies would increase average wheat prices by about 5%, maize by around 7%, and vegetable oil by about 19% over the next 10 years. The assessment called for more open markets in biofuels and feedstocks to improve efficiency and lower costs.
The debate around biofuel subsidies and their impact on food prices continues. While biofuel production has undoubtedly contributed to rising food prices, other factors, such as oil prices, the weak dollar, and increasing meat and dairy consumption, also play a role. The complex structure of agricultural markets, where prices are influenced by various factors, makes it challenging to isolate the exact impact of biofuel subsidies on food prices. Nonetheless, there are concerns that continued expansion of biofuel production could lead to further increases in food prices and negatively affect food security, particularly in regions already struggling with hunger.
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The environmental impact of ethanol production
Since 1980, the ethanol industry has been awarded an estimated US$45 billion in subsidies. The Volumetric Ethanol Excise Tax Credit ethanol subsidy became law on October 22, 2004, when President George W. Bush signed the American Jobs Creation Act. This gave ethanol blenders a tax credit of 51 cents for every gallon of ethanol they mixed with gasoline. In 2011, U.S. Sen. Tom Coburn led an effort to repeal the subsidy, arguing that it was a waste of taxpayer money. The attempt failed in the Senate by a vote of 59 to 40.
Ethanol is often touted as an environmentally friendly renewable fuel. Plants that are made into renewable fuels absorb carbon dioxide from the atmosphere as they grow, and that same amount of carbon dioxide is re-released when the fuel is produced and combusted. Even when the energy use and emissions related to the full production process are accounted for, ethanol delivers significant greenhouse gas (GHG) savings compared to the fossil fuels it replaces.
Grain-based ethanol cuts GHG emissions by 44 to 52% compared to gasoline, according to the Department of Energy's Argonne National Laboratory. Similarly, researchers from Harvard, MIT, and Tufts concluded that corn ethanol offers an average GHG reduction of 46% versus gasoline. The use of ethanol in gasoline in 2024 reduced CO2-equivalent GHG emissions from transportation by 54.3 million metric tons.
However, some studies have found that corn-based ethanol is worse for the climate than gasoline. A 2019 study from the USDA found that ethanol’s carbon intensity was 39% lower than gasoline, partly due to carbon sequestration associated with planting new cropland. However, the study underestimated the emissions impact of land conversion, according to Dr. Tyler Lark, who stated that ethanol is likely at least 24% more carbon-intensive than gasoline due to emissions from land use changes, processing, and combustion.
Water usage in ethanol production is also a concern, although it is continually declining. It takes 2.7 gallons of water to produce a gallon of ethanol, compared to 2.5–8 gallons of water to produce a gallon of gasoline.
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The future of the ethanol industry post-COVID-19
The ethanol industry has been affected by the COVID-19 pandemic, with the industry losing an estimated $4 billion in revenue in 2020 and continuing to lose money as the pandemic continued into 2021. The pandemic caused a sharp decline in ethanol production due to reduced driving demand. Many ethanol plants remain closed, and transportation fuel demand is falling as additional economic shutdowns occur in many states.
Government policies have a significant impact on the ethanol industry. The US federal government has provided subsidies and tax incentives to promote the production and use of ethanol as a biofuel. The Volumetric Ethanol Excise Tax Credit, which provided a tax credit of 51 cents for every gallon of ethanol mixed with gasoline, became law in 2004 but was reduced by 6 cents per gallon in 2008. While there have been efforts to repeal the subsidy, it remains in place, although the specific tax credits and tariffs have changed over time. The US government's support for ethanol is driven by its goal of energy independence and reducing environmental impacts. However, there is also criticism that these subsidies benefit well-connected businesses at the expense of taxpayers and small businesses.
Market trends suggest a move towards alternative fuels and a decline in gasoline consumption. The adoption of battery-electric and hybrid electric vehicles is expected to reduce gasoline consumption and shift the focus towards more sustainable energy sources. The ethanol industry will need to adapt to these changing consumer preferences and market demands.
Technological advancements and collaborations between companies are also shaping the future of the ethanol industry. Companies are investing in the development of sustainable biofuels, biochemicals, and materials. For example, Novozymes and Attis Industries Inc. are partnering to produce renewable fuel, while ADM and Dupont Industrial Biosciences are working on the production of cellulase enzymes for grain-based ethanol plant operators. The US Department of Energy's Bioenergy Technologies Office provides funding for projects that reduce the cost of biofuel production technologies and scale-up production systems, as well as initiatives to reduce carbon emissions in first-generation corn ethanol production facilities.
In conclusion, the ethanol industry post-COVID-19 will be influenced by government policies, market trends, and technological advancements. The industry will need to adapt to changing consumer preferences, market demands, and technological innovations while also navigating the impact of government subsidies and regulations. The future of the industry depends on its ability to recover from the pandemic-induced losses, embrace sustainable practices, and remain competitive in a dynamic energy market.
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Frequently asked questions
The ethanol fuel subsidy is a federal subsidy that was introduced to achieve energy independence and reduce greenhouse gas emissions. It has been supported by policymakers from the Corn Belt.
It is difficult to calculate the exact total cost of the subsidy. However, according to U.S. Sen. Tom Coburn, the subsidy cost $30.5 billion from 2005 to 2011. The National Resource Defense Council (NRDC) also interpreted a study to mean that the subsidy is costing taxpayers $4.18 per gallon.
The subsidy has been criticised for being a waste of taxpayer money and for negatively impacting food prices. However, it has also been argued that the subsidy reduces the cost of biofuel production and scales up production systems.
Other subsidies for first-generation biofuels include soybean-derived biodiesel and cellulosic ethanol.
