The Inconvient Truth about Ethanol Subsidies

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“Nobody made a greater mistake than he who did nothing because he could only do a little.”- Edmund Burke

“Sooner or later everyone sits down to a banquet of consequences.” – Robert Louis Stevenson

What did you pay for gasoline today? While I was half filling up my gas tank this morning, I noticed a sign on the side of the pump, “This fuel contains 10% ethanol”. I can remember the good old days when we were paying $1.00 per gallon for gasoline. (1997 outside of Atlanta, Ga.). What a difference 11 years can make.

Since corn ethanol was blended in the fuel I purchased, why was the ethanol/gasoline blend selling for the same price of $3.75 per gallon and across the street 100% gasoline was selling for the same price? Why are the ethanol blends selling for the same price as 100% gasoline while the U.S. taxpayer is paying billions for corn ethanol subsidies that are supposed to help offset the rising cost of gasoline?

I am not against the United States developing alternative fuels and processes to help wean off our oil addiction. Gasoline prices are near $4 a gallon in the United States, partly as a result of a 39 percent rise in the price of New York oil futures since the start of the year. Prices have more than quadrupled since 2003.

Consider the following fact: when you blend ethanol with gasoline, the ethanol and bio-fuels blends will be consumed as blends with gasoline or petroleum diesel and bio-fuels (ethanol) for some time and will become complements to petroleum-based transport fuels, not major competitors with them.

However, as I have said in the past and will keep saying, if ethanol has commercial merit, then why are we paying a subsidy for ethanol? If ethanol cannot be produced without subsidized pricing, then why keep producing such a product? This has to be the bottom line!

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Just what are the subsidies costing the U.S. taxpayer?
In 2006, the feds paid ethanol blenders $2.5 billion and ethanol corn farmers $0.9 billion. The U.S. paid an extra $3.6 billion at the pump. Total was $2.21 extra per gallon of gasoline replaced. Of all that, $5.4 billion went for windfall profits creating what USDA’s chief economist called “ethanol euphoria”.

Also, subsidized corn results in higher prices for meat, milk and eggs because about 70 percent of corn grain is fed to livestock and poultry in the United States. Increasing ethanol production would further inflate corn prices. According to this study by Cornell university: “In addition to paying tax dollars for ethanol subsidies, consumers would be paying significantly higher food prices in the marketplace”. Well, no doubt all of us are paying more for our food this year.

Are ethanol subsidies necessary to “level the playing field?” Petroleum subsidies are something less than $1 billion a year – six to eight times less than ethanol subsidies – and work out to about 0.3 cents per gallon.

The biggest single ethanol subsidy is the Volumetric Ethanol Excise Tax Credit, VEECT, which grants a tax credit to blenders who combine ethanol with gasoline, in the amount of 51 cents per gallon of pure ethanol blended. Also, don’t forget the federal mandated Energy Policy Act of 2005 which, requires that 4.0 billion gallons of renewable fuels in 2006 and 7.5 billion gallons in 2007 be used. There are also “significant direct agricultural subsidies for farmers that reduce their water, fuel, and other costs below market”.

A report issued by The International Institute for Sustainable Development (IISD) has estimated that such subsidies currently sum to $1.05 to $1.38 per gallon of ethanol. or 42 percent to 55 percent of ethanol’s wholesale market price. This means the economic value of the resources that are used to produce a gallon of ethanol are nearly 50% greater than the value of the product to the consumers.

Also, the U.S. is importing ethanol and the impact of these mandates on the price of imported ethanol is greatly amplified by the 54-cents-per-gallon tariff currently in effect for imports of ethanol intended for use as a fuel. The U.S. government wants to make sure the import prices for ethanol have to compete with corn ethanol producers in the corn belt. That is what you call a level playing field for the farmer and ethanol producer, but a real bust to the consumer..

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Ethanol producers also take extra advantage of ethanol subsidies. Suppose oil prices are high enough that ethanol and gasoline cost the same to produce; say that’s $2.00 per gallon. Ethanol producers will take advantage of the fact that blenders want the 51¢ credit, so they will push the wholesale price of ethanol all the way to $2.51, at which point blenders will still see it as just as costly as gasoline in spite of the subsidy. The USDA notes that over the past 25 years, the ethanol producers did in fact push the price this high, in fact, they pushed it about 3¢ higher. The result is that producers have captured all of the subsidy paid to blenders. This was probably the intention, but notice that with gasoline costing just as much as ethanol, the producers don’t need any subsidy–the subsidy simply provides them with windfall profits.
What can or should be done? As early as 2006, definite recommendations were made but fell on deaf ears and it seems Congress decided on policies that were poorly considered and strong efforts from the ethanol lobbyists helped get the subsidies passed. Based on the following statement (October 2006) from Mr. Simon Upton, director of GSI,(Global Subsidies Initiative), of IISD. “Many of these subsidies are poorly coordinated and poorly target for optimum results. All indications are that subsidies are being piled on top of one another without policy makers having a clear idea of their potential impact on the environment and the economy. Yet the potential for waste on a grand scale and some spectacularly perverse environmental outcomes is large. There is an urgent need to examine the claimed benefits from bio-fuel subsidies, and to compare them with the costs of meeting the same goals in other ways,” says Mr. Upton. “Until then, we suggest that the U.S. Congress and the States declare a moratorium on programs that would increase or extend subsidies to liquid bio-fuels, with a view to developing a plan for phasing out subsidies to all transport fuels as quickly as possible.”

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9 Responses to The Inconvient Truth about Ethanol Subsidies

  1. Chief June 21, 2008 at 12:28 pm #

    “The biggest single ethanol subsidy is the Volumetric Ethanol Excise Tax Credit, VEECT, which grants a tax credit to blenders who combine ethanol with gasoline, in the amount of 51 cents per gallon of pure ethanol blended.”

    I don’t see where this subsidy specifies what feedstock the ethanol is derived from. It is my understanding that any ethanol derived from any feedstock would qualify. Are you arguing that all alternative technologies that cannot currently compete with fossil fuels should have to compete on a ‘level playing field’?

    Tragedy of the Commons

  2. chemicallygreen.com July 6, 2008 at 7:46 pm #

    @Chief: Thanks for your comments. The subsidy for ethanol blending with gasoline is paid to the blender of the tw0 fuels. You are correct, any type ethanol would qualify for this credit.
    However, the new biofuels should be able to be produced at a lower cost than corn ethanol to make them favorable as a diluent for gasoline, just like corn ethanol is being used. Yes, these new fuels will have to stand on their own cost merits because most government subsidies (kickbacks) have been cornered by the corn and corn ethanol lobbyists. Currently, unless Congress opens the debate on ethanol and biofuels made from biomass, the corn ethanol subsidies will continue going to the corn producers. As you are well aware of, the corn ethanol has been a big mistake for food prices and the consumer. Very little subsidies are currently being paid out for biofuel production, and subsidizing any fuels only drives up the price and causes shortages and other problems.
    In 2006, the effective wholesale price of ethanol, after subtracting the blender’s subsidy, was 80¢ higher than the price of gasoline with the same energy content, hence the indirect subsidy to ethanol, paid at the pump, was 80¢ per gallon of ethanol.
    Check out the post on Kudzu Ethanol plant startup in Tennessee. These people are not asking for government kickbacks, they want to operate on private funds.

  3. Chief July 13, 2008 at 4:53 pm #

    I still don’t get your argument. If *any* ethanol qualifies for the subsidy then I don’t see Congress has to ‘open the debate’ about biomass ethanol. When biomass and cellulosic ethanol can compete with corn ethanol, then they will. I do not agree that corn ethanol gets any special specific subsidy. Most subsidies for growing corn are price floors…those have not been needed since the recent price increases.

    “As you are well aware of, the corn ethanol has been a big mistake for food prices and the consumer.” – I don’t fully agree with that statement. While far from perfect, corn ethanol affects food prices much less than you would believe.

    Ethanol: Crime Against Humanity?

    “Check out the post on Kudzu Ethanol plant startup in Tennessee. These people are not asking for government kickbacks, they want to operate on private funds.” – Most all ethanol plants run on private funds. The kudzu ethanol would qualify for the blender’s ‘kickback’ just like any other ethanol. I don’t know why they would forgo that. If they have a profitable product it sounds like a winner. We definitely need many sources of fuel. The 54 cent tariff would benefit *any* domestic producer of ethanol, especially processes that are currently less mature.

    I am all for second and third generation bio-fuels…the sooner the better. I’m not sure where you’re coming on your arguments. Your article seems anti-ethanol, but you’re pushing Kudzu ethanol, which benefits from all the items you are arguing against. Just a little confusing…

    Thanks for the reply.

  4. ChemicallyGreen.com
    chemicallygreen.com October 24, 2008 at 5:55 pm #

    @Chief: I was reading over the comments you made and I check this out.
    A report (link is on the above post) issued by The International Institute for Sustainable Development (IISD) has estimated that such subsidies currently sum to $1.05 to $1.38 per gallon of ethanol. or 42 percent to 55 percent of ethanol’s wholesale market price. This means the economic value of the resources that are used to produce a gallon of ethanol are nearly 50% greater than the value of the product to the consumers.
    Chief, I am all for using ethanol and using less gasoline and oil. I am tired of shipping U.S. dollars to OPEC. What is going to happen to ethanol if gas prices keep spiraling down? Americans, in their current economic condition, will care less about ethanol and the green movement and unfortunately, are satisfied with lower gas prices. Same scenario is currently playing out in the EU. EU members are screaming to drop or reduce the Kyoto Protocol and well as other green programs. I want to see cellulosic biofuels become the standard, but 2022 is still a long way off to meet EPA mandate of 50%corn/50%cellosic ethanol. Having enough ethanol to really slow down our oil consumption is still further off than many realize.

  5. starsailor March 26, 2009 at 11:09 am #

    I would have to disagree. Based on research done by a number of economists, including myself, suggests that the ethanol subsidy is NOT going to corn producers. My research looked at this question specifically and there is no statistical effect on corn prices from the federal subsidy. Nor is there any indication that the subsidy has a statistically significant effect on the supply of ethanol.
    Although theory would suggest that there should be an effect, empirical analysis does not bear it out. It could be that the subsidy amount is very small compared to the total amount spent on corn.

  6. ChemicallyGreen.com
    chemicallygreen.com March 26, 2009 at 2:36 pm #

    @starsailer: Thank you for your comments.

    Please tell me where or who is getting the government subsidy for ethanol production? Not the corn grower just like you said. (Although farmers are getting other subsidies that help with growing corn for ethanol that many people are not aware of.)

    But when the price of corn dramatically increased last summer, think people could care less about the research completed for corn costs and subsidys.

    Think Archer Daniel Midland sends all their lobbyists to Washington because they want to make Congress feel good? They want to keep the blending subsidy and then pass that cost on to the consumer. I believe this post dealt with who is getting the ethanol subsidy, don’t think I can find where it talks about farmers getting ethanol subsidy.

    You mentioned that the subsidy did not have an effect on the supply of ethanol. Uh, don’t seem to remember posting about this fact. Do you think the subsidy for ethanol is having an effect on the current supply of ethanol?

    No one can deny the subsidy is being passed on to the consumer and ever how small it is in the total process, the tax payer still foots the bill.

    There are new biofuels processed that will make the corn ethanol completely obsolete in the near future, but these producers, with this new technology, will get the subsidy.

    Making ethanol with corn has been a complete fiasco from the beginning and you my friend are paying for the subsidized costs passed by Congress for producing ethanol.

    Appreciate your arguments, but its time to move on to the new cellulose technology that should make corn ethanol an item of the past. No worries about water, fertilizer, pesticides, using fossil fuels for planting, harvesting, destroying wild life and killing the Gulf of Mexico. This is more important than researching on a dead issue.

  7. Ammon July 21, 2009 at 4:43 pm #

    we’re going to start a small Ethanol & Bio-Diesel plant in upstate New York, We are going to us supermarket waste ie; veggies ,fruits, breads sugars etc, we’ve alreagy built a still cookers etc have ATF permit etc., just need to close on farm & set up, Fuel initially will be wood (have plenty on new farm) wind mills & solar panels so only need labor, plant will make 250,000 to 500,000 gallons 1st year

  8. ChemicallyGreen.com
    chemicallygreen.com July 28, 2009 at 12:46 pm #

    @Ammon: Thank you for your comments and plans to produce ethanol.
    Who is going to purchase your ethanol? How are you going to store the ethanol and what is your daily production in gallons going to be? What about water supply and labor costs. What is your projected cost per gallon going to be?
    What about getting the ethanol to blenders? Will you deliver or have customer pickup in his tanker. One last question, what is your quality control protocol?

    I am enclosing a link that you might find interesting about “Emergency Response for Ethanol”
    http://tw8.us/vn

    Wishing you the best in your new venture.

  9. Dan W. July 31, 2009 at 9:11 am #

    Hey.
    Get your facts right.
    Blenders credits goto blenders; meaning the oil companies.
    Ethanol producers don’t set their prices for ethanol; oil companies set the price they will pay.
    When ethanol is sold at gas stations, oil companies decide that price and don’t pass on the savings.
    High Oil prices were the reasons why corn prices were high. When fuel prices dropped, corn prices dropped.
    But ethanol industry continued to expand.
    It doesn’t add up if people like you believe it was ethanol which increased the price of corn.
    Why is corn so cheap now???
    How come the food industry won’t drop their prices to consumers?
    Corn and Oil are cheap…but food is still high??
    Who’s stealing from you and me?

    Educate yourself before you make statements.

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