Yesterday the Senate voted to repeal ethanol tax credits in a bipartisan 73-27 vote. The measure is expected to save the federal government $31 billion over the next five years, money that will be applied to deficit reduction. That’s good news for people concerned about out of control government spending, and the vote will certainly help Senators establish their fiscally conservative bona fides, but the net effect on the industry and on consumers will be negligible.
Ethanol demand in the United States is ultimately driven by the Renewable Fuel Standard, popularly known as the “ethanol mandate,” which was a key part of the Energy Policy Act of 2005. Under the ethanol mandate, Americans must consume at least 7.5 billion gallons of renewable fuels (aka: “ethanol”) in their vehicles by 2012. Two years later, Congress expanded the mandate under the Energy Independence and Security Act of 2007. Under this statute, Americans must consume at least 36 billion gallons of renewable fuels in their vehicles by 2022, and at least 15 billion gallons of that total must be corn ethanol.
Since government has mandated a demand for their product, big ethanol producers like Archers Daniels Midland don’t have much to worry about subsidies disappearing. What consumers used to pay in taxes will now be paid at the pump. If anything, repeal of ethanol subsidies without repeal of the ethanol mandate (or a tax reduction that reflects the defunding of subsidies) guarantees that Americans will have less discretionary income to spend.
How much will prices at the pump rise when ethanol subsidies disappear? Heretofore, ethanol refiners were given a forty-five cent excise tax credit for every gallon of ethanol they produced that was blended into gasoline. When that credit disappears, it’s reasonable to assume that gasoline prices will increase by something on the order to forty-five cents per gallon in order to keep ethanol refinery balance sheets sound.
In an ideal world, which is to say a free-market world, gasoline refiners could shop around to find less expensive alternatives to blending ethanol into their products and pass along those savings to consumers. But, that’s not the world we live in. The United States Congress has decreed that Americans must burn a certain amount of ethanol in their vehicles and we have to pay for that one way or another. If we don’t pay by filtering our tax dollars through the Treasury Department, then we’ll pay at the pump. It’s the classic “six of one, half a dozen of the other” conundrum.
Part of the problem is the enormous investment that America has made in the ethanol industry. A few decades ago, the United States had about thirty ethanol plants. Once Al Gore and his disciples started calling for more “renewable fuels” and a technologically-challenged Congress gleefully signed on to the program, the ethanol industry expanded more than three-fold. America has thus made a huge – hundreds of billions of dollars – investment in ethanol industry infrastructure. It’s not particularly efficient. It’s not environmentally friendly, as even Al Gore himself now admits. Nor does it ultimately do all that much to free us from the tyranny of foreign oil. If we could go back in time and invest the billions that we poured into the ethanol industry into other domestic energy sources, we would be far better off.
And yet, we have made this tremendous, though ultimately ill-conceived, investment. We should abandon the ethanol for energy industry, but that would cost us jobs and put many an ethanol plant out of business. It would, in other words, be tantamount to acknowledging defeat. Admitting that kind of failure would cost too many politicians too much face, and, ultimately, too many votes. So they will instead continue to perpetuate the charade that using corn ethanol for fuel makes sense, by shifting the pieces on the energy chessboard so subtly that most Americans won’t take notice.
Don’t be fooled. Eliminating the ethanol subsidy means that less of your tax dollars will be funneled into the bank accounts of the big ethanol producers. But it doesn’t mean that the amount of money you spend to support the left’s idea of energy nirvana will be reduced in the least. If anything, get ready to pay more than ever.
Rich Trzupek is a chemist and veteran environmental consultant with over twenty-five years of experience in the field. He is the author of the Encounter Broadside How the EPA’s Green Tyranny is Stifling America and the upcoming book Regulators Gone Wild: How the EPA is Ruining American Industry (Encounter Books).