Ethanol Subsidies Are Gone, But Not Forgotten

Letting the ethanol subsidies expire is only the first step government needs to take to fix energy policies.

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Daniel Kish is the senior vice president for policy at the Institute for Energy Research.

The 45-cents-per-gallon federal subsidy provided to ethanol blenders and the 54-cents-per-gallon tariff levied on foreign ethanol imports have come to be maligned as examples of government waste and protectionism. The fact that Congress has finally put an end to the ethanol welfare program is a step in the right direction. On December 31, 2011, 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, as VEETC and the tariff represent only one part of a greater effort to force consumers to use ethanol. Of much greater significance to the industry is the Renewable Fuel Standard (RFS), a mandate that requires a certain amount of ethanol be blended into gasoline every year at increasingly greater amounts.

[Peter Roff: Ethanol Subsidies Are a Test for Congress, Obama Administration]  

Under the RFS, 15.2 billion gallons of renewable fuel must be blended into transportation fuel in 2012, eventually ramping up to 36 billion gallons in 2022. Of that 36 billion number, 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.

Yet problems with the attempt to shift the market away from gasoline have already revealed themselves. In 2010, production of cellulosic ethanol—a fuel derived from farm waste and other non-food sources of biomass—was minuscule. According to the New York Times not a drop of ethanol was commercially blended with gasoline in the second half of 2010. This is a far cry from the congressional target of 100 million gallons for 2010, and well below the 5 million gallon adjusted target set by EPA after it became clear the industry would not meet Congress's goal.

[See a collection of political cartoons on energy policy.]

The outlook for next year isn't much better. The U.S. Energy Administration estimates that of the 6.5 million gallons of cellulosic ethanol mandated for 2011—a fraction of the original congressional goal of 250 million gallons—only 3.94 million will be produced in a best-case scenario.

Cellulosic ethanol is the lynchpin of the RFS, and its failure to become a viable fuel substitute will have consequences for U.S. consumers. For every gallon of ethanol that isn't produced by biofuel companies, oil companies must purchase "waiver credits" for failing to meet the RFS mandate to purchase a product that doesn't exist. In 2010 and 2011, EPA forced oil companies to pay about $10 million for waiver credits, and these growing costs are eventually passed on at the pump.

[See the 10 priciest years in history for gas.]

Furthermore, because no commercial-scale plants are currently operating to produce cellulosic ethanol, the industry remains heavily dependent on the kind of subsidies that gave us Solyndra. In September 2011, the same month the Solyndra scandal broke, the government awarded $237 million in loan guarantees to help finance construction of two cellulosic ethanol plants in Kansas and Iowa. Government has also invested heavily in advanced biofuels—in August 2011, the Obama administration funded a $510 million program in partnership with the Navy to produce advanced biofuels, and in December 2011, the Navy signed a contract to buy biofuel at $26 per gallon from two biofuel companies. Even though we think oil is expensive at $100 a barrel, biofuel at $26 a gallon is nearly $1,100 a barrel.

[Read: How the Government Failed in Energy Policy in 2011]

Even with subsidies, these industries are a long way away from meeting the RFS mandates enacted by Congress. Only corn-based ethanol, supported by 30 years of subsidies, has been produced on a scale large enough the meet the RFS, and it too comes at a price. Corn-based ethanol is present in the E10 blend that makes up about 90 percent of gasoline on the market, but provides less power than gasoline, gallon for gallon. Additionally, the diversion of corn from food to fuel has been cited as a major culprit in rising global food prices, increasing death and disease in the developing world.

Any way you slice it, the RFS mandate to use ethanol is bad for American drivers and bad for the world's poor. If Congress really wanted to put an end to corporate welfare for the select few, taking a hard look at who benefits from the RFS would be a good place to start.

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