Congress Ends Taxpayer Funding Of Ethanol Subsidies

When the U.S. Congress adjourned for the holidays on December 23, its departure sealed the fate of subsidized ethanol production. During its session, the Congress did not renew a tax break for U.S. production of corn-based ethanol that had become increasingly unpopular across a wide area of the political spectrum.

The tax credit amounted to forty-five cents per gallon of ethanol that was blended into gasoline. It had been in place since 1980. As reported the next day, by some estimates, total subsidies to the ethanol industry may have reached $45 billion over that period. That is several times the total loans, grants, and tax credits provided thus far to the U.S. electric-car industry.

In June, the Senate voted 73-27 to end the tax break. That vote, attached to an economic development bill that was stalled, was viewed as symbolic--letting Congress members go on record against continuing the subsidies without effectively ending them. It proved to be a test case that demonstrated the waning support in Congress for the corn-based ethanol industry. Three weeks later, an agreement was reached to end the subsidies for real--and it held for the rest of the year.

Ending the ethanol tax breaks is projected to save about $2 billion over several years. Of that total, two-thirds is to be applied to cutting the national debt, although it represents just one-tenth of one percent of the total national debt of $14.3 trillion.

Using corn is the least productive way to make ethanol, at roughly three hundred gallons per acre of feedstock. The Brazilian ethanol industry gets twice as many gallons per acre using sugar cane, and other feedstocks like switchgrass have been projected to produce up to 1,200 gallons per acre. Development of cellulosic ethanol refineries that use non-corn feedstocks have lagged commercially, despite several pilot projects.

U.S. corn ethanol had further been protected by a 54-cents-per-gallon tariff on imports of ethanol from other countries (meaning Brazil). That import duty was also ended by the departure of Congress for the year. But with sugar prices high in Brazil, imports of ethanol aren't likely to spike in the short term.

That leads to a longer-range question: Will there be sufficient ethanol produced and imported to meet the escalating ethanol-use requirements of the 2007 Energy Independence and Security Act passed by Congress? That law requires that thirty-six billion gallons of ethanol be blended into U.S. vehicle fuel by 2022--which is more than three times the 11.1 billion gallons used in 2010. The requirement rises to fifteen billion gallons for 2015.

Congress has blocked the EPA's approval of E15 gasoline, which has up to fifteen percent ethanol, largely at the request of automakers and others who fear damage to engines not designed to handle fuel with that volume of ethanol. The current standard, in places for decades, permits up to ten percent ethanol in pump gasoline.

So while Congress has ended tax breaks, it may have set up the fuel industry for failure on the 2007 mandate by explicitly banning E15 gasoline. Until that is resolved, the politics of ethanol are likely to remain fractious.

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