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By Robert Rapier on May 16, 2008 with no responses

Redundant Ethanol Subsidies

The proposed farm bill just sent to President Bush (and expected to be vetoed) contains several ethanol provisions. One is to cut the corn ethanol subsidy from $0.51/gal to $0.45/gal. Forbes explains:

Ethanol For Everyone!

It also includes $1 billion for energy-related programs, including several provisions related to ethanol and other biofuels. Notably, it reduces the tax credit paid to ethanol producers from 51 cents to 45 cents per gallon. The bill also establishes a sugar-to-ethanol program and includes a temporary tax credit of up to $1.01 per gallon for production of cellulosic ethanol, made from non-edible products like wood chips.

“Now that the ethanol industry has matured, it is appropriate to curb the tax subsidy provided to ethanol,” says a Senate Finance Committee report on the tax provisions of the bill.

A small reduction in the subsidy, for an industry that has “matured” completely misses the point, which is “Why is there a need for a subsidy?” Answers will vary, depending on who you ask, but every answer I have ever heard also misses the point: Ethanol is mandated. It seems that people don’t understand what this means. It means that it is mandatory that a certain amount of ethanol is blended into our gasoline supply. For 2008, it is required that we blend 9 billion gallons of ethanol into the gasoline supply. The cost of the ethanol is not a consideration in the mandate, so why is the subsidy required?

In my opinion, the subsidy remains to hide the true cost of ethanol. If there wasn’t an offsetting credit, then the economics of ethanol blending look a lot worse. So what? It’s still mandatory. This means that if the economics look worse, the cost is now going to be passed on to consumers. Under the current system of a blender’s credit, our taxes subsidize drivers. People who don’t drive are subsidizing drivers. If you removed the subsidy, drivers would be forced to pay higher prices for fuel with less energy content – or start thinking about conserving.

Digressing for a moment, this is certainly not the only case in which our taxes subsidize drivers. While some have argued that certain wars are hidden oil company subsidies, in reality this is just another example where the government subsidizes driving (which theoretically is still beneficial to oil companies, by keeping prices lower and demand high).

The subsidy for cellulosic ethanol is a different matter. In the case where you want to influence a technology in a certain direction, those kinds of subsidies make more sense. It’s the same question I have asked before: “Do subsidies to oil companies ever make sense?” Only in the case that you are trying to influence their behavior in a certain direction. In the case of cellulosic ethanol, you are trying to wean producers away from using food. (For the record, I am not a big fan of governments trying to pick technology winners; I would prefer to raise carbon taxes and then let the alternatives compete with each other on a level playing field).

But get rid of grain ethanol subsidies. They are redundant with a mandate in effect.