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By Nathanael Greene on Apr 7, 2010 with 3 responses

Big Ethanol’s Push for Tax Credit Uses Bad Jobs Data

Big ethanol has gone into high gear lobbying for the extension of the Volumetric Ethanol Excise Tax Credit (VEETC). This article summarizes the basics. At the top of their list of dire warnings are claims that allowing the subsidy to expire at year end will hurt domestic ethanol producers and spell major U.S. job losses. But these predictions of gloom and doom don’t hold water. Not only does the VEETC support little marginal ethanol production above and beyond the Renewable Fuels Standard, but job creation claims being touted by corn ethanol industry groups like Growth Energy and the Renewable Fuels Association (RFA) are hugely inflated. Finally—and I’ll come back to this later and in future blogs—we can get a lot more domestic green jobs using the $30+ billion that a 5 year VEETC extension would cost U.S. taxpayers in smarter ways.

I’ve written before about how the VEETC is redundant when we have the RFS, which already requires oil companies to buy and blend to 12 billion gallons of ethanol into our gasoline this year and 15 billion gallons in 2015. The industry counters that the oil companies buy more corn ethanol than the RFS requires because of the VEETC and that without the VEETC and the tariff that keeps the VEETC dollars at home, U.S. corn ethanol would have to compete with international ethanol. Neither of these claims particularly plucks at my heartstrings, but if this is what the industry thinks tax payers should pay for, why on earth should we subsidize every single gallon? Why pay the old, fully amortized plant the same amount as the new plant creating construction jobs and struggling to pay off debt? I calculated the cost of marginal ethanol production driven by the VEETC at $4.18 per gallon. The VEETC, which pays oil companies $0.45 per gallon to buy any old ethanol, has to be the least cost-effective way to get just about anything you might want to get from the biofuels industry. Unless you’re just trying to line the pockets of the oil companies and big ethanol.

Beyond the redundancy and inefficiency of the VEETC, the industry is also making ridiculous jobs claims. Estimating the jobs impact of investment in any industry is difficult, but it is particularly difficult in an industry like ethanol, for which well-established industry-specific “job multipliers” are not readily available. Job multipliers take into account three distinct effects of investment: direct jobs created at a new ethanol plant; indirect jobs created in industries that supply the materials needed to produce the ethanol; and induced jobs, which are generated when those new workers spend their earnings. Only the first of these categories is based on ground up data. The other two are calculated by multiplying the first by a job multiplier, so is easy to see how even a slightly over-optimistic multiplier can easily inflate estimates of indirect job creation in the broader economy and, conversely, how assumptions about job multipliers can easily be manipulated to make outlandish claims about job creation.

For an example, we need look no further than this Growth Energy study, which estimates that an average 100 million gallon per year (mgy) ethanol plant will generate 1,417 jobs across the national economy. Given Growth Energy’s own assumption that such a plant would only require approximately 45 employees, this implies that for every worker directly employed at an ethanol plant, a whopping 31.5 additional new jobs are created across the economy!

Growth Energy uses off-the-shelf Bureau of Economic Analysis (BEA) multipliers to estimate the jobs created as initial expenditures for the construction of a single 100 mgy ethanol plant ripple through the economy. However, while the total impact of a corn-ethanol plant on the local or national economy is based on how much economic activity is generated in the businesses that supply everything needed to produce the final product, as Craig Cox points out in his piece on Big Ethanol’s Inflated Jobs Claims, estimating a credible job multiplier to fit the unique input requirements of the corn ethanol industry would involve additional, industry-specific analysis and careful adjustments to existing BEA multipliers:

“The BEA collects no data specific to the [corn ethanol] industry. In BEA’s data and its multipliers, corn-ethanol is subsumed under the much larger “organic chemicals” category. Taking off-the-shelf multipliers for organic chemicals and using them to analyze the corn-ethanol industry, as Growth Energy does, leads to inflated estimates of job creation that don’t stand up to independent analysis.”

And here’s the great twist on these numbers: many of the jobs claimed by the industry are associated with the key input, growing corn. RFA trumpets this supposed job creation loud and clear in this 2009 study. But when it comes to concerns about the supply of food and emissions from land-use change, the industry is fast to disavow these same jobs, claiming that it has little or no impact on the market for corn products. If we are to accept the ethanol industry’s own arguments on ILUC, then it is bogus for RFA to take credit for the creation of the industry’s up-stream supply linkages and any associated jobs—big ethanol simply cannot have it both ways.

The reality is of course more complicated. Neither of the industry’s extreme claims (all the jobs, but none of the land impacts) is right. A lot of the feed value is preserved through the distillers grains and would have been there for corn farmers even in the absence of a corn ethanol industry (by some estimates, fully 2/3rds to 3/4ths of the jobs were already there). But US farmers would have been growing crop any way thanks to domestic agricultural subsidies and just exporting more than we do today. Thus if there’s any significant job creation in agriculture, it’s probably internationally where farmers are trying to make up for the higher level of exports our farmers would have been able to supply.

At $0.45 per gallon of ethanol the VEETC will cost taxpayers nearly $5.4 billion this year—money that could be better spent on emerging and more competitive energy technologies with greater potential to create the green jobs we need. Scarce taxpayer dollars should be allocated across competing resources on the basis of sound analysis about potential economic gains, not exaggerated industry claims about job creation. A greener, technology-neutral biofuels tax credit, such as I’ve written about before, would pay domestic renewable fuel producers for real environmental performance, speed the transition to advanced biofuels that can make a real contribution to our energy security and thus do more to generate both reinvestment and new investment than the current VEETC. A cleaner environment, more security and more jobs! That’s a smarter way to use tax payer money. (Stay tuned for more on the jobs benefits of a greener biofuel tax credit in upcoming posts.)

  1. By johnjames on April 7, 2010 at 5:12 pm

    How about you compare how much oil subsidies are costing American Tax Payer compared to Ethanol? Probably because it’s 4 times as much. Ethanol is bolstering our economy, bettering our environment and reducing America’s dependence on foreign oil. What is wrong with putting money towards developing a young, renewable, home-grown energy source that is better for the environment and providing thousands of jobs in the United States.

  2. By OxyMaven on April 8, 2010 at 8:04 am

    We need alternative transportation fuels, and we need ethanol, even some corn ethanol, but we need to make sure that there is a net benefit from the non-market decisions being used by our government to (presumably) reduce our dependence (not an addiction) on oil (and I’m not so worked about ‘foreign oil’ as others). It’s hard to find any credible defense of the Growth Energy (or RFA) job numbers or the need for both VEETC and a mandate. Misinformation from those organizations is chronic, and if you want to find another almost ridiculous statement, evaluate their grossly exaggerated claims about the energy security benefits of ethanol. How much ‘foreign oil’ does ethanol displace? Probably only half as much as those advocates claim. We need much better scientific and independent assessments of the full life cycle costs and benefits of both alternative fuels and for petroleum. And that means much more than just GHGs, it means a full and robust sustainability assessment. We get very little of that in the current debates, and our politicians on both sides are pretty much clueless about the facts of this very important issue. USDA and DoE sometimes don’t do much to help out either, and I’m not sure about EPA. All of those organizations have the expertise to assess the merits of the job claims, and economic and environmental benefits claimed by ethanol advocates – they should do so regularly. If they don’t, CBO and GAO should be able to step up and analyze these things too. It’s not that hard to figure out, and all of their voices should be part of the ongoing discussion.

  3. By paul-n on April 9, 2010 at 12:22 am

    How about you compare how much oil subsidies are costing American Tax Payer compared to Ethanol? Probably because it’s 4 times as much.
    That may be true, but two wrongs don’t make a right, in this case, it just makes everyone poorer.
    Ethanol is bolstering our economy, bettering our environment and reducing America’s dependence on foreign oil.
    if this industry cannot survive without subsidy, as it claims, then it is not bettering the economy, it is a drag on it. What hard evidence is there that it is improving the environment? It is displacing some foreign oil, so it is achieving something, but given that 10% is mandated, it would achieve this without the subsidy, so what value is delivered by the subsidy?

    What is wrong with putting money towards developing a young, renewable, home-grown energy source that is better for the environment and providing thousands of jobs in the United States.
    The ethanol industry actually pre-dates the oil industry. Ethanol was in widespread use as a vehicle fuel in the early 20th century – Henry Ford’s model T was designed to run on ethanol, so it is hardly a “young” industry.

    And if people really want to invest in this industry, they are free to do so – but the current situation is forcing everyone to not only use the product (the 10% mandate) then then pay an additional tax to do so. Does taking $5bn a year out of taxpayers pockets really create more ethanol jobs than it costs the wider economy? is this really the way to govern, to elevate the few by the depression of the many?

    There is one simple measure of whether a (non government) industry justifies itself – profitability. The concept that the people will pay you more to provide the product than what it costs to produce (and deliver) it. If the ethanol industry is not profitable without this subsidy, even though it has a 10% mandate, then clearly, the people are not prepared to pay more than what it costs. And if that is the case, should the will of the ethanol industry trump the will of the people?

    Would make a great referendum question, now wouldn’t it?

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