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By Nathanael Greene on Apr 9, 2010 with 12 responses

Corn ethanol tax credit: most expensive way to create jobs ever?

In yet another example of ethanol industry spin, the Renewable Fuels Association released a state-by-state version of its highly inflated jobs study. This is just another part of big ethanol’s effort to make the case for extending the Volumetric Ethanol Excise Tax Credit (VEETC)—a massive, taxpayer-funded subsidy for corn ethanol—on top of both blending mandates under the Renewable Fuels Standard (RFS) and stiff border tariffs to protect domestic ethanol producers from foreign competition. I wrote yesterday about some of the reasons why the industry’s jobs numbers are way off, but given RFA’s release, it seems worth getting into more of the details.

There are three basic points here:

  1. Inflated jobs multipliers: As I discussed yesterday, big ethanol is using wildly inflated job multipliers. For every direct job created at an ethanol plant, the industry group Growth Energy is claiming 31.5 additional new jobs are created throughout the economy. For studies that try to be realistic and specific about jobs in the ethanol industry, a multiplier of about 6 is aggressive. A job multiplier of 3-4 is much more realistic, especially since big ethanol claims to have little to no impact on food and feed production or prices and therefore cannot take credit for somehow magically creating thousands of corn growing jobs that would have existed anyway.
  2. Inflated economic impact: To get to their inflated jobs numbers, big ethanol is also claiming that it will take a big economic hit from the loss of the VEETC and the associated import tariff. Unfortunately, they play fast and loose with the economics. (To get close to their numbers you have to assume that the industry is wildly uneconomic.) More on this below, but adjusting their numbers for a bit of reality and the hit is half to one quarter of what they claim. Estimates from the Food and Agricultural Policy Research Institute (FAPRI) come in at about a quarter. That means the direct jobs impact is 1/4 of industry estimates even before we get to a more realistic jobs multiplier.
  3. Just about any other use of $31 billion would create more jobs: If we start with a more realistic economic impact and the resulting, much smaller direct jobs impact and then use a more realistic jobs multiplier, we end up with a job impact of about two thousand. A five year extension of the VEETC will cost over $31 billion in taxpayer dollars. That means using the VEETC to keep about two thousand people employed for the next 5 years will cost of about $2.5million per job per year. I’ve written about NRDC’s proposal for a Greener Biofuels Tax Credit and obviously believe that would create more jobs, more security and more environmental benefits, but the reality is just about anything would be more cost effective than simply extending the VEETC in its current form.

So now to some of the wonky numbers behind points 2 and 3 above. The analysis in RFA’s study starts with the claim that if the VEETC and tariff expire, the price of ethanol will drop by the full $0.45 per gallon value of the VEETC. The premise here is that industry has fully internalized this incentive and so their marginal costs fully reflect it. For this to be true we have to accept the notion that corn ethanol is wildly uneconomic and needs this $0.45 simply to survive—meaning that neither the industry nor the oil companies are profiting at all at the taxpayers’ expense. While big ethanol likes to claim that its margins are razor thin, this implies that we’ll have to subsidize them forever. A more realistic assumption is that the oil companies are pocketing most if not all of the VEETC value. After all, the demand and supply have been a bit above the RFS mandated levels every year, which means the oil companies are setting the demand level and thus the price levels. Big oil gets to keep big ethanol’s prices low and keep the VEETC as profit.

This is a key assumption because the initial price hit of removing the VEETC triggers shifts in demand, which trigger further shifts in price and thus supply based on elasticities of supply and demand. The net result is a smaller change in the price and supply of ethanol.

[Since I had to remind myself, here’s a quick refresher on elasticity of demand and supply: the former refers to how demand in the market for a good changes in response to changes in price, whereas the latter refers to changes in the supply of the good as a result of price changes. When demand is perfectly inelastic, even large changes in price will not cause a decrease in demand. Perfectly inelastic supply—i.e. supply that is fixed no matter what the price—means that regardless how high a price people are willing to pay, no more supply of a specific good will be produced].

RFA notes that the elasticity of demand for ethanol, as with gasoline, is relatively inelastic, with fairly consistent published estimates (between -0.37 and -0.43, meaning a 10% decline in the price of ethanol would result in a 3.7 to 4.3% increase in demand). In the case of the elasticity of supply, however, the range of published estimates is much wider: from 0.37 on the low end to 4.0 on the high end. This large a discrepancy in estimates should prompt further discussion or perhaps the use of ranges and/or scenarios in an analysis such as RFA’s. Instead, RFA chooses the dubious route of simply averaging available supply elasticities to arrive at a magic estimate of 1.375 (meaning that a 10% decline in ethanol prices would result in a much higher 13.8% decline in production).

The results of their full calculation can be seen in this table from RFA’s study:

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Combining this averaged elasticity of ethanol supply with their earlier assumption that removing the VEETC would cause a $0.45 per gal drop in the price paid to ethanol producers, RFA estimates that producers will see a net drop in ethanol prices of 37 per gal or 22.5%, forcing them to cut supply by nearly 38%.

If we repeat RFA’s calculation with more modest assumptions—a $0.225 per gal drop in the price of ethanol with the removal of the VEETC (half the VEETC value assuming that the other half goes into the pockets of the oil companies) and lower-end estimates of the elasticity of supply to changes in ethanol prices (0.37 to 0.75)—the result is ethanol prices that are only 7 to 12% lower without the VEETC and a reduction in supply of only 5 to 10%.

Base Ethanol Price (cts/gal) 164 164
Price change with removal of VEETC (cts/gal) -22.5 -22.5
Net Ethanol Price (cts/gal) 141.5 141.5
Percent Change -13.7% -13.7%
Ethanol Demand Elasticity -0.43 -0.43
Potential Change in Ethanol Demand 5.9% 5.9%
Ethanol Supply Elasticity 0.37 0.75
Potential Change in Ethanol Production -5% -10%
Price Elasticity of Ethanol Supply -0.37 -0.75
Increase in Price from Reduced Production 1.9% 7.7%
Net Change in Ethanol Price -12% -6%
Ethanol Price after VEETC Removal (cts/gal) 144 153

Tellingly, the results of the FAPRI study that I wrote about a few weeks ago fall right into this range. In the FAPRI analysis of what would happen if the VEETC and tariff both expired, domestic production of corn ethanol still increases in every year, but between now and 2015, it grows by about 10% less than the baseline. The price also drops by $0.19 per gallon or 10% from the baseline.

So, what happens if the supply only changes by about 10% rather than RFA’s hysterical 33%? Well to start, a lot less direct job loss. At 45 employees per 100 million gallon per year plant, 1.4 billion gallons would require about 630 people to produce. With a jobs multiplier of 3 to 4, that’s just 1,890 to 2,520 jobs in the entire economy that are being driven by the VEETC at a cost of about $5.5 billion per year. That’s $2.1-2.9 million per job every year just to retain those jobs!

What this demonstrates is that the VEETC is widely wasteful—by paying for every gallon, we grossly overpay for any marginal benefits. There is a huge loss incurred by U.S. taxpayers when our scarce public resources are used this inefficiently to support mature technologies instead of investing in new, better performing advanced biofuels. Given the billions of dollars at stake to support a subsidy that generates little ethanol production above and beyond quantities already mandated by the RFS, Congress needs to seriously weigh the costs and benefits of extending the VEETC and ask themselves: should we really be subsidizing corn ethanol forever? Is there a better way we could be spending scarce taxpayer resources that would help bring new, more competitive biofuels to market, create more jobs, give us more security and deliver better environmental performance? The answer, I think, is a resounding yes. NRDC’s Greener Biofuels Tax Credit would pay for environmental performance, support innovation, and speed our transition to a clean energy economy with next generation biofuels that can make a real contribution to the environment, our energy security and the U.S. economy.

  1. By johnjames on April 9, 2010 at 6:06 pm

    Its easy for you write about something from your desk in NYC when really you have no idea what kind of effect this would have on rural communities and the agriculture industry. Do you have any idea what happens to a small town that loses a hundred quality jobs? No you dont.
    The ethanol industry is bolstering the U.S. economy by keeping our dollars right here in America. It’s also leading the way by creating markets for futuristic biofuels. If those future biofuels were ready to take on huge production I would be on board but their not. So ethanol is providing consumer with a choice at the pump which is saving them money and leaving fewer emissions.
    You keep on talking about ethanol subidies but you never seem to mention the oil subsidies that cost the U.S. 4x what ethanol is.

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  2. By Kit P on April 9, 2010 at 9:58 pm

    johnjames, it is the task of some to
    live in cities and explain why those who produce the food and energy
    they need are not doing it the way they would if they did not live in
    the city. How do they know? Well they read it in the NYT.

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  3. By russ on April 10, 2010 at 1:36 am

    @johnjames

    ‘Do you have any idea what happens to a small town that loses a hundred quality jobs?

    You keep on talking about ethanol subidies but you never seem to mention the oil subsidies that cost the U.S. 4x what ethanol is.’

     

    So the rest of the country is supposed pay for those hundred quality jobs for the small town? Why? Most people leave the small towns for decent employment.

    The volume of oil to ethanol is a total mismatch – point is invalid 

     

     

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  4. By Kit P on April 10, 2010 at 1:56 pm

    “So the rest of the country is
    supposed pay …”

     

    Well Russ, you have not established the
    rest of the country does not benefit from ethanol and subsidies in
    general do not provide a benefit.

     

    I think that being more productive is a
    good thing. Making ethanol allows American farmers to be more
    productive. In any case, the legislation that provided for ethanol
    did lots of other things. It was an energy bill was not a jobs bill.
    It also promoted new nukes my current job. Creating jobs was a
    secondary benefit.

     

    Currently more of my taxes are going to
    pay unemployed people. Why should I subsidize those who did not save
    for a rainy day?

     

    I am buying E10. I think it is a good
    thing. Putting lots out of work with an inconsistent energy policy
    is not a good thing.

     

    So Russ if you want to listen to some
    guy who lives in NYC, has a full time job not being productive thinks
    paying unemployment is better maybe you can explain it to me.

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  5. By russ on April 11, 2010 at 12:56 am

    @ Kit P – İ am not listening to your ‘guy who lives in NYC or reads the NYT’ nor am İ listening to your questionable logic either – it makes no more sense than your hypothetical NY guy. Your new ‘baffle them with BS approach’ is cute!

    Paying unemployment for that 100 people is a lot cheaper than supporting some failing industry!

    İ also  don’t have to establish anything about the benefit (or lack of) of ethanol for you Kit. 

    İf an industry can’ t stand on it’s own two feet it should go down – period. 

    By subsidizing any industry you are supporting far more than those who didn’t save for a rainy day – you are subsidizing those who have a failed idea – the big money boys. 

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  6. By Kit P on April 11, 2010 at 2:09 pm

    Well Russ if you think circular
    arguments are good logic I sure you can get lots of support at this
    blog.

     

    ‘Subsidies are bad.’

     

    ‘Ethanol receives subsidies.’

     

    ‘Therefore ethanol is bad’

     

    Your position is quite arrogant Russ.

     

    “İf an industry can’ t stand on it’s
    own two feet it should go down – period.”

     

    Who died and made you dictator. First,
    you are wrong. It is in our national interest to maintain some
    industries.

     

    “supporting some failing industry”

     

    “İ also don’t have to establish
    anything about the benefit (or lack of) of ethanol for you Kit.”

     

    Russ, you may want to put your hands of
    your ears and yell NA!, NA!, NA! while Rufus talk about the volume of
    ethanol is produced. I am glad my government has mandated a certain
    amount of alternatives. I think it is good policy based on
    experience and extensive reading.

     

    Yes, Russ you do have the free speech
    right to what you want to says. Stick to your guns.

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  7. By russ on April 12, 2010 at 12:04 am

    Kit P – 1) Maybe you should try your ‘teaching’ on things where you may possibly have some expertise and 2) Mr. Arrogance himself accusing someone of being arrogant? 3) Circular arguments – from Kit P? The man with a flexible position on just about everything? Depending on the day of the week it seems.  

    While İ agree it is in the national interest to maintain certain industries that would not include something as mundane as ethanol forever.

    The plant in said small town has no ‘right’ to survive at tax payer cost.

     

     

     

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  8. By moiety on April 12, 2010 at 3:56 am

    Lets break this down simply shall we.

     

    According to

    Ethanol producer magizine December 2009 subsidies to fossil fuel were 72 billion (not technically true I believe, it is to petroleum not fossil fuel but lets take the figure anyway) over 7 years. We will assume that 2/3 of this goes to liquid fuels. For ethanol they estimate less than 7.2 billion went to corn based ethanol.

     

    Now production per year using 2008 data we have approx

    Assuming the production is constant for the last seven years (grossly not true for ethanol) per M gal

    • Ethanol subsidy = 8.0E-4 billion$/Mgal/yr
    • Liquid fossil fuels = 1.6E-4 billion$/Mgal/yr

    This ignores the fact that ethanol figures have not been constant for 7 years and the co production of other procuts from the liquid fuel chain.

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  9. By Kit P on April 12, 2010 at 6:35 am

    Russ, did I say anything about
    ‘forever’ or ‘rights’?

     

    Again you are making up reason to be
    against something. I have no problem with productive people
    producing energy. We need lots of it and ethanol is helping us do
    it.

     

    It is like the person who complains
    about the weather without looking outside. I enjoyed a beautiful day
    and you said it was awful without checking. You are correct that you
    are under no obligation to tell me why it is not a nice day and you
    have ‘right’ to tell me there is something wrong with my logic.

     

    Yes I have an opinion about many issue.
    That is because producing energy is my livelihood.

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  10. By russ on April 12, 2010 at 8:44 am

    @Kit P – You have lots of opinions that is for sure – don’t know how much they have to do with your work place though. You would argue with a mule İ believe – and come out congratulating yourself on winning! 

     

    Time to go back to my policy of just not reading your garbage – works out best by far – very rarely is there any useful information in it anyway.

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  11. By CEA on April 12, 2010 at 3:55 pm

    The ethanol industry has made significant gains throughout the year. Now whether or not the benefits truly have outweighed the cost, it is difficult to say. Of course there are two sides to the issue with valid concerns. But as long as the “food versus fuel” conditions plagues the ethanol industry it will still be extremely inefficient in the face of conventional resources, again those that are also subsidized. We need energy in this country. Ethanol has a ways to go to fill its niche in this vision. Second and third generation biofuels do show promise but are still just a vision. At this point, America needs to adopt an “all of the above” energy approach where one source doesn’t take priority over another. Energy security isn’t coming from a single silver bullet, but a bucket shot from many different sources.
    Want to learn more about balanced energy for America? Visit http://www.consumerenergyalliance.org to get involved, discover CEA’s mission and sign up for our informative newsletter.

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  12. By lupe on September 14, 2012 at 5:55 pm

    The ethanol argument needs to include the factors of pollution to the ground and air (include water resource use).  Also include the cost of removing productive lands for actually producing food.  I would support the ethanol effort as an experimental with time limit and analysis for cost benefit on all of the above.  We should also include all other biological methods of producing fuels.    To move forward the way we did on this without all the knowing the problems it creates is crazy, regardless of how many jobs it creates.  It will create jobs to clean up the mess (if that’s even possible)..

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