UPDATED June 8th to correct an error made in the original post.
I wrote last week that we could soon expect the corn ethanol industry, faced with growing bipartisan calls to end corn ethanol subsidies, to start playing on consumer fears about rising gas prices and arguing that we need more corn ethanol because it reduces the price of gasoline at the pump. So arriving in Washington, D.C. this morning, I wasn’t at all surprised to see that the Renewable Fuels Association (RFA), one of the largest corn ethanol lobby groups, had rolled out a new ad campaign in the D.C. Metro. The new ad claims, amongst other things, that ethanol reduced the average American household’s gasoline bill by more than $800 and that if ethanol disappeared, “gas prices could rise by as much as 92%.”
RFA doesn’t cite the source of their numbers in their ad so there’s no way to trace their claims, but It’s not difficult to see that these claims are wildly exaggerated.
Under the Renewable Fuel Standard (RFS), oil companies are required to blend increasing amounts of corn ethanol into U.S. transportation fuels every year. On top of that, the federal government provides these oil companies a tax credit—known as the Volumetric Ethanol Excise Tax Credit or “VEETC”—for every gallon of ethanol blended with gasoline. Under the current VEETC, valued at $0.45 per gallon, American taxpayers spend roughly $6 billion per year subsidizing corn ethanol by essentially paying oil companies to obey the law.
So who benefits from these billions in subsidies? Depending on the price of ethanol relative to the price of gasoline—which affects the blending margin for oil companies—oil companies are able to pocket more or less of the VEETC (the rest goes to the ethanol producers themselves). Oil companies can then pass some of that value through to drivers in the cost of gasoline at the pump. But what’s clear is that American drivers are not at the top of the beneficiaries list.
An independent analysis by Hart Energy Consulting looked at the costs and benefits to taxpayers and drivers of continuing to subsidize corn ethanol with the VEETC. They found that the average benefit to U.S. drivers nationwide in 2009 was $8.76 on average—a far cry from the $800 benefit per household that RFA’s new ad claims. But because the mileage of gasoline blended with ethanol is approximately 2-3% lower than regular gasoline (ethanol blended gasoline has a lower British Thermal Units (BTU) content than all hydrocarbon gasoline), any benefit must be compared to the costs drivers incur from having to buy more ethanol-blended gasoline overall. Once this “BTU penalty” was taken into account, Hart found that there was no benefit to drivers at all in 2009. In fact, on a nationwide basis, the average driver was actually penalized $14.48 as a result of corn ethanol subsidies.
RFA’s ad is just the industry’s latest cynical attempt to try and reverse the rising tide of opposition to corn ethanol subsidies. But it doesn’t change the facts. The VEETC is redundant, wasteful and doesn’t benefit American taxpayers, drivers or the environment. There’s simply no rationale for continuing the VEETC any longer. This is a waste of very scarce resources that would be far better devoted to ensuring that we make the transition to sustainable advanced biofuels.