Sobering CBO report shows massive costs of corn ethanol tax credit

Yesterday afternoon, the nonpartisan Congressional Budget Office (CBO) released its evaluation of the costs and benefits of federal biofuels tax credits, including the Volumetric Ethanol Excise Tax Credit (VEETC), the largest U.S. subsidy for renewable energy that goes almost entirely to corn ethanol.  The release comes against the backdrop of a full court press by corn ethanol industry lobbyists to push Congress to extend the VEETC and a disappointing attempt by Senator Amy Klobuchar to attach a 5-year extension of the corn ethanol tax credit to a Senate energy bill ostensibly supporting renewable energy, which we discussed here and the NRDC Action Fund discussed here.

The results of the CBO study, conducted at the request of Senator Bingaman, Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance, were sobering:

The CBO report estimated that roughly 11 billion gallons of biofuels were produced and sold in the U.S. in 2009, over 98% of which (10.8 billion gallons) came from corn ethanol. Tax expenditures (essentially foregone tax revenues) in support of this production were roughly $5.16 billion, including VEETC payments of $0.45 cents per gallon for blending ethanol (regardless of the feedstock) and the additional $0.10 cents per gallon that “small producers” receive on the first 15 million gallons they produce.

CBO finds that before they even pay at the pump, taxpayers incur a cost of $1.78 to replace a gallon of gasoline by substituting corn ethanol. This accounts for not only the cost of the VEETC per gallon, but the relative energy content differences between ethanol and gasoline (gasoline contains ~32% more energy than a gallon of ethanol, so 1.48 gallons of ethanol are required to replace one gallon of gasoline), and changes in the consumption of ethanol and gasoline that can be attributed to the tax credit. In other words, the taxpayer cost of using the VEETC to promote corn ethanol depends largely on the amount of corn ethanol that would have been produced if the credits had not been available. According to CBO, that’s the majority of it:

Based on the results of analysis done at the Food and Agricultural Policy Research Institute (FAPRI), CBO estimates that if no other policies were in place, eliminating the tax credit would reduce corn ethanol consumption by 32%. Importantly, FAPRI also estimates the impact of eliminating the tax credit if RFS mandates remain in place and finds that domestic production drops just 10% over five years, which we discuss here and in our Fact Sheet on the VEETC here. The redundancy is clear, but taxpayers continue to foot the multi-billion dollar bill.

And the costs to taxpayers of reducing greenhouse gas emissions through the corn ethanol tax credit?  CBO’s estimate excludes the emissions associated with land use change—i.e. the carbon dioxide that is released from forests or grasslands that are cleared and converted to farmland as a result of ethanol production—though the report notes that if those emissions were taken into account, the cost could increase substantially. Indeed analysis done by EPA shows that when you factor in the impacts of indirect land use chance, corn ethanol actually increases emissions relative to gasoline. However, even if we use CBO’s assumptions that ethanol produces greenhouse gas benefits, the cost is staggering: $750 for every carbon dioxide equivalent (CO2e) metric ton in reductions!

The conclusion could not be clearer: we are spending billions in scarce taxpayer dollars to prop up a decades-old corn ethanol industry and a mature, polluting technology – money that isn’t getting us where we need to go in terms of reducing greenhouse gas emissions and in many cases is setting us back. The good thing is key Congressional leaders are beginning to recognize the wastefulness of these policies and the opportunity we’ll miss if we don’t instead direct our support towards newer, cleaner and better-performing advanced biofuels. In response to the release of the CBO’s report, Senator Bingaman called on Congress to look seriously at the VEETC rather than just reflexively extending it:

“This report by the nonpartisan Congressional Budget Office provides further evidence that our nation’s biofuels tax incentives might not be appropriately calibrated.  In particular, CBO’s findings should prompt Congress to critically examine whether it is appropriate to extend the Volumetric Ethanol Excise Tax Credit (VEETC) at its current 45-cents-per-gallon level beyond the credit’s December 31 expiration.”

Calling corn ethanol a “mature technology whose market share is protected by an aggressive Renewable Fuel Standard”, he also reminded Americans of just how much corn ethanol subsidies have already cost us:

“According to the Congressional Research Service, the VEETC will cost the American taxpayer $7.6 billion this year alone.  That high price tag makes the VEETC by far our Tax Code’s largest subsidy for renewable energy.  And this annual price tag comes on top of the $41.2 billion in current dollars that U.S. taxpayers have already spent since 1980 on tax-based subsidies for ethanol.”

Like the CBO, it’s time for Congress to talk a cold hard look at just how much the VEETC costs us and just how little we get in return and let the VEETC expire at year-end.