Must-read on biofuel tax credit reform

Robert Rapier has a great blog on the redundant and ridiculous biofuels tax credits, which given our huge Renewable Fuel Standard pay the oil companies to do what they’re legally obliged to do. I’ve written about the need to reform the biofuel tax credits (here, here, and here), especially the Volumetric Ethanol Excise Tax Credit (VEETC)—the main tax credit that overwhelmingly goes to corn ethanol. But Rob does a great job of crystallizing the wasteful situation we find ourselves in. He likens having the tax credit for fuels that are already mandated to paying people to obey the speed limit.

Not surprisingly, Rob’s original essay on this was targeted by Growth Energy with some wonderfully weak counter arguments, which he shreds in the blog. I say not surprising, because the ethanol industry has made it clear (PDF, see toward end) that extending this tax credit is its highest priority for the year.

At the end of his blog, Rob challenges Growth Energy to a debate the following  resolution:

Resolved: The ethanol mandates enacted by the U.S. federal government have eliminated the purpose of the ethanol subsidies.

I hope that the industry will take Rob up on his challenge. It would be entertaining. But his resolution highlights a slight difference between my take away from the current silliness. I certainly agree that the tax credits as currently structured are just wasteful, but I think they should be reformed to actually provide tax payers with some real value. To my mind, the tax credits (all of them—biodiesel, cellulosic, small producer, VEETC—all of them) should be reformed to a technology-neutral, performance based credit that pays half for climate benefits and half for ecosystem services.

By definition, paying for performance is going to put farmers more in the picture here; their performance growing crops is critical to the lifecycle performance of biofuels. As Rob points out, even the ethanol industry has acknowledged (when convenient to them) that farmers don’t benefit from the current tax credits, but oil companies or biofuel refiners had to buy better grown biomass to get higher tax credits, they would have to negotiate with the farmers to get it.

So, let’s use tax credits to drive dramatic improvements and new and better biofuels and do it in a way that we’re getting money to farmers instead of paying oil companies to obey the law.

About the Authors

Nathanael Greene

Director, Renewable Energy Policy, Energy & Transportation program

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