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Reality Check: Eliminating the Ethanol Tariff and Subsidies

by Joel Velasco on Jul 20, 2010

For decades, the corn ethanol lobby has been peddling in hysterics and kernel-nomics on the topic of subsidies and the 54-cent-per-gallon tariff on imported ethanol. Their defenders argue that the U.S. would suffer catastrophic job losses without them, domestic biofuel production would plummet and America would become more dependent on foreign sources of energy. With all these claims bouncing back and forth, we decided it was time to get an honest assessment from an impartial expert, and thought who better to engage than a world-renowned agricultural economist from the Farm Belt.

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For decades, the corn ethanol lobby has been peddling in hysterics and kernel-nomics on the topic of subsidies and the 54-cent-per-gallon tariff on imported ethanol. Their defenders argue that the U.S. would suffer catastrophic job losses without them, domestic biofuel production would plummet and America would become more dependent on foreign sources of energy.

To be fair, we’ve always thought that removing the tariff and subsidy would not only create a competitive open market, but also encourage increased imports of sugarcane ethanol from Brazil to the U.S.

With all these claims bouncing back and forth, we decided it was time to get an honest assessment from an impartial expert, and thought who better to engage than a world-renowned agricultural economist from the Farm Belt. We provided a grant to Iowa State University who engaged Dr. Bruce A. Babcock, an economics professor there and the director of the Center for Agricultural and Rural Development (CARD), to find out what would really happen if Congress lets the ethanol tariff and blender’s tax credit expire on December 31, 2010. (For the report, visit CARD's website.)

Our only request of Dr. Babcock was that he let the chips fall where they may.  Too often, special interests write the research to fit their particular policy objectives.  We wanted Iowa State University to examine the range of options Congress is actually debating and provide a realistic estimate of what changing policies will mean for U.S. taxpayers, American drivers and ethanol producers in the U.S. and Brazil.  We also provided the researchers with requested data on projections of Brazilian sugarcane ethanol production, domestic consumption and potential exports through 2014.  In order to be fully transparent, we offer you access to the memo containing that data as it was delivered to Professor Babcock.

Dr. Babcock and his staff looked at the impact of changing America’s ethanol policy in four key areas – production, jobs, price of gas and cost to taxpayers. The results provide a much clearer sense of what would happen if the subsidies and trade protection expire as planned later this year.  The findings also debunk a number of claims you hear regularly from corn-ethanol supporters – arguments like ending the ethanol tax subsidy and tariff will:

  • Eliminate over 100,000 American jobs
  • Decrease U.S. ethanol production by some 4 billion gallons – a nearly 40% drop
  • Make America dependent on foreign ethanol

It turns out that each of those claims is overstated (at best).  Here’s what the Iowa State University team finds would really happen.

  • Production:  Eliminating the tax credit and tariffs would have minimal short-term impact on the U.S. corn and ethanol markets because the Renewable Fuels Standard mandates a growing market. Production in the U.S. would increase to some 14.5 billion gallons by 2014 even without subsidies and trade restrictions. U.S. imports of Brazilian ethanol would rise modestly to about 740 million gallons that year – less than 5 percent of the total U.S. ethanol market.

  • Jobs:  There is no scenario where +100,000 jobs – or anything remotely close to that number – would be lost by eliminating the tax credit and tariff.  With mandates kept in place, the study estimates the possible loss of no more than 300 jobs in the ethanol industry in 2014.  At a cost of $6 billion annually (or $30 billion over five years), spending $30 billion to save 300 (or even 3,000) jobs is a steep price to pay.

  • Fuel Prices: Removing the tax credit and tariff would reduce ethanol prices by 12 cents per gallon in 2011 and 34 cents per gallon in 2014.  Because most gas sold in the United States includes 10 percent ethanol – a limit that the Environmental Protection Agency may increase to 15 percent later this year – lower ethanol prices mean all drivers see modest savings at the pump.  Gas prices would fall by a penny or two per gallon next year and 3-5 cents per gallon in 2014.

Here’s the bottom line: The Iowa State University researchers conclude that allowing the ethanol tax credit and import tariff to expire won’t create the dramatic, adverse affects that groups like Growth Energy or the Renewable Fuels Association claim.  And truth be told, Brazilian producers don’t see sugarcane ethanol exports rise all that much either.  As Congress takes up energy legislation and considers what to do about ethanol, they should take Dr. Babcock’s findings into account. The numbers speak for themselves in showing that consumers win and have greater choices at the pump when there’s a competitive, open marketplace.

copyright 2010 Brazilian Sugarcane Industry Association