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Deficit Commission Report a Sobering Reminder on U.S. Ethanol Policy Reform

by Joel Velasco on Nov 11, 2010

Former Sen. Alan Simpson and Erskine Bowles’s deficit reduction proposal has drawn mixed reactions from both sides of the aisle for recommending sweeping cuts to federal programs. Regardless of where you stand on the report’s recommendations, one of its main points serves as a sobering reminder that Congress must “end redundant, antiquated, ineffective spending.” The ethanol tariff and subsidies may well be the easiest place to start.

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Former Sen. Alan Simpson and Erskine Bowles’s deficit reduction proposal has drawn mixed reactions from both sides of the aisle for recommending sweeping cuts to federal programs. Regardless of where you stand on the report’s recommendations, one of its main points serves as a sobering reminder that Congress must “end redundant, antiquated, ineffective spending.”

There is a general belief among Beltway observers that reducing spending is difficult to achieve. Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney, was quoted in today’s Wall Street Journal as saying that significantly cutting the deficit “would take some pretty Herculean efforts I think down in Washington, D.C.” Addressing reporters from the G20 summit in Seoul, President Obama said, “We're going to have to make some tough choices. The only way to make those tough choices historically has been if both parties are willing to move forward together.”

The reality is that there are some easy places to start if Congress and the Obama Administration are serious about cutting the deficit and restoring fiscal responsibility.  For instance, they simply need to let 30 years of antiquated, ineffective and costly U.S. ethanol subsidies and tariffs expire on December 31.  (Interestingly enough, this recommendation was nowhere to be found in the deficit reduction proposal, as Jason Linkins points out in his Huffington Post piece today.)

The fact that members of Congress from both parties have already vowed to move forward together on this issue is not surprising. At a cost of $6 billion per year and a total of $45 billion since 1980, taxpayer-funded subsidies are no longer needed to support a mature industry that will continue to thrive for years to come because Congress mandates gasoline blenders use ever increasing amounts of ethanol. And by ending the ethanol import tariff – which was put in place to offset the cost of the subsidies – Americans would benefit from lower fuel prices, greater energy diversity and access to cleaner alternatives like sugarcane ethanol.

The proverbial cherry on top of the sundae is that ending ethanol subsidies and trade protection would have minimal impact on the U.S. corn ethanol industry. Dr. Bruce Babcock, a leading agricultural economist at Iowa State University, the heart of corn country, found that “U.S. ethanol production and the demand for corn will continue to grow with or without the tax credit and tariff.”

To continue the dessert metaphor, there is some low-hanging fruit in the deficit commission’s quest to identify spending that Americans can no longer afford.  Considering that the third and fourth largest U.S. ethanol producers say they no longer need the subsidies, I’d say reforming ethanol policy is fruit hanging so low it’s almost touching the ground!  Congress returns to Washington next week, so stay tuned to see if lawmakers take a first step towards reigning in costly, unnecessary spending by allowing the ethanol tax credit and tariff to expire as scheduled.

copyright 2010 Brazilian Sugarcane Industry Association