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Three Reasons Ethanol Subsidies are Different from Biodiesel

by Leticia Phillips on Apr 28, 2011

Secretary of Agriculture Tom Vilsack has recently been testifying in Congress and meeting with editorial boards to defend the corn ethanol industry’s $6 billion per year subsidies. While Vilsack concedes the ethanol tax credit and tariff on imported ethanol should be reformed, he’s advocating for a costly multi-year phase out. And he’s offered a questionable comparison as justification – that eliminating subsidies today would have the same dire economic consequences that it did for the U.S. biodiesel industry. When the biodiesel tax credit expired at the end of 2009, production decreased by 50 percent and thousands of jobs were lost the following year. However, comparing biodiesel and ethanol is like apples to oranges for three key reasons.

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Secretary of Agriculture Tom Vilsack has recently been testifying in Congress and meeting with editorial boards to defend the corn ethanol industry’s $6 billion per year subsidies. While Vilsack concedes the ethanol tax credit and tariff on imported ethanol should be reformed, he’s advocating for a costly multi-year phase out.  And he’s offered a questionable comparison as justification – that eliminating subsidies today would have the same dire economic consequences that it did for the U.S. biodiesel industry.  When the biodiesel tax credit expired at the end of 2009, production decreased by 50 percent and thousands of jobs were lost the following year.  However, comparing biodiesel and ethanol is like apples to oranges for three key reasons:

Ethanol has a much larger, mandated market
In 2009, the Renewable Fuel s Standard (RFS2) mandated the use of just 500 million gallons of biomass-based diesel. Compare that with ethanol’s 10.5 billion gallons then and more than 12 billion gallons in 2011. The RFS2 mandates gasoline blenders use an ever-increasing amount of ethanol, so not only is the market for domestic producers built-in – it’s growing rapidly. Don’t just take our word for it. Citing the industry’s regulatory safeguards, some of the nation’s top producers and blenders – from Valero and Exxon to Green Plains Renewable Energy – say they envision a thriving industry even in the absence of the VEETC and the 54-cent per gallon tariff on imported ethanol.

Ethanol is cost-competitive even without a subsidy
A major contributor to the biodiesel industry’s woes was the skyrocketing cost of soybeans between 2007 and 2009. The result was a product that simply could not compete in the marketplace with traditional diesel fuel.  On the other hand, ethanol continues to be extremely competitive with the cost of gasoline, despite record high corn prices. Since 2010, the average price of ethanol in the U.S. has been roughly 30 cents less per gallon than gasoline. This means blenders have a natural incentive to use ethanol, regardless of the tax credit.For proof, just listen to the CEO of Green Plains Renewable Energy – one of America’s largest ethanol producers – who recently said “ethanol continues to be the cheapest motor fuel in the world and as a result our industry fundamentals remain very strong.” Eliminating these distortive subsidies and trade barriers would make ethanol even less expensive. Recent research from Iowa State University found that competition in the marketplace would reduce ethanol prices by 12 cents per gallon in this year and 34 cents per gallon in 2014.

Ethanol is a mature industry
While biodiesel was akin to a fledgling start-up, corn ethanol is big business. After 30 years of subsidies and trade protection, the U.S is the world’s largest ethanol producer by a large margin, accounting for more than half of all ethanol produced around the globe. Tax credits and import tariffs probably made sense in 1980 to foster the nascent industry, but the policies have unquestionably worked. The time has come to remove the industry’s training wheels and promote market competition.

The ethanol and biodiesel industries are fundamentally different in nearly every way that should factor in federal policymaking. That’s why calls for immediate reform are mounting in the House and Senate.  We hope Secretary Vilsack tones down his alarmist rhetoric.  A much larger body of evidence makes clear that a competitive free market for ethanol would save American drivers money at the pump, cut dependence on Middle East oil and improve the environment.

copyright 2010 Brazilian Sugarcane Industry Association