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The True Economics of U.S. Ethanol Policy: Straight from the Heart of Corn Country

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American farms and refineries now generate half of of all ethanol produced around the globe. Despite being a mature and profitable industry, corn ethanol producers are lobbying hard to extend perks they have enjoyed for three decades; namely, the tax credit for blending ethanol with gasoline and an import tax on foreign ethanol, particularly Brazilian sugarcane ethanol. Contrary to what the majority of experts say, they claim that the United States would suffer catastrophic job losses without them, domestic biofuel production would plummet and America would become more dependent on foreign energy. This is not true.

According to leading agricultural economists at Iowa State University, in the heart of corn country,
Americans would benefit from ending the tax credit and trade protection. Key findings from the study, which was published in July, included the following:

Domestic Production Would Increase without Tax Credits or Tariffs. Elimination of the subsidies would have practically no short-term impact on U.S. corn and ethanol demand. That’s because Congress already mandates the use of renewable fuels like ethanol, and those requirements will triple from 13 billion gallons today to 36 billion gallons by 2022. As a result, corn ethanol production would continue to increase to some 14.5 billion gallons by 2014 even without tax credits or tariffs.

Taxpayers Would Save Billions. In a time of soaring budget deficits, $6 billion annually is real money. Ending the ethanol subsidies would save that amount. Yet some Washington politicians want to spend $30 billion for five more years of subsidies to corn ethanol.

300 Jobs Lost – Not 160,000. The study estimates that ethanol producers could lose about 300 jobs in 2014 – an estimate that’s miles away from the corn lobbyists’ dire warnings of losing up to 160,000 jobs. Spending $6 billion per year to save perhaps 300 jobs is a high price to pay. That’s $20 million per year per job lost!

Impact on Production and Imports. Because of strong demand in Brazil (the #2 ethanol market), imports are constrained and would rise only modestly to about 740 million gallons in 2014 – less than 5% of the total U.S. market.

Drivers Would Save at the Pump. Ending the subsidies 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 contains 10% ethanol, lower ethanol prices would lead to modest savings at the pump.

Consumers win when businesses have to compete in an open market, because competition produces higher quality products at lower costs. The same principle holds true for renewable fuels. Competition will create a race to the future and generate better alternatives for Americans.

copyright 2010 Brazilian Sugarcane Industry Association