Corn-Ethanol Fiction; Federal Subsidies Cost Taxpayers More Than They Save at the Pump

Article excerpt


Earlier this month, the Senate voted 73-27 on legislation that would terminate some of the federal subsidies granted to the domestic ethanol industry. Ethanol lobbyists and trade associations immediately went into overdrive to protect their taxpayer largesse.

The Renewable Fuels Association (RFA), the trade group representing ethanol interests, has claimed that federal corn-ethanol policy reduced the price of gasoline in the United States in 2010 by an average of 89 cents per gallon. Other pro-corn-ethanol special-interest groups and members of the Obama administration have made similar claims. None of these claims stands up to scrutiny.

A careful review of current federal corn-ethanol policy reveals an array of subsidies, both direct and indirect. These include: 1) corn production subsidies to farmers, 2) a 45-cents-per-gallon ethanol-production tax credit, 3) a mandate requiring gasoline refiners to blend 15 billion gallons of ethanol into gasoline annually by 2015, and 4) a 59.5 cents-per-gallon tariff/tax on imported ethanol. No other energy product enjoys such government favor.

The RFA and others claim these policies are worth their cost because they have helped reduce gasoline prices and petroleum imports and have improved energy security. Those claims are fiction.

The Energy Information Administration (EIA), a branch of the Department of Energy, is required to provide objective, fact-based energy forecasts to the public. The EIA has evaluated existing federal ethanol policy and compared it to alternative scenarios in which ethanol receives no federal support - in other words, a competitive market case. The comparison, from 2008, used the EIA's long-established energy-modeling system to prepare future forecasts for each policy.

The EIA forecast shows that current federal ethanol policy produces a minuscule additional amount of ethanol over what would be produced using a competitive market policy in the foreseeable future. In 2010, a mere 600 million gallons of additional ethanol were produced, roughly 5 percent of the 13 billion total gallons produced. In 2015, federal policies will increase production by just 1.4 billion gallons. The latter is less than 1 percent of U.S. gasoline consumption, and the cost per barrel of petroleum import reduction is an astounding $2,171.

Federal subsidies only marginally increase production because ethanol is one of the few additives approved by the Environmental Protection Agency for raising the octane level of gasoline. …