Is it Time to End the Tax Credit for Ethanol?
Consider this: how can you get conservative lawmakers and environmentalists to agree on energy policy? It’s not a trick question, nor is it an unachievable fantasy. It’s the reality of the Volumetric Ethanol Excise Tax Credit (VEETC). Set to expire at the end of 2011, VEETC credits oil companies for blending ethanol into their gasoline—to the tune of $6 billion a year—and consensus is building to let the credit expire.
Ethanol has long been a controversial fuel source. A boon to farmers, to whom it delivers an additional market for their product, it was also touted as a home-grown way to reduce our dependence on foreign oil. To most energy experts, ethanol was only supposed to be a “bridge” connecting fossil fuel dependence to more sophisticated biomass technology, as the efficiency of corn as a source of fuel pales in comparison to the potential of algae and other biomass materials.
A remarkably exciting breakthrough in its day, ethanol use has now been subsidized for three decades. Such subsidies are widely supported throughout the corn growing states—an anecdote which you can be sure is in the minds of Republican presidential hopefuls as they focus on the influential Iowa caucus. Lawmakers from many of the corn producing states also stand behind VEETC.
The corn-based fuel is taking blows from all sides of the energy debate, however. Budget hawks in Congress argue that it is a mature industry no longer in need of government aid to compete in the energy market (removing the tax credit would not eliminate all preferential treatment, by the way—still in place is the Congressional mandate requiring 13.95 billion gallons of ethanol and other renewable fuels to be produced in 2011 alone). According to lawmakers, paying oil companies to blend ethanol is a luxury we can no longer afford.
Surprisingly, many environmentalists agree. As mentioned, ethanol was only meant to be a bridge fuel in our efforts to create a clean, domestic, and limitless supply of energy. Environmental groups argue that money would be better spent on advancements in biofuel technology and other renewables (ethanol is currently the most subsidized of the renewables). Furthermore, it is difficult to account for ethanol’s impact on greenhouse gases (some studies say the production process is worse than simply burning regular gasoline) and the food supply (intuitively, a new market for corn should drive food prices up, a major concern for the developing world).
Of course, cutting VEETC is only a first step. As Nebraskan senator Mike Johanns put it:
Taking one piece out and saying, ‘We’re going to attack this,’ I think is the wrong strategy. I really believe you have to put it together in one big effort because you pick out these things one at a time, eventually you’ll just get nowhere.
Corn farmers should certainly not be the only group asked to sacrifice in the name of building a stronger and cleaner energy economy. The daunting task of transforming how Americans use energy requires that every dollar spent on energy security receives the highest possible return on investment. For this reason, we should next look to end subsidies for another highly mature industry—oil production.
