Bipartisan Bill Seeks To End Cornerstone Ethanol Subsidy

Yesterday evening I directed some ire at President Obama’s continued reliance on ethanol as a major plank of his do-nothing transportation/energy agenda, noting

That extra money for 10,000 E15-capable pumps? That’s because no gas station owner will pay to install a pump for a kind of fuel that only cars built since 2001 can use… and which the auto industry has tried to ban. And why E15 in the first place? Because blenders can’t sell enough E10 to blend the government-mandated amount of ethanol and collect their $6b this year in “blender’s credits” to do so. A subsidy to support a subsidy which in turn props up yet another subsidy (I may have missed a subsidy in there somewhere). You can’t make this stuff up.

The “cornerstone” subsidy that all other ethanol subsidies support is the Volumetric Ethanol Excise Tax Credit, or VEETC, or “blender’s credit,” a $6b per year subsidy that directs 45 cents to refiners for every gallon of ethanol they blend with gasoline. The VEETC nearly died in December’s lame duck session, only to be revived as a way to buy votes for the President’s tax policy. Now, however, The State Column reports that a bipartisan Senate bill has been introduced that would eliminate both the VEETC and import tariffs on foreign-made ethanol. And with a rash of bad news coming out about ethanol, this could just be the opportunity to kill this wasteful government subsidy with fire.

Where to start with the myriad reasons to end government support of a fuel that has done little besides replacing High Fructose Corn Syrup as the number one “stealth subsidy” for the agricultural business? Let’s begin with news that proves the futility of underwriting this failed fuel, namely the Detroit News‘s report that ethanol production actually dropped 1.5% last year, despite the billions in subsidies it receives. Just as the VEETC needs subsidies in order to stimulate market demand for the fuel blends it already subsidizes, this dispatch proves that no amount of government money is a substitute for organic market demand. If the government needed an excuse to cut bait, this should be enough.

Another sign that ethanol subsidies have reached the limits of their efficacy: a report from GreenCarCongress, showing that 75% of all hybrid and AFV (alternative fuel vehicles) in the US are E85 “flex fuel” vehicles. That’s a sign of success you say? Think again. E85 consumption in 2009 only hit 71,213 thousand gasoline-equivalent gallons, which means each “green” flex fuel vehicle uses about 1/10th of one gallon of E85 per year. So even if people ( or governments) buy flex fuel cars, they still choose not to run E85… which is no surprise, given that E85 regularly returns worse fuel economy. Unfortunately, the government’s ethanol blending mandate will basically require a huge sift back to E85 in order to work, so once again the government is trying to subsidize through a brick wall.

And as discouraging as these short-term signals are for the government’s attempts to create a sustainable ethanol industry (if, in fact that was the goal of ethanol subsidies), when stacked against the long-term costs one gets a real sense of the waste involved. According to a new book published by Stanford’s Hoover Institute,taxpayers will have spent “nearly half a trillion dollars” between 2008 and 2017 on a fuel that nobody wants to use. That’s right, Five Hundred Billion Dollars, or enough for more than ten auto bailouts (assuming zero payback). And while we spend $6b this year on the VEETC en route to that staggering price tag, the head of the Renewable Fuel Association still has the gall to whine that “the future of biofuels is tied to the price of oil.” Anyone else just throw up a little bit?

But despite all these signs that ethanol subsidies are accomplishing nothing at a huge cost, this new bill to eliminate the VEETC and ethanol import tariffs is no sure thing. Remember, far more than being about the environment or energy security, ethanol is about politics… namely the fact that Iowa is a key early presidential primary that no candidate wants to lose. Even the arch-Greenie Al Gore himself admits that he “regrets” his support for ethanol, but

One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president

With a presidential election looming in 2012, any efforts to kill ethanol subsidies will be met with stiff opposition from grandstanding presidential hopefuls, hoping to steal the Iowa primary. Here’s hoping that, for once, policy actually trumps politics.