The Case For Repealing Ethanol Subsidies

Earlier in response to Tim Pawlenty's call to end Ethanol subsidies, Russ made the case why repealing them would either not be that big of a deal or possibly even bad policy. (Just to clarify...Russ writes in an addendum below his post wasn't a direct response to the Pawlenty announcement post but a clarification to the earlier post on Pawlenty's USA Today Op-ed)

Let me say upfront: Russ lives this stuff, I like corn on the cob.

With that said, I will appeal to the authority of the Heritage Foundation.

Ethanol. Henry Ford called it the “fuel of the future” in the 1920s. Decades later, policymakers put laws in place to increase the amount of ethanol in our fuel supply. Environmentalists and the Midwest sold it as a way to decrease American dependence on foreign oil and a way to reduce greenhouse gas emissions. But it’s accomplished neither and instead become an industry reliant on subsidies, mandates and protectionism. Washington needs to reverse these policies and Senator Coburn’s (R-OK) amendment to repeal the Volumetric Ethanol Excise Tax Credit (VEETC) is a good first step.

The VEETC is a 45-cent blender’s credit that doles out $5-6 billion a year for petroleum refiners to blend ethanol into gasoline. Although some claim this is another handout for oil companies, the credit will be passed up the line to the ethanol producers and corn growers, or as the Wall Street Journal says, ethanol producers “can charge some 45 cents a gallon more than the market would otherwise bear.”

...Although it may be a catchy sound bite, America is not addicted to oil. As the Competitive Enterprise Institute’s Marlo Lewis says, “consumers will stop buying gasoline the moment a superior product comes along.” Ethanol and other biofuels may eventually be that superior product. Electric vehicles could as well. But it’s not the role for the government to force these sources of fuel and technologies into the marketplace.

In a free market, fuel producers and users should be allowed to make their own fuel decisions without federal bureaucrats and powerful special interests deciding that for them.

There's more at the link.

Now, this isn't going to solve the deficit or debt problems and I'd really like to see a candidate take on the Ethanol mandate in gas and farm subsidies in general. So you can say this is weak sauce but...at this point it's the strongest one on offer.

Beyond what it does for Pawlenty's own political calculations and positioning is forces every other Republican running to take a stand. Either they will be with the special interest in Iowa or Republican and general election voters.

The structure of government subsidies, market distortions and the picking of winners and losers wasn't created overnight, nor will it be undone overnight. The first step is challenging the assumption that these things always grow and expand.

If we can't get rid of something as simple and demonstrably counterproductive as Ethanol subsidies (and just because a theoretical President Pawlenty would support that doesn't mean Congress would even pass it), what can we get rid of?

What this hopefully leads to is a bidding war between candidates to see who can promise to slay more sacred cows than their competitors. It's about trying to change the political culture and assumptions about the role of government. So much dogma around policy favors Democrats and liberals: expanding government is seen as normal and natural while cutting spending and reducing the reach of government is extreme and cruel.

Pawlenty has made an opening offer, it's a good start but we should be forcing him and the other candidates to up the ante.

As always, keeping them to their promises once they are elected is essential but until we get some folks elected who at least make the right promises, we'll never get anything done.

UPDATE (Russ): Thanks for the kind words, Drew. In response to your information from the Heritage Foundation, I just have one question for you. Are ethanol prices in your area less than straight gas?

Here in Iowa, ethanol prices run about $0.10 a gallon less than regular unleaded. Back when prices were lower (around $2), the difference was exactly $0.06, which corresponds to the total federal & state tax credit for blending ethanol.

That means that currently the blenders are selling the fuel with a greater discount than that provided by the tax credit, reflecting the produced cost of ethanol being less than the refining cost of gasoline. When you figure that ethanol blends here are 10%, a $0.60/gallon tax credit on the straight stuff works out to a tax credit of $0.06 a gallon. This 10% blend will also make many of the arguments about the BTU content of ethanol moot. If you compare pure gas to pure ethanol, I believe the ethanol has approximately 70% of the BTU content that the gasoline has. If you figure out the BTU content of mixed fuel (10%x70%xBTUgas PLUS 90%xBTUgas), you come up with a final BTU content of of 97% for E10. This means that E10 fuel has 97% of the trapped energy that gasoline contains.

(To expand on my point: Ethanol blended fuel here in Iowa is sold to the consumers in a way that passes the ENTIRE tax credit on to the consumers, in addition to an extra $0.04 per gallon that reflects the lower price of pure ethanol related to pure gasoline. So, instead of a "tax break for millionaires", I think you could call this a "tax cut for consumers". I can only comment on what I know, so if this is not the case in your area we're not talking about the same thing.)

Is 97% better than 100%? Not in any math class I ever took; however, when you consider the multiple benefits of replacing MTBE as an oxygenate (without leaching into the groundwater like MTBE is notorious for doing), providing a small part of our fuel needs, and helping stabilize corn prices in America, I think ethanol is getting a bad rap. Ethanol will NEVER completely replace gasoline, but if it could replace 5-10% of the total volume of gasoline we consume here in America, this would be a good thing - just so long as ethanol isn't used as an excuse to put off American exploration for oil & natural gas.

What pisses me off is all the attacks on me in the comments that assume that I'm all for ethanol mandates, E85 AND unlimited farm subsidies. I never advocated ANY of these things, and anyone who says otherwise can suck it.

Now, getting back to my original question: Are ethanol prices in your area at least $0.06 less per gallon than gasoline? Or are you in a state where E10 ethanol is mandated because of oxygenate requirements? If so, maybe we're not arguing about the same thing. I'm all for free market choice, so if the consumer decides that they don't want to burn ethanol in their car, that's just too bad for the blenders and the farmers. All I ask is that those who decry ethanol rely on FACTS to make their arguments, not "global warming facts".

And just for the record, my post was NOT a response to your T-Paw post about ethanol. I might type fast, but I don't type that damn fast. It was a "clarification" post that I was motivated to write after I read your "Palin/Pawlenty" thread earlier in the day. Ace moved it and delayed publication until well after your thread came out because yours was "breaking news" and mine was "clarification". That's a perfectly understandable thing to do. I was a little peeved about how he seemed to insinuate that I'm only defending farm subsidies because I'm worrying about "my ox getting gored" in his addendum to your post, but then I realized that he didn't read the whole post & just made his comments without really understanding where I was coming from.

So basically, we disagree slightly on this issue. I prefer to think that my "hands-on" experience with agriculture and agribusiness gives me a slightly better viewpoint on the issue, but I think you guys are smart enough that I'd be a fool to disregard your point of view. So that's where we are. No Thunderdome tonight.

Unless we're talking about the Palin thread.........

posted by DrewM. at 07:56 PM

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