Top 10 Reasons Why Congress Should Say NO to the Ethanol Tax Credit

Filed Under: Environmental News, green automotive technology on December 27, 2010

by Sheila Korth, EWG

Rumors are flying that the lame duck Congress will attach an extension of the so-called ethanol “blender’s tax credit” to a bill to extend the Bush-era income tax cuts as part of a broader deal. Here are the Top 10 reasons – based on previously released EWG research – why Congress should say no to the tax credit extension.

1. Tax credits should go only to truly renewable and sustainable energy alternatives. In a 2009 report, EWG found that the ethanol tax credit (formally known at the Volumetric Ethanol Excise Tax Credit or VEETC) eats up fully 75 percent of federal tax credits for renewable energy, including solar and wind power.1 A recent Congressional Research Service (CRS) report indicates that tax credits and subsidies for solar, wind and geothermal power will cost $8.62 billion from 2008 to 2012; the ethanol tax credit alone would cost over three times more ($26.5 billion).  Congress needs to put scarce taxpayers’ dollars where they will do the most good.2

2. Taxpayers have passed up $17 billion in revenue for virtually no gain in energy independence.One of corn ethanol’s biggest selling points has been its alleged ability to reduce dependence on foreign oil. But from 2005 to 2009, taxpayers spent $17 billion on the VEETC and just got back a drop in oil consumption equal to a paltry 1.1 mile-per-gallon increase in fleet-wide fuel economy.3 This could have been accomplished for free by proper tire inflation, driving sensibly, obeying the speed limit and using the right grade of motor oil. Moreover, the Financial Times reported that, “during the first nine months of 2010, U.S. ethanol producers exported 251 million gallons of the corn-derived fuel, more than double the volume from the year-earlier period.” These exports do nothing to boost U.S. energy independence.4

3. Industry’s job creation and job loss claims are inflated. Independent analysts have found that the ethanol industry’s job creation claims are 5-to-10 times too high, and that each job created costs taxpayers $139,000-to-$450,000 a year. Subsidizing corn ethanol is simply an inefficient way to create jobs.5 Bruce Babcock, an economist at Iowa State University, recently calculated that without VEETC or the ethanol import tariff, ethanol production would only decline by 600 million gallons, equivalent to 10 plants’ annual production.6Assuming each ethanol plant employs an average of 50 people, only 500 jobs would be lost — not the industry’s exaggerated claim of 100,000. Even applying a multiplier of three results in just 1,500 jobs lost, or 1.5 percent of the industry’s inflated claims.

4. VEETC’s expiration won’t affect farmers’ bottom line. Congress’ investigative arm, the Government Accountability Office (GAO), found that the ethanol mandate – the Renewable Fuel Standard — makes the tax credit unnecessary. “Because the [mandate] would ensure that the same amount of ethanol was used by blenders with or without the VEETC,” the GAO reported, “we and others have found that removing the VEETC would not adversely affect the demand for corn for ethanol and the income of corn producers…”7 Robert Hill, an economist and agribusiness consultant, recently remarked on the stellar condition of the current farm economy, saying “…conditions continued to improve beyond our wildest dreams.”8 Net farm income is up 31 percent from last year and up 26 percent from the 10-year average, increasing in six of those ten years.9

5. Corn prices and ethanol production will barely change. Iowa State economist Bruce Babcock found that without VEETC or the import tariff on ethanol, corn prices will drop by just 7 percent. There is also a 45 percent chance that “there will be no 2011 impact on corn prices and U.S. ethanol consumption…”10 A University of Missouri study found that ethanol production would only decline by 2 percent over the next 8 years; it estimated that ethanol production will still exceed the federal Renewable Fuels Standard mandate by 80 million gallons (15.08 billion) from 2011 to 2018.11

6. Big oil companies like BP, not farmers, are the biggest winners. “As one of the largest blenders and marketers of biofuels in the nation,” BP brags on its website, “we blended over 1 billion gallons of ethanol with gasoline in 2008 alone.”12 In 2008 the tax credit was 51 cents per gallon, so that would have netted BP a $510 million windfall. BP’s take is probably even bigger now, but the IRS won’t tell you who’s making how much from this $6-billion-a-year program. The people making money from producing ethanol are increasingly big corporations. In 2005, 49 percent of U.S. ethanol plants were farmer-owned; today, the figure is just 19 percent.13So who are the real winners?

7. Ethanol’s environmental benefits are dubious at best. Ethanol has been touted as a “green” fuel, but the evidence is sketchy. The GAO cited several researchers who found that when you factor in indirect land use changes, such as the clearing of forests for additional production because existing corn is being diverted to make fuel, ethanol results in more greenhouse gas emissions than gasoline.14

8. Wildlife habitat is being converted to grow corn. The National Wildlife Federation (NWF) reported this year that the corn ethanol gold rush has been responsible for plowing up thousands of acres of pristine wildlife habitat (and prime carbon sequestration vegetation) and converting it to corn production. NWF’s Jan. 13 document concluded:  “Our research shows that native grassland is being converted into cropland at an alarming rate throughout the Prairie Pothole Region… as a result, populations of sensitive wildlife species are declining significantly in areas with high increases in corn plantings.”15 16

9. Pollution flowing into the Gulf of Mexico has increased because of ethanol. Fertilizer run-off from cornfields flows down the Mississippi River, feeding the vast “dead zone” in the Gulf of Mexico where fish and shellfish cannot survive. This problem has been exacerbated as corn ethanol production increased. A recent U.S. Geological Survey report found that cotton acreage in the Mississippi Delta decreased by 47 percent in 2007 alongside a 288 percent increase in corn acreage. “Because corn uses 80 percent more water for irrigation than cotton, and more nitrogen fertilizer is recommended for corn cultivation than for cotton, this widespread shift in crop type” has resulted in a 7 percent increase of nitrogen leaching from the Yazoo River Basin to the Mississippi River.17

10. The economy would grow without VEETC. USDA’s Economic Research Service (ERS) recently analyzed the tax credit’s effect on one of the best-known measures of the economy – the Gross Domestic Product (GDP). It found that if the tax credit remains in place, the GDP would shrink by $5.8 billion by 2022, assuming oil prices hover around $80 per barrel. Eliminating the credit, however, would stimulate the economy by increasing real wages, consumption of goods and services, and, finally, GDP. In fact, GDP would grow by $4 billion (assuming $80 per barrel oil) in 2022. So much for industry’s claims that the tax credit is good for the economy.18

We hope we’ve persuaded you that the VEETC tax credits deserve a peaceful death this year. Removing fiscally irresponsible and environmentally harmful fossil fuel subsidies that put unsustainable industries at a competitive advantage would be another step in the right direction.

References/Endnotes:

1) Environmental Working Group. “Ethanol’s Federal Subsidy Grab Leaves Little For Solar, Wind And Geothermal Energy.” January 2009. Accessed online 2 December 2010 at http://www.ewg.org/reports/Ethanols-Federal-Subsidy-Grab-Leaves-Little-For-SolarWind-And-Geothermal-Energy+.

2) Based on actual ethanol production statistics from the Renewable Fuels Association of 9.235 billion gallons in 2008 and 10.7 billion gallons in 2009; other estimates are based on mandated Renewable Fuel Standard ethanol production volumes for 2010, 2011, and 2012 of 12 billion, 12.6 billion, and 13.2 billion gallons, respectively. In 2008, the tax credit was higher at 51 cents per gallon but decreased to 45 cents per gallon after the 2008 Farm Bill.

[1] Sherlock, Molly and Donald Marples. “Energy Tax Policy:  Issues in the 111th Congress.” Congressional Research Service. 20 September 2010. Supports from 2008 to 2012 include credits for electricity production ($7.1 billion), the Residential Energy-Efficient Property Credit ($0.1 billion), five-year cost recovery of certain energy property $0.5 billion), and credits for holders of clean renewable energy bonds ($0.5 billion).

[1] Renewable Fuels Association. “2010 Annual Industry Outlook.” February 2010. Accessed online 2 December 2010 at http://ethanolrfa.org/page/-/objects/pdf/outlook/RFAoutlook2010_fin.pdf?nocdn=1.

3) Cox, Craig and Andrew Hug. “Driving Under the Influence:  Corn Ethanol and Energy Security.” June 2010. Environmental Working Group. Accessed online 2 December 2010 at http://www.ewg.org/files/EWG-corn-ethanol-energy-security.pdf.

4) “Record U.S. Ethanol Exports Raise Tax Issue.” 14 November 2010. Financial Times. Accessed online 2 December 2010 at http://www.ft.com/cms/s/0/d815b51e-f030-11df-88db-00144feab49a.html#axzz16sc9nmKG.

5) Cox, Craig. “Kernel-nomics:  Big Ethanol’s Inflated Job Claims.” 30 November 2009. Accessed online 2 December 2010 at http://www.ewg.org/agmag/2009/11/kernalnomics-the-ethanol-lobbys-inflated-jobs-claims/.

6) Babcock, Bruce. “Impact on Ethanol, Corn, and Livestock from Imminent U.S. Ethanol Policy Decisions.” November 2010. Iowa State University. Accessed online 2 December 2010 athttp://www.card.iastate.edu/publications/DBS/PDFFiles/10pb3.pdf.

7) Government Accountability Office (GAO). “Biofuels:  Potential Effects and Challenges of Required Increases in Production and Use.” August 2009.

8) Hill, Pat. “Ag Business Confidence Buoyant.” DTN Progressive Farmer. 1 December 2010. Accessed online 2 December 2010 at http://www.dtnprogressivefarmer.com/dtnag/common/link.do?symbolicName=/free/news/template1&paneContentId=5&paneParentId=70104&product=/ag/news/topstories&
amp;vendorReference=0f4971e5-73db-4414-a3b8-39bac7e6ddf6&DCMP=Todd
.

9) Economic Research Service, U.S. Department of Agriculture. “Farm Income and Costs: 2010 Farm Sector Income Forecast.” 30 November 2010. Accessed online 2 December 2010 athttp://www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm.

10) Babcock, Bruce. “Impact on Ethanol, Corn, and Livestock from Imminent U.S. Ethanol Policy Decisions.” November 2010. Iowa State University. Accessed online 2 December 2010 athttp://www.card.iastate.edu/publications/DBS/PDFFiles/10pb3.pdf.

11) Food and Agricultural Policy Research Institute, University of Missouri. “Impacts of Selected US Ethanol Policy Options.” May 2009. Accessed online 2 December 2010 at http://www.fapri.missouri.edu/outreach/publications/2009/FAPRI_MU_Report_04_09.pdf.

12) BP. “Biofuels:  Our Plans for Biofuels are Growing.”  Accessed online 29 June 2010 athttp://www.bp.com/iframe.do?categoryId=9030825&contentId=7056953.

13) Korth, Sheila. “Will the Real Ethanol Beneficiaries Please Stand Up?” 15 November 2010. Environmental Working Group. Accessed online 2 December 2010 at http://www.ewg.org/report/Will-the-Real-Ethanol-Beneficiaries-Please-Stand-Up.

14) See GAO reference.

15) Environmental Working Group. June 2010. “Greenwashing Corn.” Accessed online 2 December 2010 athttp://www.ewg.org/agmag/2010/06/greenwashing-corn/.

16) National Wildlife Federation. “Corn Crowds Out Wildlife in Prairie Pothole Region.” 13 January 2010. Accessed online 2 December 2010 at http://www.nwf.org/News-and-Magazines/Media-Center/News-by-Topic/Wildlife/2010/01-13-10-Corn-Crowds-Out-Wildlife.aspx.

17) Welch, Heather, et al. “Unintended Consequences of Biofuels Production: The Effects of Large-Scale Crop Conversion on Water Quality and Quantity.” 19 October 2010. Accessed online 2 December 2010 athttp://pubs.usgs.gov/of/2010/1229/.

18) Economic Research Service, US Department of Agriculture. “Effects of Increased Biofuels on the U.S. Economy in 2022.” October 2010. Accessed online 4 November 2010 at http://www.ers.usda.gov/Publications/ERR102/ERR102.pdf.

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