Why Billions In Corn Ethanol Subsidies Create Little Domestic Production And Few New Jobs
Sasha Lyutse and Nathanael Greene
Transitioning the U.S. economy away from fossil fuels toward low-carbon fuels is critical to breaking our dependence on oil and solving global warming. Low-carbon liquid fuels can and should be part of a comprehensive policy agenda to address these challenges.
But not all biofuels are equal. Some reduce pollution, and some pollute more than gasoline and diesel. The Federal Volumetric Ethanol Excise Tax Credit (VEETC) fails to recognize this difference and subsidizes the mature corn ethanol industry—despite its high levels of greenhouse gas (GHG) emissions and impacts on water pollution and soil erosion—at the expense of developing newer and cleaner biofuels. Furthermore, the VEETC is expensive and wasteful, paying oil companies billions to buy corn ethanol they are already required to purchase under the Renewable Fuel Standard (RFS).
Congress should allow the VEETC and its companion import tariff to expire at the end of the year.
Multiple federal policies encourage the production and consumption of ethanol as an alternative to gasoline in the United States. The RFS, established in 2005 and expanded by the Energy Independence and Security Act of 2007, requires that increasing quantities of biofuels, including ethanol, be blended into U.S. transportation fuels every year.
The RFS does impose GHG performance standards, but those standards primarily apply to the emerging advanced biofuels industry, while the vast majority of the old corn ethanol industry is exempt. The federal government also provides blenders and marketers of fuel a $0.45 tax credit for every gallon of ethanol blended with gasoline, regardless of environmental performance, and imposes a $0.54 per gallon tax on imported ethanol to protect domestic producers against foreign competition.
In 2007, oil companies collected 75 percent of all federal tax credits available for renewables in exchange for blending corn ethanol—a technology that has been commercially operational for decades and now provides nearly 10 percent of light-duty vehicle fuel. In other words, a mature, mainstream technology with dubious environmental performance gets four times the credits available to companies trying to expand all other forms of renewable energy, including solar, wind and geothermal.
The corn ethanol industry argues that its margins are thin and the VEETC and the import tariff are critical to its survival. But the evidence does not support this claim. In every year since the RFS was put in place, both demand and supply of domestic corn ethanol has exceeded mandated levels. As a result, oil companies have been able to set demand and price levels for ethanol, keeping prices low and pocketing much if not all of the VEETC as profit.
Given that most of the value of the VEETC goes to the oil industry, it is not surprising that independent analysis of the ethanol industry’s economics suggests that it will continue to grow without the VEETC, just at a slightly slower rate. A recent study by the University of Missouri Food and Agricultural Policy Research Institute (FAPRI) found that even if both the VEETC and import tariff are allowed to expire, domestic corn ethanol production still increases in every year, but grows by roughly 10 percent less than the baseline between now and 2015.
FAPRI forecasts that, if extended, the VEETC will lead oil companies to consume just 6.9 billion more gallons of conventional corn ethanol than they would without it from 2011 through 2015, just 10 percent of the 69 billion gallons already required by law over the period. At a price tag of more than $30 billion, this will cost U.S. taxpayers approximately $4.35 per extra gallon above the RFS blending mandate.
In 2009, U.S. plants had the capacity to produce roughly 13 billion gallons of corn ethanol, and it is very hard to get gasoline without some ethanol in it today. Some of these plants have been around for decades, and many are fully paid off. The corn ethanol industry is mature, and the little additional demand driven by the VEETC and the import tariff will not lead to any significant cost reductions, let alone economic competitiveness and self sufficiency.
Perhaps recognizing this, the industry focuses most of its defense of the VEETC on jobs, but this argument doesn’t hold up either. If, as the industry claims, a 100 million gallon per year plant requires 45 workers to operate, then in 2009, the industry directly employed approximately 5,566 workers. In that year alone, U.S. taxpayers spent $4.82 billion in VEETC subsidies. Even if we put aside the RFS and assume that the VEETC was responsible for every single job in the industry, those numbers still translate into more than $865,000 per direct job.
By comparison, multiple studies estimate the cost of job creation in the United States to be $50,000-$100,000 per direct job, meaning jobs created by the VEETC are 8 to 16 times more costly than what is typical in the U.S. economy.
Recognizing that the critical role of the RFS is setting a floor for ethanol demand in the market, FAPRI estimates extending the VEETC would drive 1.4 billion gallons of domestic ethanol production over RFS-mandated levels in 2011, requiring about 630 workers. Ethanol industry claims about job creation use highly inflated “job multipliers” or take credit for jobs associated with growing corn ethanol’s key input—corn—even though most farmers would still be farmers without the ethanol industry.
If we account for indirect job creation using more realistic job multipliers, the additional ethanol demand driven by the VEETC will only generate between 1,890 and 2,520 total jobs at a total cost of $5.5 billion. This translates into $2.1-2.9 million per year to create and maintain each job. This is an unacceptably high price tag.
For an industry as mature, mainstream and polluting as corn ethanol, the VEETC and the tariff are expensive and wasteful, especially with the RFS in place. At $0.45 per gallon of ethanol, it will cost taxpayers nearly $5.4 billion this year alone—a massive giveaway to oil companies for obeying the law. By spending billions to subsidize every gallon of conventional corn ethanol produced at existing plants, we are not getting our money’s worth in terms of domestic production, new jobs or environmental performance.
We can do better by supporting emerging and more competitive energy technologies in wind, solar, geothermal and advanced biofuels that create many more times the green jobs we need and far less global warming and water pollution. Now is the time for Congress to stop subsidizing Big Oil and Old Ethanol and allow the VEETC and the tariff to expire at year-end.
Sasha Lyutse is a Welch Fellow with the Natural Resources Defense Council’s Center for Market Innovation.
Nathanael Greene is director of NRDC’s Renewable Energy Policy.
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