$6 Billion Corn Ethanol Subsidy Under Fire

Summary

Corn ethanol subsidies continue to receive criticism from politicians and the press. Recent editorials in the Wall Street Journal and the New York Times recommend eliminating the 45 cents per gallon corn ethanol tax credit. Both articles quote a recent CBO study that estimates the cost of corn ethanol subsidies in 2009 at $6 billion. Should the government invest the $6 billion in renewing subsidies for wind, solar, and geothermal energy or in cellulosic biofuels R&D instead?

Analysis

Corn ethanol subsidies continue to receive criticism from politicians and the press. Recent editorials include “Survival of the Fattest”, published in the Wall Street Journal on July 26, 2010, and “Energy Subsidies—Good and Bad”, published in the New York Times on July 29, 2010. Both articles recommend eliminating the 45 cents per gallon corn ethanol tax credit. The New York Times article also recommends renewing subsidies for wind, solar and geothermal energy. Both articles quote a recent Congressional Budget Office (CBO) study that estimates the cost of corn ethanol subsidies in 2009 at $6 billion.

This subsidy helped to create the corn ethanol market. Projected corn ethanol production for 2010 is over 11 billion gallons, with a mandated increase to 15 billion gallons in 2014. Since corn ethanol usage is required by law, the government could remove the subsidy and either save the $6 billion or invest the funds elsewhere.

Increasing the use of renewable fuels is considered a cost efficient method of reducing greenhouse gas (GHG) emissions. Yet, the CBO report estimates that the cost of reducing GHG by using corn ethanol is over $750 per metric ton. Even if this estimate might be overstated, wind, solar, and geothermal energy reduce GHG emissions for less than $50 per metric ton. Should the government invest the $6 billion in renewing subsidies for more cost efficient sources of renewable energy?

The $6 billion could also be invested in subsidizing cellulosic biofuels research & development. The cellulosic biofuels industry is not meeting the production levels that they previously projected. So recently, the Environmental Protection Agency (EPA) lowered the cellulosic biofuels blending mandate for 2011 from 250 million gallons to 6-25 million gallons. It is not likely that the EPA will increase the required blending levels for 2012. Should the government subsidize R&D to assist the cellulosic biofuels industry to meet the mandated blending levels?

However, removing the corn ethanol subsidy could reduce profits for oil refiners, who are the recipients of the 45 cents per gallon tax credit. In the case of independent oil refiners, such as Valero Energy Corporation, Sunoco Inc., and Tesoro Corporation, removing the subsidy could have a pre-tax impact of approximately $750 million, $250 million, and $200 million, respectively. Other factors, such as an increase in the cost differential between the retail price of gasoline and the wholesale price of corn ethanol, could reduce the impact of losing the tax credit.

Removing the subsidy could also create an over supply of corn ethanol for producers such as Archer Daniels Midland Company, BioFuel Energy Corp., Pacific Ethanol Inc., and Green Plains Renewable Energy Inc., because oil refiners would not only loose the tax credit, but also the incentive to blend above the mandated levels. If this occurs, the decrease in demand could reduce the wholesale price of corn ethanol.
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Analysis by: GLG Expert Contributor
Analysis of: Energy Subsidies — Good and Bad

Contributed by a Member of the GLG Energy & Industrials Councils

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