The free ride is over for ethanol
Subsidies, under attack, are likely to be modified or eliminated
A push to eliminate federal subsidies for ethanol production could affect Illinois farmers and consumers, while more moderate efforts to adjust the subsidies are gaining momentum.
Ethanol is an alcohol made from fermented plant material – mainly corn – and blended into gasoline as an additive.
Darrel Good, an agriculture economist at the University of Illinois Urbana-Champaign, says it’s unclear just what effect ending ethanol subsidies would ultimately have.
“Like many other things, the answer to that is, ‘It depends’,” Good says. He explains that corn prices depend partly on the demand for ethanol, which in turn depends partly on the price of oil. There is a mandated minimum level of annual ethanol production that will be met regardless of what happens with subsidies, he says, but Illinois is currently producing more than the minimum amount. Essentially, it’s a question of whether ethanol demand is high enough to survive the removal of the incentive that made it popular to begin with.
“The question is, if the tax credit were eliminated, would that reduce ethanol production just to the minimum levels,” he says. “The answer to that, then, is a function of how profitable it is for the blenders to blend ethanol. If ethanol prices are below gasoline prices and if gasoline prices remain pretty high, then it may still be profitable to blend ethanol even above the minimum level. It clearly would not be as profitable as it is now with the tax credit.”
Illinois is third in the nation behind Iowa and Nebraska for ethanol production, producing more than 1.2 billion gallons of ethanol per year, according to the Washington, D.C.-based Renewable Fuels Association. Meanwhile, between 35 and 40 percent of Illinois corn grown each year goes toward ethanol production, according to the Illinois Corn Growers Association, so the fortunes of Illinois corn farmers are intrinsically linked to the success of ethanol. Most gasoline sold in Illinois contains a 10 percent blend of ethanol, though blends of up to 85 percent ethanol are available for vehicles that can utilize it.
Good says that before ethanol became widespread, corn prices were “highly variable,” but hovered around $2.40 per bushel. Since ethanol production took off in late 2006, corn prices have averaged around $4.40.
Dave Loos, research and commercial development director for the Illinois Corn Growers Association, points out that the VEETC subsidy has, at least in theory, helped moderate the price of gasoline.
“It should be, but I just don’t know,” he says. “It still remains to be seen how it’s going to affect consumers. Maybe I’m a little more worried about that right now because it’s more of an uncertainty.”
Oklahoma Republican Sen. Thomas Coburn attempted to pass an amendment to eliminate VEETC on June 14, but it was voted down 40-59. The subsidy gives ethanol blending companies a 45-cent tax credit for each gallon of blended fuel produced, while imposing a 54-cent tax on each gallon of imported ethanol fuel.
Though Coburn’s amendment #436 to Senate Bill 872 failed, he indicated that he would continue to push the issue, while political analysts suggest the amendment may have failed because of the unusual parliamentary procedure Coburn used to call it for a vote. His motion was seen as subverting the traditional hierarchy of Senate authority, so the vote may have been more of a rebuke than a statement about the amendment itself.
Both of Illinois’ senators in Washington, Democrat Dick Durbin and Republican Mark Kirk, voted against Coburn’s amendment, instead throwing their support behind Senate Bill 884, a measure that would hasten the expiration of the tax credit and link it to the price of crude oil. That would trigger the subsidies when crude oil costs more than $90 per barrel – the point at which it is economically advantageous to produce ethanol.
“What we’ve found is there are periods when ethanol blending has not been economic except for the tax credit and other times when it’s been profitable even without the tax credit,” says Darrel Good, the UI ag economist. “I think as an economist, what we’re saying is if you are going to require ethanol blending, then this concept of a variable tax incentive has some merit. … It’s kind of the concept of when it’s needed, it’s there, but when it’s not needed, there’s no sense paying it.”
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