Thursday, December 29, 2011

Happy New Year!: Ethanol subsidies expire at end of 2011

Ethanol in Winter 12/30/11

Wonder of wonders, the tax subsidy and tariff expire.

Congress created ethanol subsidies in 1978, expanded them in a 1980 bill, and then rinsed and repeated in 1982, 1984, 1988, 1990, 1992, 1998, 2004, 2005 and 2007. But now, wonderful to relate, this 30-year adventure in corporate welfare may finally be going into reverse.

Congress adjourned this month without extending the $6 billion annual tax subsidy for blending corn ethanol into gasoline and the steep import tariffs on the industry's foreign competitors. Both turn into a pumpkin at the stroke of the New Year.

The Senate voted overwhelmingly against continuing the 45-cent-a-gallon ethanol credit in July, and an extension was not slipped into the final budget deal. Deliberate neglect is not the Viking funeral the ethanol lobby deserves, but given its many political clients this is a minor policy watershed all the same.

The left-right coalition against corn ethanol has been growing for some time, and the latest outfit to lend its voice to what is now a not-so-lost cause is none other than the National Academy of Sciences. In an October report, academy researchers concluded that grain ethanol "could not compete with fossil fuels in the U.S. marketplace without mandates, subsidies, tax exemptions, and tariffs . . . This lack of competitiveness raises questions about the use of government resources to support biofuels."

The liberal revelation has been the growing evidence that biofuels increase net carbon emissions. Pumping energy-intensive row crops into gas tanks leads to land-use changes in world agricultural markets that increase greenhouse gases.

The irony is that a fuel that was sold as a global-warming palliative—the industry will use any argument to justify its government lucre—is now being hoist on its own corn stalk. Green carbon fuel standards regulations from the Environmental Protection Agency and in California credit sugar ethanol produced in Brazil with better climate benefits than corn ethanol.

So South American makers have been shipping their product to the West Coast, paying the tariff and selling it at a premium. U.S. makers then send their product south to backfill the Brazilian market. So much for "energy independence," another example of false ethanol political marketing.

Ending ethanol protectionism will at least help lower U.S. costs, but the tragedy is that no one would ever buy it at the pump without Congress's mandate, which, alas, will continue. The National Academy's summary is apt: "Without biofuel tax credits . . . the cost of biofuel programs is borne directly by consumers, as they are forced to pay a higher cost for the blended renewable fuel than for petroleum-based products. Otherwise, consumers bear the cost of biofuel programs indirectly through taxes paid."

The fight for economic rationality goes on.

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