Congress Ends Ethanol Subsidies, Mandates Remain

Published January 31, 2012

Congress has declined to extend a federal tax credit for ethanol production, putting an end to a special interest subsidy once viewed as politically untouchable. Nevertheless, federal mandates continue to require U.S. consumers to purchase large quantities of ethanol, which is more expensive than gasoline and delivers fewer miles per gallon.

Three Decades of Subsidies
The federal tax credit existed for more than 30 years, costing U.S. taxpayers nearly $6 billion in 2011 alone. The credit expired at the end of 2011 after Congress resisted political pressure to extend the subsidy. Congress also declined to extend a 54-cent-per-gallon protectionist tariff on imported ethanol.

Mandates Remain
U.S. consumers will still be required to subsidize ethanol indirectly through purchasing mandates imposed by the Energy Policy Act of 2005. The mandates were increased two years later with the enactment of the Energy Independence and Security Act of 2007. The 2007 Act requires consumers to purchase 36 billion gallons of ethanol annually by 2022.

The 2007 Act further mandates that 16 billion gallons come from cellulosic ethanol (made from wood chips, switchgrass, or corn stover) by 2022, even though no company has yet figured out how to produce it in a commercially viable way. As a result, none was produced in 2011, and none is expected to be manufactured this year.

Market Still Compromised
“The end of the federal ethanol subsidy is a cause to rejoice. After all, it is exceedingly difficult to roll back subsidies once they are in place,” said Daniel Simmons, state director at the Institute for Energy Research. “But we shouldn’t rejoice for too long, because the subsidies were the least important part of the federal government’s promotion of ethanol.

“The federal government mandates the use of ethanol and creates a guaranteed market for this particular biofuel,” Simmons explained. “This means that even though the federal government will save some money, American drivers will continue to subsidize America’s corn farmers and ethanol producers. This is far from a free and open marketplace.”

Bonner R. Cohen, Ph. D. ([email protected]) is a senior fellow at the National Center for Public Policy Research.