Ethanol Tax Incentives Produce Little Environmental Benefit, GAO Reports

Published July 1, 1997

A new report by the U.S. General Accounting Office finds that billions of dollars in subsidies and tax exemptions for alcohol fuels have failed either to reduce U.S. reliance on foreign sources of oil or to benefit the environment. The report, titled “Tax Policy: Effects of the Alcohol Fuels Tax Incentives,” was released in March.

The partial exemption from motor fuels excise taxes for alcohol fuels reduced tax revenues by about $7.1 billion from fiscal years 1979 to 1995. About 108 billion gallons of alcohol fuel mixtures were sold over that period and about $7.5 billion of motor fuels excise tax revenues were collected on the sales of this fuel. Without the partial exemption, the amount of tax paid on an equivalent amount of gasoline would have been about $14.6 billion.

Virtually all of the revenue forgone due to the exemption is money that otherwise would have been earmarked for the Highway Trust Fund. In fiscal year 1995, gross federal highway user tax receipts for the Highway Trust Fund were $23.1 billion. Without the partial exemption for alcohol fuels, an additional $617 million of revenue would have been allocated to the Highway Trust Fund for fiscal year 1995.

Supposed Environmental Benefits

In the 1970s and 1980s, the federal government adopted several policies to encourage the use of alternatives to imported fossil fuels. Among those policies were tax incentives specifically targeted at the use of alcohol fuels derived from biomass materials. Supporters claimed that the tax incentives would reduce U.S. reliance on imported petroleum and extend the life of limited petroleum reserves.

In the late 1980s, Congress’ attention turned to using alcohol fuels as additives to fossil-based fuels to reduce urban air pollution. The Clean Air Act Amendments of 1990 required that transportation fuel used in some urban areas have a minimum oxygen content to reduce these areas’ levels of carbon monoxide and ground-level ozone.

In the early 1990s, Congressional attention turned to the possible benefits of using renewable energy sources, including alcohol fuels, to reduce emissions of greenhouse gases that may contribute to global warming.

Real Impact Is Slight

According to the GAO study, despite this long record of favorable policies and billions in tax exemptions, the ethanol tax incentives have had very little effect on the environment. Although available evidence suggests that the tax incentives for alcohol fuels increase ethanol fuel use, it also indicates that these incentives do not significantly reduce petroleum imports. Ethanol currently accounts for less than 1 percent of U.S. motor vehicle fuel consumption.

The substitution of other fuels for ethanol, if the tax incentives were removed, would likely have very little effect on air quality. In areas where gasoline containing oxygenates is mandated to help meet existing air quality standards, the likely substitute for ethanol would be MTBE. Both ethanol and MTBE meet existing standards for gasoline containing oxygenates.

In areas that already meet existing air quality standards, ethanol has been used mainly as a gasoline extender and octane enhancer. The elimination of ethanol use in these areas would be expected to result in little reduction in overall air quality. According to the Environmental Protection Agency (EPA), even if ethanol use were eliminated, these areas would most likely continue to meet national ambient air quality standards. A negative effect would likely be slightly increased carbon monoxide emissions. A positive effect would be slightly decreased emissions of ozone precursors.

The effect on global warming through changes in greenhouse gas emissions that would occur if ethanol fuel were not subsidized is likely to be minimal. The global-warming effects of using ethanol are likely to be no better than, and could be worse than, those of using conventional gasoline. Furthermore, even if current ethanol use were to contribute to lower greenhouse gas emissions, ethanol is such a small part of total U.S. fuel use that global environmental quality should not be significantly affected if ethanol use were discontinued.

The End of Ethanol?

The key to reducing air pollution caused by motor vehicles has been and will likely continue to be improvements in automobile technology. At the same time that government mandates, like those for ethanol, were producing low single-digit impacts on air quality, improved auto technology has reduced emissions per vehicle mile for new cars by 90 percent. As these newer models replace older ones, air quality should continue to improve. Moreover, new “cold start” technology may reduce the already-low emissions of new vehicles by an additional 70 percent.

Rather than forcing everyone to buy a more costly ethanol fuel or to line up for time-consuming annual vehicle emission inspections, government ought to focus its attention on the minority of vehicles responsible for the majority of the pollution. Measures such as mobile emission enforcement are cost-effective ways of restoring government to an effective role as “referee” rather than an inept prescriber of ineffectual and costly mandates.

The complete text of the GAO report can be retrieved from the Internet at