Ethanol subsidy set to expire

Europe could soon impose oil sanctions on Iran.

CORRECTION: The original version of this story incorrectly described the direct recipient of the “blender’s tax credit” for ethanol. It is received by fuel distributors and oil refiners that mix ethanol with gasoline. The text has been corrected.

Jeremy Hobson: It is the 29th of December, 2011 -- a year in which Congress didn't accomplish a whole lot. And it's one of the things lawmakers didn't do that's about to affect a powerful industry come Sunday. Congress chose not to extend a subsidy that encourages the production of ethanol. For decades, oil refiners and fuel distributors have received what's called a blenders' tax credit: For every gallon of ethanol they mix with gasoline, they're eligible for a 45-cent tax credit. Well, in three days, that subsidy is history, as Marketplace's David Gura reports from Washington.


David Gura:The government has been at this for a while now. Chris Knittel teaches energy economics at MIT.

 

Chris Knittel: We’ve been subsidizing ethanol since at least 1978. Texaco Ad: What’s Texaco doing in a field of corn? Not growing it. Texaco is making “gasohol.” It’s a mixture of 90 percent Texaco unleaded gasoline and 10 percent ethanol, made from renewable crops like corn.

Back then, biofuels were the stuff of the future, another key to energy independence. But there were obstacles. Dermot Hayes is an economics professor at Iowa State. Companies had to invest in new facilities to make ethanol. 

Dermot Hayes: It didn’t make economic sense to build those kinds of plants.

That’s because, for a while, ethanol and gasoline were both pretty cheap. The blenders’ tax credit tipped the scales, and Hayes says it’s kept them tipped, encouraging the ethanol industry to grow over the last three decades.

Hayes: Given that the industry has been built, the industry can survive without the subsidy.

Especially since the government mandates companies make a certain amount of ethanol every year. That’s an issue Republicans presidential candidates are arguing about. At the end of 2011, the blenders’ tax credit will expire, and MIT’s Chris Knittel says that’s no small thing.

Knittel: $7 billion a year, funneling from taxpayers to ethanol producers and corn farmers.  So, it’s not chump change.

What does it mean for consumers? The demand for corn, and the price of corn, is probably going to stay high. The U.S. will produce ethanol, with or without the subsidy. We’d only see demand change if the price of oil dropped dramatically. In Washington, I'm David Gura for Marketplace.

About the author

David Gura is a reporter for Marketplace, based in the Washington, D.C. bureau.

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