The economics of U.S. ethanol policy: A rebuttal
The problem is: That someone doesn’t have to be an ethanol producer here in the United States. And, if the U.S. ends up importing ethanol, then we will once again lose a growth industry, export American jobs, and become dependent on foreign energy producers. As it happens, these are three of the problems that public policymakers sought to solve when the nation encouraged the development of a domestic ethanol industry three decades ago.
Yes, the Renewable Fuel Standard (RFS) provision of the Energy Independence and Security Act of 2007 (EISA 2007) requires the use of renewable fuels to increase from 13 billion gallons this year to 36 billion gallons in 2022. And, yes, the RFS has promoted increased production and use of ethanol. In fact, the U.S. industry produced 10.8 billion gallons of ethanol last year and the nation’s 188 operating plants are poised to produce nearly 13 billion gallons this year.
But why is the great majority of the ethanol, whose use is mandated by the RFS, being produced here in the U.S., rather than somewhere else, such as Brazil? The answer is that the VEETC promotes the blending and marketing of ethanol in this country.
What will happen if the VEETC is allowed to expire at the end of this year? As Professor Babcock admits, failure to reauthorize the ethanol tax credit will reduce ethanol prices. A study commissioned by the Renewable Fuels Association earlier this year estimated that elimination of the ethanol tax incentive would prompt a 17.8 percent drop in net revenue for ethanol producers. A decline in profitability of this magnitude can be expected to force marginal producers to either cut operations or cease production. Given the experience of 2008 and 2009 regarding bankruptcies and idled capacity in the ethanol industry, a decline in profitability of this magnitude would lead to as much as a 38 percent reduction in domestic ethanol output, or about 4 billion gallons.
This means that the ethanol industry would spend $6.6 billion less annually on purchases of grain and other raw materials, good and services. Not only would jobs be lost in the ethanol plants that closed or cut output, but jobs in other industries that supplied goods and services to ethanol producers, or relied on the spending by ethanol employees and their families, also would be affected. When the full impact of the loss of this spending is considered, the potential loss of jobs in all sectors of the economy is much closer to 112,000 than the 300 jobs estimated by Professor Babcock.
Since the RFS mandates the use and not the production of ethanol, removing the tax credit would likely result in the replacement of domestically produced ethanol with imported ethanol. Together with removing the ethanol tariff, this would provide a significant incentive for foreign producers such as Brazil to export directly to the U.S. competitively without having to transship through the CBI countries to avoid the tariff. Thus, removing both the tax credit and tariff would increase export demand for Brazilian ethanol, which would raise domestic ethanol prices in Brazil and stimulate production.
According to the Brazilian Sugarcane Industry Association (UNICA) ethanol production in Brazil nearly doubled between 2003 and 2008 while exports increased by a factor of four! Last year, Brazil exported more than 17 percent of total ethanol production and the U.S. is their leading market. The interest of the Brazilian ethanol industry gaining a larger foothold in the large and growing U.S. renewable fuel market is evidenced by their willingness to underwrite a study showing that allowing the ethanol tax credit to expire would have no adverse consequences for the U.S. industry.
Failure to reauthorize the ethanol tax credit also will send an unintended message to the investment community that the United States is not serious about supporting the development and growth of the biofuels industry. Also, allowing the tax credit to expire would likely raise questions among investors about the potential longevity of other incentives such as the cellulosic tax credit, thereby increasing risk for lenders and investors. This increased risk is likely to impede the vital flow of capital for investment and development of this component of the biofuels industry. Developing the cellulosic biofuel industry is vital to achieving the 36 billion gallon target for renewable fuel use by 2022. Failure to develop this industry will increase demand for biofuel or oil imports and further erode U.S. energy security.
In short, removing the tax credit would encourage the export of another U.S. industry. The nation would lose the ethanol industry’s economic benefits: direct and indirect jobs; a reliable market for farm products; increased output for the economy and income for Americans; and billions of dollars in tax revenue for the Federal treasury and State and local governments. Moreover, instead of reducing its reliance on imported energy, the U.S. will be increasing its dependence for a different fuel from different supplying countries.
After 30 years of progress towards securing our energy supplies and developing a new clean energy industry, the U.S. would be back to Square One. That’s not a “field of dreams” – that’s an energy nightmare.
John M. Urbanchuk is a technical director with the natural resources and environmental consulting firm ENTRIX. He is an agricultural economist with more than 30 years experience as a consultant to the ethanol, biodiesel, and corn industries.