So much for that ethanol subsidy

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Senior Reporter

Frank Morris is the news director at KCUR in Kansas City and a senior contributor to Harvest Public Media.

The fuel in your car or truck didn’t get to the gas station straight from the refinery. It all stopped at a place like the Magellan terminal in Kansas City, Kan., where petroleum gasoline comes out of a pipeline, and is blended with ethanol.

The ethanol flows in followed by the petroleum gasoline and blends in the tank.   That’s happing all over the country right now — just about all gasoline sold in the U.S. contains close to 10 percent ethanol.

Those who own the fuel, oil companies generally, earn a tax credit worth 45 cents for every gallon of ethanol used. That adds up to about $6 billion a year.

That subsidy was once iron clad, but now it’s looking like Congress will cut it off as soon as the end of this month.  

Clearly, a lot has changed.

Until just recently the ethanol industry said it couldn’t exist without the tax credit.

“If you do not extend the tax incentive, we’re going to lose 112,000 jobs across all sectors of the economy,” said Bob Dinneen, president of the Renewable Fuels Council, in an interview with “Domestic Fuel.”

That was about a year and a half ago. Here he is talking about same tax credit now: “In today’s environment, no you don’t need it.”

There are at least three big reasons for this.   The first is regulatory.  The government forces oil companies to use ethanol — and that Renewable Fuels Standard is growing.   Next year, it’ll be over 13 billion gallons, which is just a little bit more than the industry will produce this year.  

Bruce Babcock, a professor of economics at Iowa State University, said that mandate renders the tax credit irrelevant. 

“You can see that that growing mandate really is the thing that’s going to drive ethanol demand, and the $6 billion that we are spending really isn’t going to accomplish anything,” he said.

Another reason the ethanol industry doesn’t much care about the tax credit is economic.   Even with high corn prices, ethanol is cheaper to produce than gasoline.   And domestic corn-based ethanol is now much cheaper than the sugarcane based ethanol they make in Brazil.  

The last reason is political.

“They’ve never been so politically vulnerable as they are right now,” Babcock said.

Last month the Senate voted overwhelming to end the subsidy.   A plan to end the ethanol subsidy at the end of this month is likely to be included in any agreement to raise the debt ceiling.    

Shelia Karpf, with the Environmental Working Group, said the subsidy should have been eliminated long ago.

“We think of it as a college kid who needs to move out of their parent’s basement, or even a 50-year old who needs to move out of their parent’s basement,” she said.

The Environmental Working Group doesn’t like ethanol mainly because it jacks up the price of corn.  That makes food more expensive, and has encouraged farmers to grow a whole lot more corn, plowing up land that had been wildlife habitat, and causing water pollution.  

And Karpf would like to go further.

“I think the Renewable Fuels Standard will be the next battle ground,” she said.

But the ethanol mandate has a lot more friends than the subsidy did — and it's not likely to change anytime soon.

The ethanol industry's more immediate problem is finding some way to sell all of the fuel it can produce. That would mean going above the 10 percent now found in most gasoline.

Gas stations, like one in Lee's Summit, Mo., could be part of the solution. Here, customers can buy a range of fuel blends — 85 percent ethanol is a popular one. Thanks largely to the tax credit, it's much cheaper than normal gas. But patrons also say they appreciate that it helps farmers and is not made with imported oil.

Michael Riely pulls up in a Japanese sports car with a big hood scoop and starts filling up at the pump.

"For me, it's either this gas, or I have to run race fuel. And race fuel runs at least 8 bucks a gallon," Riely said. "So, I'm paying $2.99 for this, versus the same quality fuel, I have to pay $8 if I want regular gasoline for this car."

So, 33 years of federal subsidies have helped to build a large U.S. corn ethanol industry. And mandates aside, most people who run it say it's ready to stand on its own.