The corn ethanol industry in the US has received some $41 billion in federal subsidies since 1980. This year alone, federal subsidies are expected to total about $7.6 billion. As the federal budget goes, these are not huge amounts, but they are worth fighting over and that fight surely will heat up when Congress returns from its August recess.
The Congressional Budget Office released a report in July on the effects of tax credits to achieve energy and environmental goals. The report highlighted three reasons for subsidizing not only corn ethanol, but other biofuels as well. First, the fuels will reduce dependence on imports. Second, biofuels help meet environmental policy issues. Third, biofuel subsidies raise incomes in the agricultural sector.
In the US, most ethanol is blended with gasoline in a 10% mix known as E10. This blend can be used in any gasoline-burning car on the road today. By itself, this blend should reduce gasoline consumption, and therefore demand for imports, by 10%. That’s not the way it works out. A gallon of corn ethanol contains about one-third less energy than a gallon of gasoline, reducing the 10% gain to about 6.5%.
The second objective, reducing CO2 emissions, generates a lot of debate about the exact amount of CO2 reductions one can attribute to ethanol. Burning ethanol reduces CO2 emissions by about 21% compared with gasoline. Ethanol is primarily shipped from refiners by truck, and if the CO2 emitted by those trucks is added to the total CO2 emitted by burning ethanol and by burning other fossil fuels to grow the corn and get it to market, CO2 emissions do not fall by 21%.
Finally, corn ethanol receives a $0.45/gallon credit known as the Volumetric Ethanol Excise Tax Credit, VEETC, or more commonly, the blender’s credit. The credit was established in 2004 at $0.51/gallon and was reduced to its current rate in 2008. The cash goes to refiners who blend corn ethanol with gasoline. By the time the blender’s credit is scheduled to end in December 2010, taxpayers will have kicked in $22 billion to pay for this credit.
The name blender’s credit is almost a misnomer. Even though the money is paid to refiners like Archer-Daniels-Midland Co. (NYSE:ADM), The Andersons, Inc. (NASDAQ:ANDE), and Valero Energy Corp. (NYSE:VLO), the benefit goes to corn growers and ethanol producers. On the issue of the blender’s credit, the CBO said, “Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to the farmers who grow the corn—in the form of higher prices received for their products.”
Pure-play ethanol companies have all but disappeared. Pacific Ethanol, Inc. (NASDAQ:PEIX) shares have traded under a dollar/share since mid-May. The company has bounced up from a year-to-date low of $0.41 on the strength of belief in the Congress renewing the ethanol blender’s credit.
The corn ethanol subsidy will become more visible once Congress returns, but probably won’t have much effect on the November elections because there are no national candidates on the ballot. Iowa candidates will all support the corn ethanol subsidy, and New York candidates won’t even notice. The Obama administration is likely to support the continuation of the subsidy.
Corn ethanol is one of those subjects that is an almost endless source of opinion, conjecture, and argument. There will be more of all those in the rest of this year.
Paul Ausick
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