The Congressional Budget Office recently completed a study of biofuel tax credits that aimed to determine if existing tax credits favor one type of biofuel over another and estimate the costs of those credits on U.S taxpayers. The study, titled “Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals,” was prepared by the CBO at the request of the Chairman of the Senate Subcommittee on Energy, Natural Resources and Infrastructure.
The CBO’s main findings included the following:
-The incentives provided by the tax credits differ between the three fuels. When adjusted to reflect the different energy contents of the biofuels, as well as the petroleum fuel used to produce them, the CBO found that corn ethanol producers receive 73 cents for each quantity of ethanol that contains the energy equivalent of one gallon of gasoline. On the same basis, the incentives for cellulosic ethanol and biodiesel were a respective $1.62 and $1.08 per volume of energy equivalent fuel.
-The cost to taxpayers to use corn ethanol to reduce gasoline consumption by one gallon is $1.78. The same cost for cellulosic ethanol is $3 and the cost for biodiesel was found to be $2.55. According to the CBO, these cost estimates depend on the size of the tax credit for each fuel, changes in federal revenue streams that result from the difference in excise taxes collected on the sales of gasoline and biofuels, and the amount of each biofuel that would have been produced if the credits had not been available.
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-The costs to taxpayers of reducing greenhouse gas (GHG) emissions through the tax credits was $750 per metric ton of carbon dioxide equivalent (CO2e) for corn ethanol, $275 per metric ton of CO2e for cellulosic ethanol, and $300 percent metric ton of CO2e for biodiesel.
Response to the report was swift and game-changing for the ethanol industry, primarily because Growth Energy took it as the occasion to introduce its ideas for new policy directions. The day after the CBO report was released, Growth Energy announced its Fueling Freedom Plan July 15, calling for an extension of the tax credit, but with some of the incentive being directed towards infrastructure development and a requirement that all new U.S. vehicles be flex fuel. Growth Energy also suggested that tax credits could ultimately be discontinued with a transition to an open market.
That announcement diverted attention from the CBO report, however. The Renewable Fuels Association dug into the details of the CBO report and offered its analysis. Geoff Cooper, RFA vice president of research and analysis, said that in general the CBO relied upon worst-case assumptions and failed to give credit for coproducts. “The CBO report confirmed that biofuels like ethanol have indeed reduced both petroleum consumption and GHG emissions. However, using highly pessimistic and debatable assumptions, CBO greatly exaggerates the cost of those benefits to taxpayers,” Cooper wrote in his blog analyzing the report. “Using more realistic assumptions, we find that CBO likely overestimated the cost to taxpayers of displacing petroleum with ethanol by a factor of 3 to 4 and overestimated the cost to taxpayers of reducing GHG emissions by a factor of 6 to 8.”
The RFA also said the CBO used an overly conservative estimate of ethanol's GHG reductions. “Based on our research, the result of using more reasonable assumptions on the GHG reductions associated with using corn ethanol is that the cost to taxpayers of reducing one ton of GHG emissions is just 13-17 percent of the CBO estimate,” Cooper said. The RFA also criticized CBO for failing to include comparisons with other energy tax incentives, particularly those that subsidize oil interests.
Click here to read a summary of the CBO report
or access the complete report or visit www.cbo.gov and follow the links to publications by subject, under taxes and July reports.