Study: VEETC expiration would hurt industry

By Holly Jessen | February 09, 2010
Posted March 12, 2010

A university research program said this week that U.S. fuel ethanol and biodiesel production would be cut by 10 percent if biofuels tax credits were to expire at the end of the year. In addition, the report said it would also cause ethanol imports to increase and corn prices to drop about 15 cents in the next nine years.

The findings were published in a yearly report of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. The organization publishes yearly baseline projections for the international commodity and U.S. agricultural markets. This year's briefing book is titled "Projections for agricultural and biofuel markets."

The Renewable Fuels Association agrees that the industry would be hurt if the Volumetric Ethanol Excise Tax Credit (VEETC) were allowed to expire as scheduled Dec. 31, 2010. However, it probably understates the likely impact on the ethanol industry, said Geoff Cooper, vice president of research for RFA. "We think based on some internal analysis that it's probably closer to one third of ethanol production that would be lost," he told EPM.

Growth Energy said in an email to EPM that the study proves what that organization has been saying all along. That VEETC has "tremendous value" and a "substantial return" to taxpayers. "We have to keep in mind that federal support for this industry is far smaller than what is paid out in support for fossil fuels, particularly oil," said Chris Thorne, director of public affairs for Growth Energy. "(that federal support for oil came) in the form of direct subsidies and tax credits, not to mention the direct costs to taxpayers for defending oil shipping routes and the daily drain, as much as a billion dollars a day, from our economy to the economies of other nations."

The study was referenced in a blog post March 10 by Nathanael Greene, director of renewable energy policy for Natural Resources Defense Council. His position was that the ethanol tax credit is costing taxpayers $4.18 per gallon. Both RFA and Growth Energy pointed out that this math doesn't appear anywhere in the FAPRI study. Cooper called it ridiculous and laughable. Thorne said it was simply inaccurate. "What FAPRI does is validate the importance of the tax credit in advancing the production and use of domestic ethanol in the United States," Thorne said.

The FAPRI report compared projected ethanol production if the tax credit and tariff were extended or if the tax credit and tariff were not extended. Without the tax credit and tariff, the study projected that domestic ethanol production would drop by 1.4 billion gallons in 2011-2012 and 3.6 billion gallons in 2019-2020. "If the ethanol tax credit and tariff expire as scheduled … there would be less incentive to produce ethanol in excess of quantities needed to satisfy the RFS2," the report said.

Looking specifically at imported ethanol, the analysis predicts that, without the extensions, in 2010 200 MMgy of ethanol will be imported. By 2012 that projection increases to 820 MMgy and by 2019 it's at 2,958 MMgy.

The report highlights that VEETC and the Renewable Fuels Standard are complementary programs, Cooper said. RFS is a mandate to use biofuels, not a mandate that those biofuels be domestically produced. The tax credit does that job. "If you take the tax credit away you see a substantial reduction in production and dramatic increase in ethanol imports," he told EPM.

FAPRI's report shows that, without the tax credit and tariff, imported ethanol would be used to satisfy RFS, Cooper said. If the primary goal of RFS is to ensure domestic energy security and diversity fuel supply, how does it make sense to remove VEETC and trade oil reliance on oil imports for reliance on ethanol imports, Cooper asks.

Another thing people don't think about is how this could impact global land use. If VEETC expires, Cooper said, it leaves a "gaping hole" for the global players to ramp up production of ethanol feedstocks. An indirect consequence, for example, could be rapid expansion of sugar cane in Brazil and India and corn crops in China and Argentina.

The analysis looked at the results of changing four biofuels policies simultaneously, said Pat Westhoff, who authored the FAPRI study along with Scott Brown. That includes the $1 a gallon biodiesel tax credit that expired Dec. 31, 2009; the 45 cent a gallon ethanol tax credit, the 54 cent a gallon tariff on imported ethanol from countries not receiving preferential treatment, which is scheduled to expire Dec. 31, 2010; and the $1.01 per gallon benefit for cellulosic ethanol, which is scheduled to expire at the end of 2012. "We looked at alternative biofuel policy scenarios to help users of our baseline in Congress and elsewhere reconcile differences between our baseline (which assumes biofuel tax credits and tariff are extended when they would otherwise expire) and the Congressional Budget Office baseline (which is required to assume that taxes and tariffs are not extended when they expire)," he told EPM in an email. "We would obtain different results if we only examined one of those policies at a time instead of all four at once."

To compile the report, FAPRI averaged 500 stochastic market outcomes, or possible ways it might happen, including different assumptions about everything from oil prices to meat demand and more. "Eliminating the ethanol tax credit, for example, would have very little impact on ethanol consumption under some circumstances, and very large impacts under other circumstances," Westhoff said.