When Congress ended the tax credit for corn-based ethanol recently, the big ethanol companies all said that they didn’t consider that a big deal despite spending huge amounts of money trying to keep the subsidy. Doug Mataconis explains why they aren’t all that concerned about it: Because there are other subsidies and other federal regulations that assure their continued profits.
He notes, for example, that the subsidy for other cellulosic ethanol — ethanol made from switchgrass, wood chips, corn stalks, etc. — is now up to $1.01 a gallon. Congress has not killed that subsidy but also hasn’t extended it. The industry is still pushing for another five years for that subsidy and may get it after the current recess. More importantly, the federal government still requires that 10% of all fuel refined in the country contain ethanol.
So the reason the industry isn’t complaining too much about the end of the tax credit isn’t because they have suddenly gotten religion and realized that they don’t need government help to push a product that nobody seems to want, it’s because they are now benefiting from the most powerful subsidy of all, mandated demand. It’s as if Congress decided that all fast food hamburgers sold in the United States must include a certain quantity of lettuce and then eliminated a tax credit to lettuce farmers. The industry wouldn’t complain because the new mandated demand subsidy is far more valuable to them, and far harder to repeal once it is enacted, than a tax credit.
The ethanol tax credit is gone, and that’s a good thing, the fact that it took 30 years to kill this monster is just another demonstration of how difficult it is get rid of these vestiges of crony capitalism once they’ve made their way into the law. While the tax credit may be dead, though, ethanol subsidies are still very much with us. Not only does that mean that we’ll continue producing an environmentally dubious product in the name of “energy independence,” it also means that we will continue to suffer the economic distortions that the subsidy creates. It’s already been fairly well established that artificially increasing demand for corn-based ethanol has increased the cost of corn. As James Joyner noted in September, this policy has had the effect of increasing worldwide grain prices, as well as the price of meat given the fact that corn is used as feed for cattle, pigs, and chickens.
I wonder, though, how the lifting of tariffs against Brazilian ethanol might change this. Is it 10% of all fuel used that must contain ethanol? Can refineries import cheaper ethanol from Brazil rather than using American-made ethanol? Brazil makes ethanol with sugar cane, which produces about twice as much ethanol per acre, so it should be a lot cheaper even with transportation costs.