Who Needs $6 Billion?
A development perspective on why Congress should let the Volumetric Ethanol Excise Tax Credit (VEETC) expire.
Recent headlines warn that another food price hike crisis could strike in 2011. If so, development organizations will soon be scrambling to respond to the immediate need while looking to address the systemic policies that underlie food price volatility including commodity speculation, land rights, the role of small holder farmers, and the growing impact of industrial biofuels as they relate to food prices. The mid-term elections results made it clear that jobs, the economy, and reducing the deficit are top priorities for voters and will be major themes for Congress and the Administration in the upcoming year. There is an opportunity in the lame duck session to recognize one of the underlying food crisis issues and save taxpayer dollars, without mortgaging jobs or our economy. We can sunset the Volumetric Ethanol Excise Tax Credit.
Today, ActionAid joined a diverse group of business associations, hunger and development organizations, taxpayer advocates, agricultural groups, religious organizations, environmental groups, budget hawks, and public interest organizations on a letter that was sent to House and Senate leadership calling for the end of the Volumetric Ethanol Excise Tax Credit (VEETC).
VEETC subsidizes oil and gas conglomerates like Chevron and Shell to blend ethanol with gasoline. VEETC is due to expire at the end of this year, but the ethanol industry has been pushing strongly for its extension. Earlier this year, Earl Pomeroy (D-ND) proposed extending VEETC for five years at the cost of $30 billion to corn ethanol alone. Pomeroy lost his seat in the mid-term elections, but ethanol lobbies are pushing hard for the continuation of VEETC.
The VEETC was established in 2004 as a payment to gasoline refiners to purchase and blend ethanol into the gas supply. However, under the Renewable Fuels Standard (RFS) set out by the Energy Independence and Security Act (EISA) legislated in 2005 and expanded in 2007, oil companies are already required to blend certain percentages of ethanol into the gas supply. The RFS mandate thus eliminates the need to incentivize ethanol blending through subsidies. In effect, taxpayers have spent more than $20 billion in the past five years to pay refineries to comply with the mandate.
Recent studies by the Congressional Budget Office (CBO), Iowa State University, and Cornell University all conclude that the RFS alone is sufficient to continue to prop up the ethanol industry at current levels. The reality is that VEETC increases the ethanol industry’s profit margins by a few percent by encouraging oil companies to buy slightly more ethanol at higher prices. It would not even be possible for the oil industry to blend significantly more ethanol than is required by the RFS due to Clean Air Act regulations that limit the ratio of ethanol blended into gasoline for most vehicles. Valero Energy Corporation and ExxonMobil have publicly stated that they neither need nor want VEETC. In short, ending VEETC would have little impact on ethanol prices, jobs or production volume. Allowing the VEETC to expire will, however, send the message that development groups are watching the role of industrial biofuels as they relate to food prices and global hunger. While cutting the subsidy won’t slow down the push to meet the RFS, it also won’t be fueling growth in the industry beyond current commitments.
Ultimately, ethanol subsidies are a taxpayer give-away to big oil companies that indirectly, ever so slightly, increases the profits of a handful of agribusiness corporations. Industrial biofuels, like the corn ethanol subsidized in the US by VEETC and other means, have been linked to a wide array of social and environmental problems, such as water pollution, ecosystem destruction and degradation, hunger, food price hikes, and land inequity. As headlines begin to warn of the potential for another food crisis in 2011, the US should save the American taxpayer $6 billion a year and sunset this duplicative subsidy.
