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Time to Stop Subsidizing Ethanol

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Why Congress should let a major biofuels tax credit expire this year

Though its name may be little-known, the Volumetric Ethanol Excise Tax Credit (VEETC) is not a little subsidy: taxpayers pay more than $5 billion (a number that's increasing) to oil and gas conglomerates like ConocoPhillips and Exxon Mobil to blend ethanol with gasoline each year.

This is in spite of a growing body of evidence that corn ethanol actually causes substantially greater greenhouse gas emissions than traditional gasoline, causes water pollution in the form of fertilizer run-off as seen in the "dead zone" of the Gulf of Mexico, and contributes to rising food prices globally.

But it's not just environmentalists or food sovereignty campaigners who are concerned about this giant taxpayer giveaway. Good government advocates who oppose wasteful spending are at the fore of the fight to repeal ethanol subsidies, and for good reason. The $5 billion VEETC subsidy pads the pockets of Big Oil, but does almost nothing to advance its stated purpose of actually promoting ethanol production.

While this subsidy boondoggle is due to expire in less than two months, the ethanol industry and its congressional cronies have been pushing for its extension. However, given that several members of Congress with a history of backing dirty ethanol have lost their re-election bids, including Reps. Stephanie Herseth-Sandlin (D-SD) and Earl Pomeroy (D-ND), Congress has the opportunity to save taxpayers billions of dollars and advance smart policy by ending this giveaway. As the legislative conversation quickly moves to what the 112th Congress will do (or not do), the lame duck session (between now and January, when the new Congress is sworn in) looks to be turning into the last chance to pass this bad legislation. The ethanol lobby is responding, stepping up its game by running ads, making new hires and attempting to cash in on the investments they've made into the congresspersons that they've supported over the last few election cycles -- especially those representatives who didn't win re-election --in order to extend subsidies for corn ethanol.

Earlier in the year, Blue Dog and member of the powerful House Ways and Means Committee Rep. Earl Pomeroy championed the extension of the tax subsidy for five years. The cost of this proposal would have been well over $30 billion dollars to corn ethanol alone. According to conversations that Friends of the Earth's biofuels campaign coordinator, Kate McMahon, had with congressional staff, Pomeroy made the case to his Democratic colleagues that he needed to extend this credit in order to win re-election. Despite indications from his colleagues on Ways and Means that they would support extension of this credit -- and the vast amount of money he was able to garner from the biofuels industry as a result of his pro-ethanol stance -- it is clear that Pomeroy's election hung on much more than the credit. Pomeroy lost by a 10 percent margin. Now, with the elections over, the question remains: will Congress extend this credit or allow it to expire?

There are many reasons Congress should choose expiration. The tax credit is completely unnecessary. VEETC was established in 2004 as a payment to gasoline refiners to motivate them to purchase and blend ethanol into the gas supply. However, because of an ethanol use mandate set out by the Energy Policy Act of 2005 and expanded in the Energy Independence and Security Act (EISA) of 2007, oil companies are now required to blend ethanol into the gas supply. The mandate thus eliminates the reason to incentivize ethanol blending through subsidies. The result is that in effect, taxpayers have spent more than $20 billion in the past five years to pay refineries to do something they are already required to do.

Recent studies by the Congressional Budget Office and Iowa State University conclude that the mandate alone is sufficient to increase ethanol production. The reality is that instead of increasing ethanol production, VEETC increases the ethanol industry's profit margins by encouraging oil companies to buy slightly more ethanol at higher prices. Any claim that VEETC has a substantial impact on ethanol production and blending is false. Oil companies agree. Valero Energy Corporation and ExxonMobil -- two of the largest U.S. oil refiners -- have publicly said that they neither need nor want VEETC. Irrespective of the credit, they'll purchase and sell the amount of ethanol that they're required to under the mandate.

Last month, seeing the writing on the wall for their doomed subsidy, ethanol industry groups, including the Renewable Fuels Association, American Coalition for Corn Ethanol, Growth Energy, and National Corn Growers Association, introduced a proposal that they claimed represents a "turning point." But in reality, it was more of the same: waste billions of taxpayer dollars on a mature industry that needs no further subsidization.

Not only does their plan call for extending VEETC through 2011 at 36 cents a gallon, it guarantees that taxpayers will continue to foot the bill to subsidize dirty ethanol for an additional four years via a "producers' credit." The 36 cent rate represents a reduction from the current rate of 45 cents per gallon, but even with the reduction the tax credit would still cost taxpayers at least $4.7 billion next year. There are better ways to spend this money. However, considering that many lawmakers have been critical of VEETC, which will cost more than $5.6 billion this year alone, and have called for a reduction and complete phase-out of VEETC, this proposal doesn't seem as revolutionary as the industry would have you believe. While VEETC is currently paid to gas and oil companies that blend ethanol into the gas supply, redirecting the payments to ethanol producers would not make the tax credit any less of a boondoggle: ethanol consumption would still be required by the mandate, making subsidizing the fuel redundant and wasteful, regardless of to whom the subsidy is paid.

At the end of the day, ethanol subsidies are little more than a taxpayer giveaway to big oil companies that also slightly increase the profits of a handful of agribusiness corporations -- corporations whose practices contribute to a wide array of social and environmental problems, such as water pollution, ecosystem destruction and degradation, hunger, and land inequity. Industrial biofuels like the corn ethanol subsidized in the U.S. today are no exception. Let's stop giving destructive industries -- fossil fuels and biofuels alike -- billions of taxpayer dollars. Let's end VEETC this year.

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