Ethanol credit subsidy set to expire at the end of the year-let’s hope it does

If the GOP really wants to start things off with a bang next year, they should immediately go after the ethanol credit. They expire at the end of this year and will likely be extended at a reduced rate. Currently, ethanol producers receive a 45 cents per gallon taxpayer paid subsidy. Last year, this subsidy added $4.7 billion to our deficit, but the effects extend well beyond the direct cost of the credit. There is also a 54 cents per gallon import tariff in place that will expire. Subsidies for biodiesel expired last year. 

Ethanol is of course a corn product. We found out in 2008 just how many products contain corn when the cost of food skyrocketed. Along with high gas prices at the pump, this is what triggered the economic collapse when people started skipping mortgage payments due to the one-two punch of high food and gas prices. Those prices have been on the rise again for some time now despite the Fed proclaiming we have no inflationary fears. Of course, the Fed leaves food and energy costs out of their core c.p.i. valuations when these costs affect us quicker and more broadly than anything else.

People may be surprised to learn that the biggest benefactors to these credits have been the oil industry to the tune of over $20 billion dollars so far. The program is costing the taxpayer about $6 billion dollars annually. That’s $7 per gallon gas. The ethanol industry will fight back hard as the expiration of the subsidy would cost them thousands of jobs and reduce the price of corn significantly.

This is a complicated issue per usual. Removing government subsidies that end up costing industry money will result in costs being passed on to the consumer. This is why government cannot be involved in propping up industries and artificially stimulating demand. They can’t pick winners and losers. They need to stay out of the markets. Bush created this monster and the oil companies benefitted the most. Is it any wonder?

In Al Gore fashion, the science is settled. Ethanol can’t hold a candle to gasoline. It takes 5.6 gallons of ethanol to equal the energy content of gasoline. That’s because ethanol has a btu heat value, or energy content, of 76,100 vs. 114,100 for gasoline. It simply doesn’t come close to gasoline in energy output, and the result is low consumer demand. Why would we want to burn the stuff in our vehicles if it has far less power output? The only rational answer is price and this is where the government stepped in. They are suckering us into buying it because the pump price is cheaper due to the subsidy. Yet, the average consumer has no idea that it is their tax dollars that are providing the price break, so in the end we are paying much more per gallon. Nearly $7 per gallon!

This is the case with so many government subsidized programs. Is it worth it in the long run? We are paying $6 billion per year in total subsidies. We don’t benefit with a better performing fuel product. We don’t benefit with a reduced cost of energy, despite the mis-leading lower pump price. The benefactors are the ethanol and oil industries. The oil industry with the $20+ billion in subsidy profits. That’s a tax credit. Cash. Money in the bank. The ethanol industry benefits with both demand and jobs.

The ethanol industry claims letting the credits expire will result in the permanent loss of 160,000 jobs. Critics of the credits claim that the standard ethanol plant only employs 45 people on average using ethanol industry numbers, so there is no feasible way a 160,000 person job loss could occur. They claim a direct loss of 407 jobs. The truth, as always, usually lies somewhere in between. If you use the ethanol industry numbers, the $6 billion dollar subsidy cost translates to $37,500 per job. The critics number is fantastic based on 407 jobs, about $15 million per job. Either way, if the ethanol mandate is a jobs program, it is prohibitively expensive.

The other reported claim that ethanol is better is environmental. Lower carbon emissions. This is true. Sort of. Yes, ethanol has a slightly smaller carbon footprint per gallon burned than gasoline. However, since it is far less efficient and requires more product to attain the same energy equivalent as a gallon of gasoline, it actually is a far larger CO2 contributor by half. What the industry doesn’t factor in is the CO2 component in ALL aspects of getting the corn planted, harvested, processed and delivered to the pump. The fact is that it is a more complicated process to get ethanol to the pump tha it is for gasoline. You must add up all the CO2 emissions along the way to compare fairly.

There really is not much to ponder here. If ethanol resulted in lower overall CO2 emissions, you could at least make the argument that it’s better for the planet. That’s if you buy into the global warming argument. As a jobs program, the costs are far too high to be considered practical. Industry profits are certainly up, but again, this is essentially a wealth transfer from the taxpayer to private industry. We need to get away from the smoke and mirrors. We need true growth based on true demand. We need to eliminate government as a middleman. The consumer, who is also a taxpayer, looks like a fool here.

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