Posts tagged with: tax credit

Blog author: lglinzak
posted by on Wednesday, May 11, 2011

With rising gas and food prices, ethanol subsidies are getting strict scrutiny. Many have called for the end of ethanol subsidies, and now the Senate is acting. Senators Tom Coburn and Dianne Feinstein introduced legislation that would end ethanol subsidies and repeal the tariff that is placed on foreign ethanol.

The problems with ethanol subsidies have been vast as I’ve pointed out in previous posts including a tax credit for oil companies that blends ethanol with gasoline—even though they are mandated to do it by law. That’s right. Oil companies are being paid to follow the law. Senators Feinstein and Coburn put together a long list of problems associated with ethanol subsidies:

“The ethanol subsidy and tariff is bad economic policy, bad energy policy and bad environmental policy. As our nation faces a crushing debt burden, rising gas prices and the prospect of serious inflation, continuing our parochial ethanol policy that increases the cost of energy and food is irresponsible. I’m pleased to introduce this common sense bill with Senator Feinstein and will push for its consideration at the earliest opportunity,” Dr. Coburn said, noting that the bill has been filed as an amendment (#309) to the small business bill pending in the Senate.

“Ethanol is the only industry that benefits from a triple crown of government intervention: its use is mandated by law, it is protected by tariffs, and companies are paid by the federal government to use it. Ethanol subsidies and tariffs sap our budget, they’re bad for the environment, and they increase our dependence on foreign oil. It’s time we end subsidies that we cannot afford and tariffs that increase gas prices,” Sen. Feinstein said.

And, as the Heritage Foundation states in a recent blog post, this legislation, if passed, will “…fully eliminate the import tariff on ethanol and repeal the Volumetric Ethanol Excise Tax Credit. This would grant U.S. blenders cheaper inputs, which in effect lowers productions costs and, subsequently, prices.”

Economies across the globe are struggling, and rising food prices are not going to make life any easier.  The Acton Institute raised concern for rising food prices, especially corn, in 2007, when Ray Nothstine wrote a commentary on, and at the time, record prices for corn, resulting in revolts in Mexico due to rapidly rising prices for tortillas.  The commentary brought to light unintended consequences of ethanol and its subsidy, including rising food prices.

And again, with food prices on the rise, and the subsidy for ethanol up for renewal, the debate has been given new life.

Corn prices are dramatically rising and are currently more than $6 per bushel.  Compare that to a few years ago in 2005, when corn was less than $2 per bushel.  Also, in November of 2010, corn prices reached a two year high.  However, corn is not the only food stock on the rise.  The past year wheat on Chicago Board of Trade was up 74 percent, and both soybean and cotton futures have already jumped.  Although, these rising food prices have had an adverse effect across the world, and according to the World Bank, since June of 2010, the rising food prices have pushed 44 million more people into extreme poverty in developing countries.

The debate over the cause of rising food prices, especially corn has centered around whether current adverse weather conditions are the culprit, or if it can actually be contributed to ethanol subsidies from the United States.

Weather conditions have recently been less than ideal for growing crops in many parts of the world.  Last year drought in Russia and Argentina, along with torrential rains in Australia and Canada caused numerous problems for farmers, and crop production was less than expected.  Furthermore, a cool wet summer in the United States resulted in a delayed harvest.  China’s current wheat crop is being threatened by a drought which may result in even higher food prices especially because China produces more wheat than any other country.  It is estimated approximately 42 percent of China’s winter wheat crop has been hurt by the drought.

While the unfavorable weather conditions have contributed to rising food prices, critics of the ethanol subsidy claim that the subsidy has played a major role in the rising food prices.  The ethanol subsidy, which is up for renewal, places a 54 cent tariff on imported ethanol and a 45 cent tax credit for every gallon of ethanol blended with gasoline.  Current federal law also mandates the use of ethanol.  Oil companies must use a designated amount of ethanol each year, 12.6 billion gallons in 2011, which will rise to 15 billion gallons by 2015.  The ethanol subsidy is paying oil companies to abide by a mandate required by federal law.

The use of corn in ethanol is continuing to rise.  The oil industry uses more ethanol each year because of the federal mandate, and as of November 2010, ethanol production consumed 40 percent of the corn crop produced in the United States.  If the United States decides not to renew the ethanol subsidy it will not only  save 40 percent of its corn crop, but will also save $25-$30 billion over the next five years.

The United States is a major exporter of food, supplying over half the global corn exports and over 40 percent of soybean exports.  However, with more and more corn produced in the United States being used for ethanol, less corn is used for food; thus, by the law of supply and demand, increasing the price of corn.  With the ethanol subsidy creating an increase demand for corn and raising the price, more and more farmers will gravitate to growing corn instead of other crops that are also needed for food supplies around the world.

With food prices on the rise, it is imperative to think long term when deciding if the ethanol subsidy should be renewed.

Not only are the economic arguments to the ethanol subsidy important, but so are the moral arguments.  Tomorrow I will evaluate the morality of rising food prices and the ethanol subsidy.