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Good News for the New Year

The ethanol $.45/gallon tax subsidy is gone! Happy New Year. This could be a small opening wedge for both good energy and good fiscal policy. Bipartisan inaction (a techniques which Congress has mastered) let the 30 year old credit for corny ethanol, which cost us taxpayers $6 billion last year, expire with the end of 2011. This brave inaction was taken BEFORE the Iowa caucuses! BTW, this is a healthy recognition that a targeted tax break is every bit as much a subsidy as a government check.

At the same time the $.54/gallon tariff on imported ethanol was also allowed to expire, and so cheaper ethanol made from Brazilian sugar cane will set a price limit on what American producers of corny ethanol can sell their product for. This competition matters because Congress did NOT eliminate that requirement that refiners add ethanol to our gasoline and diesel supplies. We are still going to buy the stuff whether we like it or not

It took an unusual left-right alliance for this significant inaction to occur. Originally the subsidies were supposed to promote energy independence and prevent carbon emissions. The left was disappointed to find that emissions may actually have increased as a result of ethanol subsidies encouraging the use of more and more of the existing farmland for fuel rather than food and forest land being converted to farms. Also, of course, the price of food has increased as the grain supply has been diverted to ethanol. The right's not-always-consistent suspicion of subsidies was confirmed by a National Academy of Sciences report (as quoted in The Wall Street Journal) saying that grain ethanol "could not compete with fossil fuels in the U.S. marketplace without mandates, subsidies, tax exemptions, and tariffs . . . This lack of competitiveness raises questions about the use of government resources to support biofuels." Even the farm lobby did not fight hard to keep the subsidy, recognizing that all of its subsidies are in danger in a time of general affluence for grain farmers.

Getting rid of the subsidy and the tariff is only two-thirds of the battle; there is still a nonsensical requirement that refiners put a 10% ethanol spike into our transportation fuel supply regardless of whether ethanol competes with other fuels on a miles per dollar basis. Congress would actually have to act to undo this requirement and Congress isn't much good at acting. Under old laws the required percentage of ethanol in fuel keeps going up on autopilot unless and until the EPA determines that there is not adequate ethanol available. So put this in your tailpipe and smoke it: since we are no longer subsidizing the use of ethanol with our tax dollars and since ethanol currently costs more than gasoline and since the refiners are forced to buy ethanol, the price of gasoline and diesel at the pump will go up. We will send this forced contribution to Brazilian sugar farmers and to any American producers who manage to reduce their prices sufficiently. Refiners who don't buy enough ethanol pay a penalty to the EPA, which, of course would get passed on to us.

Refiners aren't likely to have to pay the penalty for run-of-the-mill ethanol since there is enough of it around at prices below the penalty. However, there is a separate mandate for the amount of cellulosic ethanol (ethanol from nonfood crops) which must be blended into our fuel supply. Congress initially set 500 million gallons as the cellulosic ethanol number for 2012, but gave the EPA the ability to reduce the number in case sufficient quantities are not likely to be available. Given that NO qualifying cellulosic ethanol was produced in the US in 2011, the EPA has reduced the target to only 8.65 million gallons. And what happens, you ask, if that quantity is not available? Simple, refiners will pay a penalty of $.78/gallon for each non-existent gallon of cellulosic ethanol they don't buy (and presumably pass this cost on to us).

But let's look on the good side: we're two for three; the subsidy and the tariff are gone.

This is a great precedent for NOT passing any of the proposed subsidies for natural gas, which I believe will contribute greatly to solving energy, economic, and environmental problems without a government handout so long as there is reasonable, effective, and speedy regulation of extraction. Credits and subsidies for various forms of "renewable" energy are expiring; RIP. It'll take congressional action but existing tax and other subsidies for oil and nuclear power ought to also be repealed (and subsidy-free projects like the XL Pipeline be allowed to proceed). Heck, pretty soon we'll be taking tax breaks away from hedge fund managers. That'll be a real new year.

Related posts:

Natural Gas Disrupts the Energy Industry

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

We Can End Energy Subsidies

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