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Fight to End Corn Ethanol Subsidy Creates Strange Bedfellows

Cato Institute and Friends of the Earth unite against a $6 billion boondoggle

By Stacy Feldman

Sep 30, 2010

In a "strange bedfellows" story of sorts, some environmental groups have moved to cement ties with free-market conservatives on energy policy.

Their goal: to end a lucrative subsidy for corn ethanol they contend is a colossal waste of money and producer of greenhouse gases.

A joint being held today on Capitol Hill by the , a libertarian think tank, and environmental group (FOE) is the latest evidence. The unlikely partnership is an indication of just how wide and deep the disdain for the corn ethanol tax credit has become.

FOE is a long-time defender of federal intervention to clean up fossil fuel pollution. It backs subsidies for third-generation cellulosic biofuels that come from nonfood crops—but not corn. Cato, in contrast, believes all ethanol feedstocks must stand on their own; it frowns upon government regulation in energy markets.

"If we can show that Friends of the Earth and the Cato Institute can sit in a room together and agree on something when it has to do with energy policy, that’s probably pretty significant," said Kate McMahon, a biofuels campaigner for FOE, who is speaking today alongside Harry de Gorter, a Cato Institute senior fellow.

De Gorter, an economist and professor at Cornell University, agreed the partnership is rare.

"I have lots of disagreements with these particular environmentalists on other issues on how you analyze biofuels," he told SolveClimate News. "But not on this one."

Causing the collective angst is the Volumetric Ethanol Excise Tax Credit (VEETC), commonly known as the "blender's credit."

The subsidy gives oil companies $0.45 for each gallon of pure ethanol they blend with gasoline. It went into effect in 2005 under the Bush Administration's American Jobs Creation Act of 2004, and is set to expire at the end of the year.

Sens. Charles Grassley (R-Iowa) and Kent Conrad (D-N.D.) introduced in April that would preserve the subsidy for five years at a yearly cost of up to $6 billion.

Expensive Waste

Both groups say the extension would be a redundant waste of tax dollars.

Under the (RFS), the ethanol industry is already required by law to mix 15 billion gallons of ethanol into the nation's gas supply in 2015—much of that from corn—and 36 billion gallons by 2022.

"With this policy you're essentially handing over billions of dollars to produce nothing," McMahon told SolveClimate News. "It's a silly subsidy. It's got to go."

Indeed, findings from a July by the nonpartisan Congressional Budget Office (CBO) revealed the subsidy to be something of a boondoggle. "The 45 cent credit for each gallon of ethanol is equivalent to paying blenders 67 cents for each gallon of gasoline that ethanol displaces," it said.

In all, taxpayers pay $1.78 for every gallon when fuel is made from corn, the report concluded.

According to de Gorter, the authors were "completely erroneous" in their cost estimates. Using the CBO methodology, he and discovered that the subsidy is even more expensive than anyone thought.

"The cost of the tax credit is seven to 11 times higher than the CBO reported," he said.

De Gorter claims the subsidy forces the price of fuel down and consumption up—of conventional gas, that is.

"It turns out that the tax credit does not do anything to the ethanol market. But it does something," he said. "It subsidizes gasoline consumption."

"Taxpayer money is doing the opposite of what you think it's doing," de Gorter said. Rather than greening fuel, it's increasing oil dependence and greenhouse gas emissions, he said.

Ending subsidies that make no sense

Good news. Now if only the Cato Institute would agree with environmentalists to end the massive subsidies for fossil fuels.

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