Tuesday, December 07, 2010

Predictions mixed about ending ethanol tax credits

We've been following the push from the ethanol industry to extend tax credits that some say are essential to its growth. Now, predictions of how expiration of the tax credits would affect the industry are mixed. Iowa Republican Sen. Chuck Grassley said last week in floor testimony, "A lapse in the ethanol tax incentive is a gas tax increase of over 5 cents a gallon at the pump." Conversely, "In a paper published in July and updated in November, an economist from Iowa State University's Center for Agricultural and Rural Development projected that an expiration of the VEETC and a 54-cent-per-gallon tariff on ethanol, taken together, could lower pump prices for drivers," Jenny Mandel of Environment & Energy News reports.

Grassley's statements were based on analysis from the Renewable Fuels Association, an industry trade group, which "equates the scheduled VEETC expiration next month with a 4.5-cent-per-gallon fuel cost increase," Mandel writes. Geoff Cooper, RFA's vice president of research and analysis, told Mandel in an email the analysis was based on a simple calculation of the VEETC's value to the refiners that blend ethanol into gasoline. "The VEETC is $0.45 per gallon of ethanol, and ethanol is blended in gasoline nationwide at a rate of 10 percent (called E10)," Cooper said. "So, it stands to reason that failing to extend the tax credit would increase the ultimate consumer tax burden on gasoline by 4.5 cents per gallon of gasoline."

The ISU study from Center for Agricultural and Rural Development Director Bruce Babcock is favored by groups including the National Resources Defense Council and Friends of the Earth that advocate ending the tax credit, Mandel writes. Babcock constructed a new economic model to assess the effects of tariff and tax changes on the markets for U.S. corn and ethanol and for Brazilian ethanol, concluding immediate impact would be negligible. "In 2011, he predicted, elimination of the tax credits would cause ethanol prices to fall by 12 cents per gallon, with domestic production falling by about 0.7 billion gallons out of the otherwise expected 13.24 billion gallons," Mandel writes. (Read more, subscription required)

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