Alternative energy is a booming business in the United States. Mandates on blending of liquid biofuels into gasoline have spurred an explosive market. Most notably, the Renewable Fuel Standard (RFS) was initiated in the Energy Policy Act of 2005 under the Bush administration. The program was so politically popular, especially among politicians from the Corn Belt, that it was expanded by the Energy Independence and Security Act (EISA) of 2007. The RFS law now requires that the 9 billion gallons of renewable fuels blended into gasoline in the year 2008 be expanded to 36 billion gallons by 2022.
Almost single-handedly, the newest RFS has caused a global spike in prices of this staple food product.
U.S. corn prices last year hit their highest levels since mid-2008 — and will dip by at most 5 percent by the end of this year, according to a Reuters poll of 16 analysts. Corn futures posted the best gains (52%) among grains and oilseeds last year due to strong demand from the ethanol industry. The U.S. Department of Agriculture reported February 9 that the industry’s projected orders this year rose 8.4 percent to 13 billion bushels after record production in December and January.
Prior to its extension in December 2010, a study by economists at Iowa State University claimed that ending VEETC protection for U.S. producers would reduce demand. Therefore, the study says, ethanol prices would fall by 12 cents per gallon in 2011 and 34 cents per gallon in 2014. Currently most gasoline sold in the United States contains 10 percent ethanol — and the U.S. EPA recently increased the legal limit in gasoline to 15 percent. The study also said that if the subsidies lapsed out of existence, U.S. corn and ethanol demand would not waver due to the increase in RFS standards, adding that U.S. corn ethanol production would continue to rise to about 14.5 billion gallons by 2014 without VEETC credits or tariffs.
Bruce Babcock, one of the authors of the study, weighed in on the future of VEETC, which again will be up for renewal in December 2011.
“I think it will be allowed to expire at the end of this year,” Babcock said. “I just don’t like subsidies… (we should) let biofuels compete in an open market.”
Corn ethanol producers criticize the study, claiming it was partially funded by UNICA, the Brazilian trade organization whose members produce half of the sugarcane ethanol in the Brazil.
“Our only request of Dr. Babcock was that he let the chips fall where they may. Too often, special interests write the research to fit their particular policy objectives,” said UNICA’s North America Representative, Leticia Phillips.
When asked about the future of VEETC, David Swenson, another Iowa State economist, says it looks “pretty darn dicey.”
“American ethanol is protected in three different ways (by VEETC)… That can’t last. Lowering or eliminating the 45-cent blender’s credit is likely in a compromise package (in Congress),” Swenson said.
In October 2009 the U.S. Government Accountability Office issued a report questioning the need for the tax credit subsidy. The reason? It’s not expected to boost ethanol production beyond currently mandated levels. So not only is the subsidy doomed, it may not even be achieving its purported goal of increasing corn ethanol production. Cui bono? The fossil fuel industry, of course.
Follow me on TwitterMy Tweets