Biofuels policy in the US is at a crossroads, with subsidies and mandates for ethanol production currently leading to oversupply of the domestic market as well as increased exports. At the same time, second- and third-generation biofuels are struggling to get traction, and political wrangling over extension of the ethanol tax credits threatens to close off an opportunity to reevaluate the future course of biofuel development. In this Brief, Garten Rothkopf examines the developments in the ethanol market in the past few years, and what the political state of play is for legislation next Congress.

The increasingly acrimonious debate over ethanol subsidies has created a rare window of opportunity for policymakers and interest groups to collaborate on transforming an outdated policy to one that is capable of more effectively and efficiently addressing the nation’s energy security goals.  The issue has drawn the ire of Republicans and Democrats alike, successfully crossing party lines and creating the space for more nuanced discussion over subsidy reform and the transition toward more sustainable fuels.  However, as the battle over biofuels credits has raged on and the matter has become a negotiating tool in the debate over Bush-era tax cuts, lawmakers and interest groups have staked their ground and reduced the matter to the extension or expiration of the credits rather than a focus on reform.  While the latest reports from Capitol Hill suggest the credits will get a one-year extension - in some form - as part of the broader tax deal, details have yet to emerge.  What is clear is that the focus on fiscal conservatism in Washington has created a rare opportunity for needed subsidy reform – with the potential for meaningful discourse on biofuels subsidies with the inauguration of the 112th Congress irrespective of a one-year extension.  However, the pull of the agricultural lobby and the looming presidential election may impede progress.  In this GR Energy and Climate Brief, we explore the underpinnings of the subsidy debate, the current state of US biofuels, unlikely alliances and a potential alternative path forward. 

The Birth and Boom of an Industry

Over the last three decades, the biofuels industry in general – and the ethanol industry in particular – has enjoyed steadfast support from policymakers on Capitol Hill, with lawmakers – particularly those from the Corn Belt - seeking to support a nascent industry, stimulate the agricultural sector, and reduce US dependence on imported oil.  The 2004 enactment of the 45 cent per gallon Volumetric Ethanol Excise Tax Credit (VEETC) along with the $1.00 per gallon biodiesel blending credit, backed by the 2005 Renewable Fuels Standard and a 54 cent per gallon import tariff on Brazilian ethanol together have resulted in a rapid influx of investment into the industry and an explosion of production capacity reaching 12 billion gallons of ethanol and roughly 3 billion gallons of biodiesel each year – the reported cost of which has exceeded over $41 billion to taxpayers. According to the Congressional Budget Office, at present, the cost to taxpayers of reducing greenhouse gas emission through biofuels tax credits is equivalent to roughly $750 per metric ton of CO2e for ethanol, $300 for biodiesel, and $275 for cellulosic ethanol, underscoring the disproportionate costs to taxpayers for to sustain current biofuels policy that has marginal impacts on CO2 or the fuel mix. Should the mandate and tax credits remain place, the cost to taxpayers could total $200 by the RFS2 end year of 2022, with an estimated deadweight loss of $11 billion per year due to the redundancy of the mandate and the credits, based on economic research coming out of Cornell University.

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