A Congressional Budget Office report issued on Wednesday, July 14 examines the costs to taxpayers of achieving national energy goals for different types of biofuel.  The report was requested by Senator Jeff Bingaman (D-NM), chairman of the Subcommittee on Energy, Natural Resources and Infrastructure of the Senate Committee on Finance.  He is also the Chair of the Senate Committee on Energy and Natural Resources.

The primary focus of the Report was the cost to taxpayers of a $0.45 per gallon tax credit for ethanol blended into gasoline, the Volumetric Ethanol Excise Tax Credit (VEETC).  The VEETC is scheduled to expire at the end of 2010 and its extension is being hotly debated in Congress.  The report concluded that in 2009 the VEETC, along with a tax credit of $0.10 for small ethanol producers, cost taxpayers about $5.16 billion in decreased federal revenue because of the application of the tax credit to about 10.8 billion gallons of ethanol blended with gasoline.

Almost all this U.S. ethanol is produced from corn starch.  When compared to the tax credits for per gallon for cellulosic ethanol and biodiesel, corrected to the amount of energy produced by a gallon of gasoline, the cost to the taxpayer of corn ethanol per gallon is lower because the size of the tax credits for cellulosic ethanol and biodiesel are higher.

The Report also indicated that the replacement of petroleum-based fuel by corn starch ethanol, if produced using natural gas, did reduce greenhouse gas (GHG) emissions but at a much higher cost than the replacement of petroleum by cellulosic ethanol or biodiesel.  This difference was attributed to high levels of GHGs from the natural gas and coal used to produce inputs and cultivate corn and to process corn for ethanol.  The calculation ignored the impact on GHGs of indirect land use changes that might occur if uncultivated land is broken out to replace the corn diverted to biofuels.  The Report reached the general conclusion that the costs of reducing GHG emissions through biofuel tax credits is higher than the costs resulting from imposing a price on the emissions through a cap-and-trade system or a tax on GHG emissions.

Although there will likely be debate about assumptions and variables used in the Report, the political message was clear.  Upon release of the Report, Senator Bingaman issued a press release citing the Report’s findings as a reason for not extending the VEETC.

This message about the direct ethanol subsidy was heard by at least part of the corn ethanol sector.  On July 15, Growth Energy, a major lobbying organization for the corn ethanol industry, called for a change in ethanol policy that it said would “level the playing field” with subsidies for the petroleum industry.”  The proposal is to:

• End the VEETC but redirect the federal funding to provide for the build out of distribution infrastructure for ethanol – such as tax credits for retailers to install 200,000 blender pumps and federal backing of ethanol pipelines; and

• Require that all automobiles sold in the U.S. be flex-fuel vehicles – as many as 120 million.  These cars could use hydrous ethanol and higher blends of ethanol with gasoline.

This change in position is not unexpected, given that gasoline refiners have begun buying up ethanol production facilities.   An example is Valero’s acquisition of a number of ethanol facilities owned by Vera Sun, a bankrupt ethanol refining company.  Valero is the number one refiner of gasoline in the U.S.  Another example is the announcement that Verenium Corp. is selling its cellulosic biofuels business to BP Biofuels North America.  Both Valero and BP own gas stations across the U.S.  It is likely that vertically integrated refiners with their own fuel stations will be quite willing to have federal funding subsidize their delivery and marketing of ethanol from corn or any other source.

An alternative proposal to ponder — phase out public subsidies for corn ethanol and petroleum and replace them with improved public subsidies for low carbon energy sources and regional public transit systems, serving both rural and urban areas.