Editorial: The dependency mechanism

April 26, 2010
Before proceeding further with its campaign to remake energy choice, the US government should consider the latest favors requested on behalf of fuel ethanol.

Before proceeding further with its campaign to remake energy choice, the US government should consider the latest favors requested on behalf of fuel ethanol. They reveal much about state meddling in energy markets.

When governments make fuel choices, they must override market forces with subsidies and consumption mandates. The standard presumption is that favored energy forms will become competitive and therefore self-sustaining in some reasonable—though never specified—amount of time.

With fuel ethanol, as with most state-sponsored energy, the initial boost became an addiction. The gasoline additive has received tax subsidies since 1978. Since 2005, it has benefited further from a growing consumption mandate. Yet ethanol is less competitive than ever. The main tax break, the Volumetric Ethanol Excise Tax Credit (VEETC), will expire at the end of this year. Ethanol promoters warn that if Congress doesn't extend the benefit their industry will shrivel.

So, after 3 decades, fuel ethanol remains dependent on public assistance. Does no one see a problem with this?

Expensive help

For taxpayers, the help isn't cheap. As modern subsidies go, the 45¢/gal VEETC isn't enormous. Federal tax credits for cellulosic ethanol and biodiesel are more than twice that level.

But the VEETC isn't the only help fuel ethanol receives. The Energy Policy Research Foundation Inc. estimates that in 2008 the value of the tax credit and other assistance to the alcohol and its agricultural precursors totaled $9.15 billion. That's $1.08/gal of ethanol or $1.63/gal of displaced gasoline after adjustments for energy content. If left in place, the subsidy will rise as production follows the mandate over the next 5 years to its implied ceiling, under the 2007 Energy Independence and Security Act, of 15 billion gal/year.

Last month, Rep. Earl Pomeroy (D-ND) introduced legislation that would extend tax credits for ethanol from corn and cellulosic sources, as well as a tariff on imported ethanol. The initiative probably will find its ways into legislation under discussion by House Ways and Means Chairman Sander Levin (D-Mich.) to extend subsidies for a broader range of renewable energy sources. Levin is expected to propose offsetting the subsidies by ending tax preferences used in the oil and gas industry.

"Investing in energy efficiency and renewable energy has major potential to create new jobs and help our economy recover," Levin said while announcing an Apr. 14 hearing on the subject. The promise of "green jobs," of course, has become a major seduction in the making of energy policy. Characteristically, the ethanol industry is taking full advantage.

In support of a VEETC extension, the Renewable Fuels Association commissioned a study postulating the loss of 112,000 jobs across the economy if the tax credit expired. "Failure to extend the VEETC would deal a significant blow to the green jobs market," it said in a disputable claim to this form of environmental sanctimony. Amazingly, the study went on to warn that expiration of the VEETC would lower corn prices by 8%. Except to corn growers, what's to regret about that? Meanwhile, as ethanol threatens to saturate the gasoline market at below-mandate volumes, its lobby pushes for an increase in the blending cap, whatever the consequences for gasoline engines not designed for ethanol concentrations above 10%.

So it goes with subsidized energy. The government creates a constituency dependent on political largesse. The dependence never ends. And politicians responsible for the mischief hope voters never wise up to the costs: market distortions, economic inefficiency, and incessant pressure to raise tax rates as subsidies sap the treasury. Ultimately, energy subsidies enrich special interests—in ethanol's case select agricultural constituencies—at everyone else's expense.

Formula for loss

Congress and the administration want to attach more such leeches to the economy, feeding them with tax increases on competitive energy forms. It's a formula for massive economic loss, certainly no way to boost net employment.

Unless brought to heel, the government will spend money on every fanciful promise that appears about green employment, energy security, and environmental goodness. Fuel ethanol illustrates the hazard. It shows how the dependency mechanism works…and works…and works…

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