The likely end of a $5 billion-a-year federal subsidy that helped build the ethanol industry will likely mean two things, experts who have followed its development say. First, it doesn’t guarantee an end to the high prices that corn farmers have enjoyed and livestock producers and other food manufacturers have endured. That’s because of the second point: the ethanol industry likely would be fine without the subsidy and keep using just about as much corn as it has the past few years.
As the experts point out, the 45-cent-a-gallon tax credit set to expire at the end of the year doesn’t even go directly to ethanol producers, but instead has been an incentive for oil companies such as BP, Valero Energy Corp. and ExxonMobil Corp. to buy ethanol and blend it with gasoline. And the tax credit isn’t even the primary driver of ethanol demand. That, economists note, has been the federal requirement that the country produce an increasing amount of renewable fuels like ethanol.
“What do you need a tax credit for when you have this built-in huge market in the United States?” says Bruce Babcock, an economist at Iowa State University. “The U.S. ethanol industry is very competitive; they don’t need the (subsidy).” The U.S. Senate voted last week to end the tax credit and an accompanying tariff on ethanol imports in July, half a year ahead of schedule. The move was mostly symbolic, but it shows that lawmakers may be ready to let the subsidy die in December rather than renew it as they did last year.
