GAO report questions effectiveness of ethanol production tax credit
September 15, 2009
BY Erin Krueger
Report posted Oct. 5, 2009, at 5:35 p.m. CST
The U.S. Government Accountability Office recently released the results of an August 2009 report on biofuels. The report, titled "Potential Effects and Challenges for Required Increases in Production and Use," was compiled by the GAO at the request of Sens. Barbara Boxer, D-Calif., and Susan M. Collins, R-Maine.
The report aims to study the effects of increased biofuels production on agriculture, the environment and greenhouse gas (GHG) emissions, as well as examine federal support for domestic biofuels production and key challenges in meeting the renewable fuel standard (RFS). To complete the report, the GAO reviewed a variety of scientific studies, interviewed experts and agency officials and visited U.S. DOE and USDA laboratories.
Principle findings of the study include:
- Biofuels production has had mixed effects on U.S. agriculture, but the effects of expanded production are less certain.
- Increased biofuels production could have a variety of environmental effects, but the magnitude is largely unknown.
- Researchers disagree on how to account for indirect land use changes in estimating the lifecycle GHG effects of biofuels production.
- Federal tax credits, the RFS, and the ethanol tariff have primarily supported conventional corn starch ethanol.
- Federal research and development mainly supports the development of advanced cellulosic biofuels.
- Significant challenges must be overcome to meet the RFS's increasing volumes of biofuels.
In the report, the GAO also makes several suggestions on how biofuel policy can be improved. The office encourages Congress to consider requiring the U.S. EPA to develop a strategy for assessing lifecycle environmental effects of increased biofuels production beyond the effects of GHG emissions. According to the report, this could include evaluating the effects of increased biofuel production on water, air and soil quality. The report also recommends that the EPA, DOE and USDA develop a coordinated approach for addressing uncertainties in lifecycle GHG analysis and give priority to research and development initiatives that address the blend wall issue.
The GAO also encourages lawmakers to consider whether revisions should be made to the Volumetric Ethanol Excise Tax Credit, which was originally established to help spur the growth of the ethanol industry. According to the report, this credit may no longer be needed because unless crude oil prices rise significantly, it is unlikely the tax credit will stimulate ethanol consumption beyond levels specified by the RFS. In addition, the report claims that the U.S. corn ethanol industry is mature and that production levels already near the RFS limit of 15 billion gallons per year. The GOA states that the VEETC's annual cost to the U.S. Treasury in forgone revenues could increase from $4 billion in 2008 to $6.75 billion in 2015 for conventional corn ethanol. The report further explains that the RFS and VEETC are redundant with respect to their effects on ethanol consumption and that under current market conditions the VEETC does not stimulate additional ethanol consumption.
On Oct. 5, Sen. Chuck Grassley, R-Iowa, issued a statement in response to the GAO report supporting the VEETC. "Home-grown ethanol is the shining star in our efforts to reduce our dependence on dirty, imported fossil fuels," he said. "It would be short-sighted to shoot ourselves in the foot and end a tax credit that helps ensure that the renewable fuels standard we in Congress enacted is a floor and not a ceiling for ethanol use. This tax credit helps ethanol producers increase efficiencies and production methods as they move toward the development of the next generation of biofuels. Ethanol remains relatively new, especially when you compare it to the oil industry, which has been around for 100 years and still receives extensive government support."
Like Grassley, the Renewable Fuels Association has also voiced its support for continuing the VEETC. "The tax incentive has been instrumental in helping to build a renewable fuels industry in this country," said the association in a statement released Oct. 2. "It should remain. As long as petroleum and fossil fuel companies that dominate the energy market continue to receive preferential tax treatment and hidden subsidies, incentives are needed to develop renewable alternatives such as ethanol."
The U.S. Government Accountability Office recently released the results of an August 2009 report on biofuels. The report, titled "Potential Effects and Challenges for Required Increases in Production and Use," was compiled by the GAO at the request of Sens. Barbara Boxer, D-Calif., and Susan M. Collins, R-Maine.
The report aims to study the effects of increased biofuels production on agriculture, the environment and greenhouse gas (GHG) emissions, as well as examine federal support for domestic biofuels production and key challenges in meeting the renewable fuel standard (RFS). To complete the report, the GAO reviewed a variety of scientific studies, interviewed experts and agency officials and visited U.S. DOE and USDA laboratories.
Principle findings of the study include:
- Biofuels production has had mixed effects on U.S. agriculture, but the effects of expanded production are less certain.
- Increased biofuels production could have a variety of environmental effects, but the magnitude is largely unknown.
- Researchers disagree on how to account for indirect land use changes in estimating the lifecycle GHG effects of biofuels production.
- Federal tax credits, the RFS, and the ethanol tariff have primarily supported conventional corn starch ethanol.
- Federal research and development mainly supports the development of advanced cellulosic biofuels.
- Significant challenges must be overcome to meet the RFS's increasing volumes of biofuels.
In the report, the GAO also makes several suggestions on how biofuel policy can be improved. The office encourages Congress to consider requiring the U.S. EPA to develop a strategy for assessing lifecycle environmental effects of increased biofuels production beyond the effects of GHG emissions. According to the report, this could include evaluating the effects of increased biofuel production on water, air and soil quality. The report also recommends that the EPA, DOE and USDA develop a coordinated approach for addressing uncertainties in lifecycle GHG analysis and give priority to research and development initiatives that address the blend wall issue.
The GAO also encourages lawmakers to consider whether revisions should be made to the Volumetric Ethanol Excise Tax Credit, which was originally established to help spur the growth of the ethanol industry. According to the report, this credit may no longer be needed because unless crude oil prices rise significantly, it is unlikely the tax credit will stimulate ethanol consumption beyond levels specified by the RFS. In addition, the report claims that the U.S. corn ethanol industry is mature and that production levels already near the RFS limit of 15 billion gallons per year. The GOA states that the VEETC's annual cost to the U.S. Treasury in forgone revenues could increase from $4 billion in 2008 to $6.75 billion in 2015 for conventional corn ethanol. The report further explains that the RFS and VEETC are redundant with respect to their effects on ethanol consumption and that under current market conditions the VEETC does not stimulate additional ethanol consumption.
On Oct. 5, Sen. Chuck Grassley, R-Iowa, issued a statement in response to the GAO report supporting the VEETC. "Home-grown ethanol is the shining star in our efforts to reduce our dependence on dirty, imported fossil fuels," he said. "It would be short-sighted to shoot ourselves in the foot and end a tax credit that helps ensure that the renewable fuels standard we in Congress enacted is a floor and not a ceiling for ethanol use. This tax credit helps ethanol producers increase efficiencies and production methods as they move toward the development of the next generation of biofuels. Ethanol remains relatively new, especially when you compare it to the oil industry, which has been around for 100 years and still receives extensive government support."
Like Grassley, the Renewable Fuels Association has also voiced its support for continuing the VEETC. "The tax incentive has been instrumental in helping to build a renewable fuels industry in this country," said the association in a statement released Oct. 2. "It should remain. As long as petroleum and fossil fuel companies that dominate the energy market continue to receive preferential tax treatment and hidden subsidies, incentives are needed to develop renewable alternatives such as ethanol."
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