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I wrote here three years ago, during the last food price crisis, that corn-based ethanol subsidies were economically inefficient, environmentally unfriendly, and inequitable.  So I listened with great interest yesterday to an NPR story on the likelihood that the ethanol subsidy will be eliminated as part of a budget deal. But as I wrote in another recent post on farm subsidies generally, what is cut, and how, matters from the perspective of developing countries, as well as American consumers and taxpayers.

The good news is that the Senate, which hasn’t been able to agree on anything of late, voted 73-27 in mid-June to eliminate the tax credit (and an associated import tariff) and put the $2 billion or so saved this year toward deficit reduction. The bad news, which was the focus of the story, is that the ethanol industry, while not happy about losing six billion in taxpayer dollars, can survive without it, leaving us with continued pressure on food prices and the environment.  According to  Tom Buis, an industry spokesman who was interviewed for the story:

"The industry wouldn't have happened without [the subsidy]," Buis says, "but we're in a different position today."

The industry is able to survive without the subsidy for two reasons. First, with the plant infrastructure established, thanks to the subsidy, corn ethanol is competitive as a feedstock for gasoline when oil prices are as high as they’ve been of late. The second factor pushing demand is a separate government mandate to blend ethanol into gasoline, with the mandated level rising from just over 12 billion gallons this year to 15 billion gallons by 2015. So far, there is little serious talk of reducing, much less eliminating, the mandate.  And this is what makes the recent Senate compromise on ending the subsidy, as well as a recent Environmental Protection Agency (EPA) decision on ethanol blend levels, so disturbing.

With both natural (oil prices) and man-made (the government mandate) forces pushing up the demand for corn ethanol, the chief constraint on the industry’s growth has been standard gasoline engine technology, because higher ethanol blends can damage car engines if they have not been modified to handle it. In January, however, the EPA authorized an increase in the ceiling for ethanol-gasoline blends from 10 percent to 15 percent for cars produced in the 2001 model year or later.

But that would require gasoline stations to install separate pumps for E10, for older cars, and E15 for newer ones, and that’s where the Senate compromise on subsidy elimination raises concerns. Senator Dianne Feinstein (D-CA), the primary sponsor of the bill to eliminate the ethanol subsidy and tariff, negotiated a compromise with Senators Amy Klobuchar (D-MN) and John Thune (RSD) to extend a tax credit for alternative fuel infrastructure that could be used to subsidize the installation of E15 pumps.

Continuing to subsidize the industry’s fixed costs for infrastructure, combined with the mandate and high prices, facilitates the industry’s continued growth. When I visited the website for Mr. Buis’ organization, Growth Energy, the home page featured a link to an article listing government subsidies for flex fuel pumps and how to get them. This is a case where doing nothing—just letting the tax credits expire as planned at the end of the year—might be cheaper in the long run than a compromise that allows fuel needs to continue to be pitted against food needs.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.