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The Ethanol Tax Credit – It’s Worse Than You Think

By Harry de Gorter and Jerry Taylor -- August 6, 2010

[Editor note: Harry de Gorter is Professor in the Department of Applied Economics and Management at Cornell University; Jerry Taylor is a senior fellow at the Cato Institute specializing in energy and environmental policy.]

The nonpartisan Congressional Budget Office (CBO) recently issued a report on how the corn-ethanol tax credit costs $1.78 to reduce one gallon of gasoline consumption and $754 to reduce one ton of greenhouse gases. The Wall Street Journal immediately noted that “to put that [latter] number in perspective, the budget gnomes estimate that the price for a ton of carbon under the cap-and-tax program that the House passed last summer would be about $26 in 2019”.

While this study is being used by critics of the tax credit – which will cost about $30 billion over the next five years and is up for reauthorization this year – the CBO nonetheless severely underestimates the true costs of the ethanol tax credit in their calculations because:

(1) It ignores the existence of the ethanol consumption mandate (the Renewable Fuel Standard);

(2) It assumes each (energy equivalent) gallon of ethanol produced due to the tax credit replaces a gallon of gasoline;

(3) It ignores the fact that with an ethanol consumption mandate, the ethanol tax credit subsidizes gasoline consumption instead, and

(4) It erroneously suggests that the ethanol consumption mandate has not been binding in the past.