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:
- It ignores the existence of the ethanol consumption mandate (the Renewable Fuel Standard);
- It assumes each (energy equivalent) gallon of ethanol produced due to the tax credit replaces a gallon of gasoline;
- It ignores the fact that with an ethanol consumption mandate, the ethanol tax credit subsidizes gasoline consumption instead, and
- It erroneously suggests that the ethanol consumption mandate has not been binding in the past.
We analyze each error in turn.
(1) The mandate will kick in when the tax credit is not extended
The first error the CBO makes is that it calculates ethanol consumption to fall 32% if one removes the tax credit compared to no ethanol policy at all.But this is a purely academic exercise because we know in reality that a mandate exists and would kick in very soon if the tax credit was eliminated. In fact, ethanol consumption exceeded mandated volumes on average by 3.1% in 2008–2009 and will likely exceed mandated volumes by an average of 4.8% from 2011–2014. If ethanol consumption were to drop by only 3.1% or 4.8% — rather than 32% — as a consequence of eliminating the tax credit, the cost of eliminating a gallon of gasoline via this program increases by 7–11 times; from a meager $1.78 as reported by the CBO to a range of $12 to $18.Likewise, the cost of reducing one ton of greenhouse gases would increase from $754 to a range of $8,000 to $9,000.
The time period of analysis for the CBO’s calculations begins in 2011 yet the CBO itself predicts that ethanol consumption will equal mandated levels in the future: