An Encouraging Vote to Kill Ethanol Subsidies

In a surprise development, the Senate yesterday approved an amendment that would kill the ethanol tax credit and repeal the import tariff on foreign ethanol. I'll refer to the tax credit and import tariff collectively as "ethanol subsidies."

Cheers to Tom Coburn (R-Okla.), who drove the effort to repeal the ethanol subsidies, and Dianne Feinstein (D-Calif.), who co-sponsored the amendment. Jeers to the Obama administration, and Charles Grassley (R-Iowa) (the most vocal advocate of ethanol subsidies), who refused to support the measure.

The vote represents an encouraging display of bipartisan cooperation (or "ethanol miracle," if you're feeling melodramatic). 37 Republicans joined 38 Democrats and two Independents to support the measure. Despite the urgency of the challenges facing our nation, we have rarely witnessed bipartisan cooperation on any meaningful policy issue in recent years. Although this was largely a symbolic victory, it demonstrates that sound policy can trump special-interest politics in a time of fiscal emergency.

The ethanol subsidies are an example of a bad policy that refuses to die. The federal government has subsidized the ethanol industry since the 1970s. Successive administrations have pandered to the farm states and environmentalists, shifting the rationale for subsidies as the political climate changed. Team Gore argued that corn-based ethanol results in higher energy output and lower carbon output than petroleum-based gasoline. (He has subsequently reversed course and indicated that his support for ethanol was politically motivated.) Teams Bush and Obama have both argued that ethanol can move us towards the elusive dream of "energy independence." Team Obama is also concerned about the "jobs argument," i.e., that reduction in ethanol subsidies will reduce the number of "good American jobs" in the ethanol industry.

Although economists have grumbled about ethanol subsidies for a decade (see Ed Dolan's blog here and here for a good discussion), the U.S. Government Accountability Office directed a spotlight on the subsidies in a report earlier this year. The GAO projected that the cost of the ethanol tax credit would increase from $5.4 billion in 2010 to $6.75 billion in 2015. The GAO characterized this expenditure as "duplicative," in light of renewable fuel standards that will phase in over the next decade.

The ethanol subsidies demonstrate the power of special interests (in this case, a coalition of farmers, landowners, fuel producers and naive environmentalists) to capture windfall profits from unwitting taxpayers. The "ethanol coalition" has fended off repeal for years, despite analysis indicating that (i) corn-based ethanol has lower energy output and higher carbon output than petroleum-based gasoline and (ii) ethanol subsidies were materially increasing food costs to consumers. The import tariff on foreign ethanol is particularly maddening; why increase the cost of foreign ethanol to consumers if ethanol is "greener" than petroleum-based gasoline? And why increase the cost of foreign ethanol if domestic ethanol production is increasing food costs to consumers?

The Senate vote yesterday demonstrates that members of Congress can look across the aisle, lock arms with their colleagues, and move forward to eliminate special-interest boondoggles that we can no longer afford. Let's hope that Congress will build on this momentum in the days ahead, and that the Obama administration will catch up.