FAQ: Current Ethanol Tax Credits and Our Clean Fuel Future
What is the VEETC?
The Volumetric Ethanol Excise Tax Credit (VEETC) is an expensive and ineffective biofuels policy that has outlived its original purpose. Under the tax credit, the government pays oil companies and other fuel suppliers 45¢ for every gallon of ethanol blended with gasoline.
The policy was designed to provide a taxpayer-funded incentive for fuel suppliers to blend ethanol with gasoline. However, fuel suppliers don’t need this incentive, since they are legally obligated to buy ethanol by the Renewable Fuel Standard (RFS).
Established in 2005 expanded in 2007, the RFS requires fuel suppliers to blend increasing quantities of biofuels into gasoline, including 12 billion gallons of conventional ethanol this year, and growing 5% each year to 15 billion gallons by 2015.
With a mandate this large, the VEETC does not increase biofuels production or provide additional benefits to farmers. Instead, it provides subsidies to oil companies for simply obeying the law.
How much does the VEETC cost U.S. tax payers?
This year VEETC will cost taxpayers $5.4 billion dollars. If extended for 5 years, it would cost more than $30 billion.
When does the VEETC expire?
The VEETC expires for corn ethanol at the end of 2010.
Who benefits from the VEETC?
The tax credit, sometimes called the blenders credit, goes to the parties that blend ethanol into gasoline before it is sold. In most cases these blenders are oil companies.
If the VEETC expires, how will it affect the U.S. ethanol industry?
A recent study from the Center for Agricultural and Rural Development at Iowa State University found that allowing the tax credit to expire would not have significant adverse effects on the domestic ethanol industry, but instead the industry would continue to grow (1).
The Government Accountability Office (GAO) agrees, also concluding with when the RFS sets the level of demand for ethanol “the VEETC does not affect the level of ethanol consumption and is a duplicative policy tool for increasing ethanol consumption…removing the VEETC would not adversely affect the demand for corn for ethanol and the income of corn producers, which depend on the total level of ethanol consumption.” (2)
With or without the VEETC, oil companies have to blend biofuels into gasoline in order to be in compliance with the law. The existence of the VEETC has not caused oil companies to buy more corn ethanol, just as a lack of the VEETC will not cause oil companies to purchase less ethanol.
The RFS is what drives the demand. In fact, Valero, a Texas-based oil refiner and major ethanol producer, recently agreed, stating the ethanol industry would “not see blending down one barrel because of the credit being gone”, and went further to describe VEETC as unnecessary.
Why should Congress let the VEETC expire?
VEETC wastes tens of billions of dollars, without providing effective support for the next generation of cellulosic biofuels we need to meet the energy security and climate change goals of the RFS. Eliminating VEETC will free up resources to invest in the next generation of clean low carbon cellulosic biofuels.
What is a better alternative to the VEETC?
Instead of paying oil companies to follow the law, a more effective tax policy is a Biofuels Performance Tax Credit. Under a performance-based tax credit, the amount of the tax credit would vary depending on the fuel’s reduction in global warming emissions compared with today’s corn ethanol. The greater the reduction in emissions, the greater the tax credit.
A variable tax credit would give a clear financial incentive for all fuels to reduce their emissions. A performance-based tax credit would save $20 billion between 2011 and 2014, compared with extending existing tax credits, and free up resources to invest in advanced, low-carbon biofuels from so-called “cellulosic” sources such as grasses, wood pulp, and even many kinds of waste.
1. Center for Agricultural and Rural Development, "Costs and Benefits to Taxpayers, Consumers, and Producers from U.S. Ethanol Policies”, July 2010. Available online on the CARD web site.
2. Government Accountability Office, “Biofuels: Potential Effects and Challenges of Required Increases in Production and Use”, 99, August 2009. Available online.