GAO Says Federal Ethanol Incentives Costly, Unnecessary

Federal tax credits and other policies to support U.S. ethanol production, which cost taxpayers more than $5 billion a year, are largely unneeded given an existing federal renewable fuel standard that requires production of several billion gallons every year, according to a new report by the Government Accountability Office.

Federal tax credits and other policies to support U.S. ethanol production, which cost taxpayers more than $5 billion a year, are largely unneeded given an existing federal renewable fuel standard that requires production of several billion gallons every year, according to a new report by the Government Accountability Office. 

The GAO report also concludes that the web of federal mandates requiring government purchases of more efficient vehicles, plug-in hybrid vehicles, and alternative fuel vehicles are often conflicting and do not always result in purchases of the most efficient models. 

Officials from the Energy Department and General Services Administration told GAO investigators that both departments are working on a "performance-based" legislative proposal to curb such unintended consequences. 

The report suggests that the current 45-cent-per-gallon federal tax credit for ethanol producers may be unnecessary given the federal renewable fuel standard, which sets a production requirement that will climb to 36 billion gallons of ethanol and "advanced" cellulosic biofuels by 2022. "The ethanol tax credit and the renewable fuel standard can be duplicative in stimulating domestic production and use of ethanol, and can result in substantial loss of revenue to the Treasury," says GAO. 

Current tax credits for ethanol production are expected to have cost $5.4 billion "in foregone revenues" in 2010, GAO says. That amount is projected to increase to $6.75 billion in 2015, the report adds. With a certain level of ethanol production already required under the renewable fuel standard, "the ethanol tax credit is largely unneeded today to ensure demand for domestic ethanol production" GAO says. 

To curb that level of support for what it termed an "already mature" domestic ethanol industry, Congress has four options: to allow the tax credit to expire at the end of 2011; to cut the amount of the existing tax credit; to phase out the tax credit gradually over the next several years; or to allow the tax credit to fluctuate depending on crude oil prices. 

As of January 2010, the U.S. ethanol industry had 13 billion gallons of production capacity with an additional 1.4 billion gallons under construction. The usage mandates for corn ethanol will top out at 15 billion gallons a year starting in 2015. 

The mandates are already at levels high enough "to ensure that a market for domestic ethanol production exists in the absence of the ethanol tax credit." In fact, says GAO, production may soon exceed the amount that can be blended into gas domestically. 

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