A History of Federal Support for the Ethanol Industry

The ethanol industry in the US recently made a major sacrifice for the greater economic good of the country. Farmers involved in the production of ethanol willingly gave up their tax incentives to help the country overcome its fiscal crisis.

The development faced almost no opposition from the entire biofuel sector. This recent development was supported by the fact that incentives are meant to assist emerging industries in their early growth, not subsidy them forever.

So now that the ethanol tax incentives have been dropped, it seems clear that the ethanol industry is now past its growth stage and can now hold its own. But the road it has taken to get to where it is now was never easy. Here’s a quick look at the ethanol subsidies history.

Legislative History on Subsidies for Ethanol

The success story of the ethanol industry started in 1978, when the Energy Tax Act of 1978 mandated a $0.40 per gallon tax exemption for all ethanol producers from the $0.04 gasoline excise tax.

In 1980, the Crude Oil Windfall Profit Tax Act and the Energy Security Act further promoted domestic fuel development, which focused mainly on ethanol production.

In 1982, the Surface Transportation Act increased the tax exemption being enjoyed by ethanol producers to $0.50 per gallon but increased the gasoline excise tax to $0.09 per gallon. And in 1982, the ethanol subsidies per gallon increased to $0.60.

In 1988, the Alternative Motor Fuels Act created several programs geared towards research and development of automobiles that can support alternative fuels. They also provided fuel economy credits to automobile manufacturers.

A slight decrease in the ethanol subsidies per gallon, which went from $0.60 to $0.54, was mandated in 1990 under the Omnibus Budget Reconciliation Act. On the bright side, however, the tax incentive was extended to last until the year 2000. Then, in 1992, the Energy Policy Act heavily promoted the use of E85 ethanol blends by offering E85 subsidies. The Energy Policy Act offered tax deductions on all vehicles that could run on E85 fuel.

In 1998, under the Transportation Efficiency Act of the 21st Century, the ethanol tax exemptions was reduced to $0.51 per gallon but was extended to 2007.

And in 2004, it was further extended to 2010 and was formally enacted as the Volumetric Ethanol Excise Tax Credit of VEETC.

The VEETC replaced the rather convoluted set of subsidies that the industry has been enjoying since the 70s. It was also during this year that an important change in ethanol subsidies history was recorded. Under the Jobs Creation Act, the ethanol subsidy was changed to a blender tax credit as opposed to the excise tax exemption previously mandated. So from 2004, the tax exemption applied to any gasoline blended with a minimum of 10% ethanol.

In 2005, the government established the Renewable Fuel Standard, which started at 4 billion gallons per year by 2006 and 7.5 billion gallons per year by 2012.

In 2008, as the industry continued to grow, the Farm Bill reduced the VEETC credit to just $0.45 per gallon. By 2009, ethanol subsidies from the federal government were worth around $5 billion.

One other type of tax credit also applied to small ethanol producers. "These corn ethanol subsidies began in 1990" and allowed plants that can produce less than 30 million gallons of ethanol each year to get a $0.10 tax credit per gallon for the first 15 million gallons it produces every year.

Now, all ethanol subsidies have expired. In place of federal ethanol subsidies, however, several states have enacted their individual biofuel incentives.

The Link between Historical Ethanol Prices and Subsidies

Ethanol subsidies and prices are interconnected within the whole system of ethanol production and demand. In the mid-2000s, the ethanol industry experienced a huge boom. It is noticeable that at around the same time, the government reduced the amount of tax exemptions that ethanol producers enjoyed. This means that the ethanol industry is fast becoming a successful, independent industry capable of prevailing without the financial support of the government.