Clearing the Air: A Policy Analysis of the Ethanol Excise Tax Credit

Abstract

Established in 1978, the ethanol excise tax credit has been a resounding success in helping establish a vibrant corn ethanol market, with almost 11 billion gallons produced in 2009. However, the original goals of the credit—energy security and oil independence—have not been significantly aided and, by at least some measures, have actually been hindered by the subsidy. Secondary environmental goals, such as avoidance of carbon emissions from motor fuels, show limited success. Ex post cost-benefit analyses of the subsidy have shown that it has negative to zero cost-benefit ratios and that socially optimal levels are well below current tax credit rates. The credit had a high dollar cost of $4.8 billion in 2009, and has also increased corn prices. Finally, development of a host of alternatives, such as cellulosic ethanol, have been retarded by the creation of hegemonic constituencies dependent on the credit.