A new study from Purdue University finds that a variable rate for the ethanol blenders tax credit could cost the government less and provide more security for producers than current fixed rates.
The study, by Purdue agricultural economist Wally Tyner, concludes that a variable rate would insulate producers from risk because as oil and ethanol prices drop, the subsidy for producers would increase. The government would save money because the rate would go down when oil prices are high.
The Volumetric Ethanol Excise Tax Credit (VEETC), which currently pays blenders a fixed rate of 45 cents per gallon of ethanol, will expire at the end of the year. Congress will have to decide whether to create a new fixed rate, implement a variable rate or go with no subsidy at all.
Tyner said his study, which was published in the October issue of the journal Energy Policy, shows that a variable rate would be the most beneficial since it still lowers risk for producers and could entice new cellulosic ethanol production. “We could see ethanol plants close if the subsidy isn’t renewed in some form,” Tyner said.
Under a variable rate, there would be no tax credit for blenders at $90 per barrel of oil. The subsidy would kick in at 17.5 cents per gallon when oil is at $80 and increase 17.5 cents for every $10 decrease in oil prices.
However, Tyner noted that the study’s findings are irrelevant if the Environmental Protection Agency does not increase the amount of ethanol that can be blended with gasoline from 10 percent to 15 percent. He said without that increase, the United States is at the ethanol blend wall, the point at which growth in ethanol production has to stop because the maximum amount possible is being purchased and used by consumers. The EPA is expected to make a decision on the blending limit this fall.