During the early part of 2010, when the volumetric ethanol excise tax exemption (VEETC) looked like it was heading towards elimination, ethanol industry contortionist Bob Dinneen of the Renewable Fuels Association worked hard to paint the subsidy as vital to all things American. In yet another RFA-sponsored study by the industry's favored economist John Urbanchuk, RFA set out to quantify the bad things that would happen if VEETC expired. They came up with quite a list, summarized by Ethanol Producer Magazine:
If VEETC is allowed to lapse, the study said, the price to producers would be reduced by 27.4 percent, resulting in a nearly 38 percent cut in supply by producers...
If the VEETC is eliminated, the immediate impact on the industry is expected to be severe," the study said. "A significant amount of capacity would likely go offline quickly. Some of that capacity may come back online as prices rebounded to an equilibrium point, but most of the lost production would not come back.
In Dinneen's own words:
Failure to provide the kind of assurance investors require to continue building out this industry by extending the tax incentives would be shortsighted, relegating future generations to a reliance on both foreign oil and foreign renewable fuels.
With such dire outcomes, how could Congress even consider stripping away the multi-billion dollar tax break?
The manner in which the RFS and blending subsidies interact, however, paints a very different picture of the likely impacts from elimination. The RFS sets a mandated consumption floor for favored fuels, in good times or bad, high corn prices or low. This is great protection if you are an ethanol producer, though quite bad if you happen to be a member of the urban poor in the developing world trying to buy corn for food. Because the RFS creates a price-insensitive mandate, the rising feedstock prices would not divert supply from fuel to food markets as quickly as without the mandate. This increases the likelihood of rich world fuel markets outbidding developing world urban poor looking to buy corn to eat. Not a great dynamic.
But back to US fuel markets though. The RFS generates a market-clearing price for providing a pre-set number of RFS-compliant gallons. With a few exceptions (such as biofuels so environmentally-challenged they can't even meet the weak RFS2 ghg reduction standards), these are the very same gallons eligible to meet the RFS2 mandates.
So how would the policies overlap? For a given production cost structure, gallons earning a 45 cpg tax credit are able to remain in production at a lower RFS credit value than would be possible for them to do without the tax credit. (The RFS credit value in the US is referred to as the RIN value, which is short for "Renewable Identification Number," the accounting units the program uses for RFS-compliant gallons). Pull the tax credit and the equilibrium RIN prices will rise more or less the same amount. Increase the credit and the equilibrium RIN prices are likely to fall in response.
And, despite the claims of Urbanchuk and Dinneen, this is exactly what seems to be happening. Here's an article on what's happening in the biodiesel sector, from Biodiesel Magazine in November 2010:
Although the U.S. biodiesel industry has struggled since the lapse of the $1 per gallon tax credit, renewable identification number (RIN) prices are currently trading high enough to fill that void. One factor that seems to be contributing to the relatively high price of RINs is the volume requirements mandated by the U.S. EPA under the renewable fuel standard (RFS2)...
According to Sam Gray, a renewable fuels trader with VICNRG LLC, 2010 biodiesel RINs hit an all-time high on Dec. 8, trading at 96 cents per RIN. Since each gallon of biodiesel that is produced generates 1.5 RINs, that equates to $1.44 per gallon, which more than offsets the lost value of the expired $1 per gallon biodiesel tax credit. [Emphasis added]...
Current market conditions seem to be indicating tight biodiesel supply in 2011, leading to relatively high RIN prices, but McMartin and Gray agree that this will change if the biodiesel tax credit is reinstated. "If that $1 comes back, there is no way RINs can remain high, the market just wouldn't allow it," Gray said. "The market will correct that, so if the dollar comes back, you are going to see a large percentage of that dollar proportionally wipe away the 2010 and 2011 RIN value."
The policy take-away here? The very least Congress can do here is kill the blenders' credits permanently. No transformation of the credits into new or bigger subsidies, such as to ethanol refueling infrastructure and pipelines as industry group Growth Energy has advocated; just kill the blenders credits because doing so will save taxpayers lots of cash, and will have virtually no effect on market structure anyway.