Robert Rapier

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Subsidy arbitrage in international trade is not a new issue.  It is popping up again in the biofuels sector, this time regarding the collection of ethanol blending credits on fuel that is then shipped out of the United States.  Not surprisingly, producers in the receiving markets are not happy about it.  Robert Rapier has writting a good overview of the issue and the industry's denials ("Clarifying misconceptions about taxpayer-subsidized ethanol exports in the United States") for the most recent Global Subsidies Initiative newsletter.

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I should have linked to this last month, but better late than never.  Robert Rapier has done a nice review of the Renewable Fuel Association's rather exuberant claims on the impacts of killing VEETC. Given that the mandate still requires the use of almost all of the ethanol produced domestically, the mechanism of support may shift (from tax credits to transfers from consumers, as illustrated by rising prices on compliance credits under the renewable fuel standard) but the demand will remain.

Part I covers the problems with their jobs impact numbers and the work of John Urbanchuk, RFA's frequent researcher on these questions.  Rapier points out that in stark contrast to the more than 100,000 jobs Urbanchuk says will disappear with the demise of VEETC, another analysis, done for food manufacturers, estimated keeping VEETC in 2011 would save a whopping 296 jobs and at a cost of roughly $20 million each.   Part II covers the inaccurate comparisons RFA has made on subsidy support to oil versus ethanol.  Having done detailed work on subsidies to both of these fuels, I concur with Rapier that RFA simplifies and skews the comparison. 

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Subsidy recipients rarely admit their government largesse is a subsidy rather than some sort of altruistic investment they've reluctantly agreed to accept on behalf of their good work for the commonweal.  This natural spin tends to go into hyperdrive when the public affairs team of a trade association strays too far from the policy folk.

Nonetheless, Growth Energy, a recent entry to the growing array of lobby groups for the biofuels industry, does seem to have taken a brief respite from reality-based communications in a recent effort to defend the honor of the Volumetric Ethanol Excise Tax Credit, or VEETC.  The trigger for this particular e-mail campaign was a post in Forbes by Robert Rapier, in which he had the gall to claim that VEETC was a redundant policy in the presence of a mandate. 

For the record, I fully agree with Rapier and don't think he is making a particularly controversial point.  The mandate compliance comes in the form of tradable "Renewable Identification Numbers" or RINs.  RIN prices are, for the most part, residual impacts net of other subsidy policies.  This is because if you've already provided large tax breaks to the fuel, producers can sell the ethanol to meet the mandate at a lower subsidized price than if you didn't provide tax breaks.  Thus, assuming that RIN trading is a competitive market, the conventional ethanol RINs will trade at a lower price due to the other subsidies. 

The parity isn't perfect.  For example, both ethanol and biodiesel excise tax credits have no environmental eligibility criteria at all, while the mandate-eligible fuels -- at least in theory -- do.  This means that some pockets of dirty biofuels could still tap in to VEETC even if they failed the RFS screens.   (See the recommendations in this paper, starting on page 29, for more on how to make the biofuel subsidization policies of the US a bit less destructive).  Similarly, if there is a large glut of ethanol production, RIN values can't go negative so the tax breaks would continue to provide subsidies to producers even when a mandate-only system would not.  Overall though, the policies overlap a great deal.

But Growth Energy went even further in its attack of the Rapier piece.  Chris Thorne, their Director of Public Affairs, wrote:

"The VEETC is not a subsidy. It is a tax credit that provides incentives so petroleum companies blend their gasoline with ethanol. It leads to significant benefits to you, the taxpayer, including lower gas prices and reduced support payments for farmers."

Bad news for Thorne here.  Tax credits are subsidies.  OMB and JCT agree on this.  So does the OECD, the World Bank, the International Energy Agency, even the G20.  "Incentive" is a commonly used synonym for "subsidy" as well.  So too for "tax expenditure," "liability cap," "federally-guaranteed loan," and "government grant."  If you want to defend the subsidy on other grounds, fine.  But don't pretend its not a subsidy.

Thorne goes on to suggest the following argument to refute Rapier's posting:

"What Rapier is suggesting boils down to a tax increase on an innovative, domestic energy industry. Does Forbes really endorse raising taxes in this tough economic climate? Does Rapier really think raising taxes on an emerging industry is smart?"

In case you are not following this nuanced nugget, let me rephrase Growth Energy's logic here:

1)  A multi-billion dollar per year tax credit, in the form of VEETC, is not a subsidy.

2)  Even though it is not a subsidy, removing that credit amounts to a tax increase

3)  It is a tax increase even though the presence of the mandate means that the total support to the ethanol sector is unlikely to change (as the lower tax break triggers higher market price support as RIN prices rise). 

4)  We don't want to increase taxes because it is anti-stimulus, anti-recovery, and anti-American.

Thorne's other claims are equally specious. 

It is true the initial incidence of blender's credits is at blending, and that petroleum companies often fill this niche in US ethanol markets.  However, the tax credit is what has historically made ethanol cheap enough for the petroleum blenders to want to blend it (though the mandate now plays a similar -- and overlapping -- role).  Clearly, if Thorne really felt all the benefits of VEETC went to petroleum companies, Growth Energy would be out there working to kill the program.  They are not.

What about the "significant benefits to you, the taxpayer" that Thorne refers to?  I like benefits, and I'm a taxpayer, so I guess he's talking about me.  Well, even if ethanol pump prices are a tad lower than what we'd pay for 100% gasoline, were just talking a shell game here because unsubsidized ethanol is not less expensive than gas.  If we see lower prices for ethanol blends at the pump (even after adjusting for its lower energy content) it is because we pay even more than that to the industry through tax breaks, grants, and market price support from the mandates.  Not such a great deal. 

And the big savings in farm subsidies?  The rational response to high farm subsidies should be to remove them as well, not to subsidize other uses of the feedstock in order to boost the market prices on the subsidized products so the payouts under the first program aren't quite so high anymore.  In fact, this whole shell game turns out to be a net loser as well according to papers by Du, Hayes, and Baker (2009) and Gardner (2007). 

See also Rapier's own response to these issues here.