Why new U.S. biofuel legislation is on track to waste billions of tax dollars, while subsidizing oil consumption

Harry de Gorter, like David Just a Cornell professor of applied economics and management, advises the U.N.’s Food and Agriculture Organization and the World Bank on issues related to the impact of biofuels on food security and global warming. He is also involved in talks on biofuels in the Doha negotiations and in World Trade Organization trade disputes. Just studies the use of information and, more particularly, how differences in human capital and information availability affect decisions.

New U.S. energy legislation mandates the use of renewable fuel but calls for continuing current biofuel subsidies that will cost taxpayers billions of dollars. The subsidies — tax credits — by themselves encourage ethanol production as a replacement for oil-based gasoline consumption. Instead, the tax credits will play a major role in unintentionally subsidizing gasoline consumption. This contradicts the new energy bill’s stated objectives of reducing dependency on oil, improving the environment and enhancing rural prosperity.

Biofuels, particularly ethanol, are under increased scrutiny because of ethanol’s use of crops, such as corn, at a time of rapidly escalating worldwide food prices. There are also doubts over whether biofuels mitigate carbon dioxide (CO2) emissions when indirect land use is taken into account. But one key issue that has been overlooked in all of this debate is how the new Renewable Fuel Standard in the recently passed Energy Independence and Security Act mandates the use of 36 billion gallons of renewable fuel by 2022. In fact, the new energy legislation will unintentionally reverse the effects of the existing biofuel government subsidies in the form of federal and state tax credits, totaling about 57 cents per gallon. The resulting taxpayer costs, exceeding $20 billion per annum, will be completely wasted.

The new legislation will, therefore, not improve energy security nor help the environment or farmers.

The effects of current policy are mind-boggling and will have profound consequences beyond wasted tax dollars. Transfers of wealth to the Middle East will increase, leading to even more dependence on oil and energy insecurity. Air quality will decline while CO2 emissions will increase. Meanwhile, the resulting rise in oil prices hurts farmers through higher input costs, while ethanol prices are unchanged as ethanol consumption remains at mandated levels.

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