Extending the current ethanol tax credit and tariff would boost corn-based fuel production — and corn prices, report University of Missouri economists.
The current 45-cent tax credit for biofuel blenders and associated 54-cent tariff on ethanol imports were studied by the MU Food and Agricultural Food and Policy Research Institute (FAPRI). Economists ran “what-if” scenarios on FAPRI computer models of the U.S. farm economy.
Both tax laws are due to expire Dec. 31, 2011.
With incentives in place, they saw fuel production from corn go up 1.2 billion gallons a year and corn prices rise 18 cents per bushel.
Increased demand for corn as an ethanol fuel source would expand corn acreage by 1.7 million acres, said Seth Meyer, MU FAPRI economist and author of the study, released June 27.
The report is available on the FAPRI website: http://fapri-mu.org/.
“The study considers only changes in the ethanol tax credit and tariff, but not changes in current mandates to use a set amount of biofuels,” Meyer said.
FAPRI prepares an annual 10-year baseline of agricultural production to analyze effects of policy changes on farm income.
"The baseline prepared earlier this year assumed biofuel tax credit and tariff expire at the end of 2011, as provided in current law,” said Pat Westhoff, director of MU FAPRI. “This analysis looks at an alternative scenario that keeps ethanol tax credit and tariff at current levels.
“There is debate about federal support of the ethanol industry,” Westhoff noted. “At a Paris meeting, G-20-nation trading partners raised concerns about U.S. support of biofuels.
“The revised baseline gives FAPRI a tool to study proposed policy changes.”
Under current energy legislation, blenders who add ethanol to gasoline receive a 45-cents-per-gallon tax credit. A 54-cent-per-gallon tariff slows import of foreign ethanol.
Our ethanol policy is complex, Westhoff explained.
“When you give fuel blenders a tax credit, they keep part of the benefit and charge service stations less for blended fuels. In turn, service stations should charge consumers less for blended fuel at the pump.
“At the same time, blenders can pay more to ethanol plants that in turn pay farmers more for corn.
“Our work suggests that how benefits of the blender’s tax credit are shared among fuel consumers, ethanol plants and corn farmers is very sensitive to market conditions,” Westhoff said.
MU FAPRI maintains computer models of all agricultural commodities. Those are used to calculate the economic impact of changes in laws and farm policies.