Subsidies and Mandates for Biofuel Don’t Provide Enough Stability?

- by Nicolas Loris, May 16, 2014, Source: The Foundry

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With the Senate considering extending a package of tax credits that expired at the end of 2013, six Senators have banded together to call on Congress to re-up the expired biofuel credits.

In particular, tax credits of $1 per gallon produced was offered for blended diesel made with agricultural products. Apparently, decades of handouts worth billions of dollars, a federal mandate for biofuel production, and numerous state “incentives” just aren’t enough stability for those feeding from the trough filled with taxpayers’ money.

The Senators pointed to a drop in biodiesel production in 2014 as evidence of the need for continued government support. Biodiesel production in January 2014 was 65 million gallons lower than December 2013. That’s because biofuel producers are gorging on taxpayers’ money to oversupply the market.

And the tax credit is only a part of how the government supports biofuel production. Congress mandated production of biofuels in the 2005 Energy Policy Act, and the Energy Independence and Security Act of 2007 amped up the production quotas to 36 billion gallons by 2022, including biodiesel.

If that weren’t enough, most states provide tax credits, loans, grants, and regulations for renewable fuel production. For instance, Senator Al Franken (D–MN), one of the Members pitching for biofuel stability, has a laundry list of incentives, laws, and regulations in his home state, but apparently he needs the federal taxpayer to pitch in even more.

Removing the federal government’s preferential treatment doesn’t spell the end of the industry. It would remove the uncompetitive elements of the industry and free up the resources not dependent on the taxpayer to be more valuable elsewhere in the economy. Problems of instability come from an inability to compete in the market, not from extending a tax credit they knew was set to expire.

Displacing oil with ethanol in the gasoline market may be reducing Americans’ dependence on oil, but it’s a very small reduction at a very high cost. In 2011, biofuels accounted for only 4 percent of the transportation fuel used in the United States, and because ethanol is less energy-dense, the displacement of oil is even less than that. Even this small share of the market is also due to strong political effort—a federal mandate and billions of dollars in taxpayer support.

We don’t know if biofuels are an American success story, because biofuels haven’t competed in a free market. But it is clear that the policy is a complete and utter failure that benefits a select group of special interests at the expense American taxpayers and fuel consumers.