GAO says VEETC, RFS duplicate efforts to stimulate ethanol

By Holly Jessen | March 03, 2011

A Government Accountability Office report released March 1 said the Volumetric Excise Tax Credit and the renewable fuel standard duplicate efforts to stimulate domestic production of ethanol. “If reauthorized and left unchanged, the VEETC’s annual cost to the Treasury in foregone revenues could grow from $5.4 billion in 2010 to $6.75 billion in 2015,” the report said.

Since the RFS already requires increasing use of ethanol and other biofuels, VEETC is “largely unneeded” to stimulate demand for renewable fuels, according to GAO. It repeated what it said in August 2009, that the tax credit was needed to create a profitable ethanol industry in the build-out phase, but that it’s less important now for sustaining the industry. “Fuel blenders receive the ethanol tax credit for each gallon of ethanol they combine with gasoline and sell, yet they are also required under the fuel standard to acquire and blend specified volumes of ethanol with gasoline.”

GAO offered five options for the U.S. Congress to consider.

  • Maintain VEETC at current levels
  • Allow VEETC to expire the end of 2011
  • Reduce VEETC
  • Phase out VEETC over a number of years
  • Modify VEETC to counteract movement in other commodity prices. For example, VEETC could increase when crude oil prices dip and decrease when crude prices increase.

The GAO report is the first annual report to Congress following a requirement that the agency identify federal programs, agencies, offices and initiatives which have duplicative goals or contain opportunities for cost savings or increased revenue. VEETC is not the only government program singled out in the more than 300-page report. GAO included a total of 81 areas for consideration, including such diverse categories as economic development, health, homeland security and social services.

The U.S. ethanol industry doesn’t have a problem with producing ethanol, said Chris Thorne, public affairs director for Growth Energy. The issue is access to the market. “As long as the petroleum companies control access to the market, then we will need to have some kind of tax policy that supports the U.S. ethanol industry,” he said, pointing to the fueling freedom plan, which would transition VEETC toward building ethanol infrastructure. “Once we’ve got enough blender pumps in the ground and flex-fuel vehicles on the road to really add up to a level playing field, then we can compete against oil without any government assistance or interference.”

Matt Hartwig, communications director for the Renewable Fuels Association, said ethanol producers are committed to reforming the tax incentive in a way that will reflect a growing industry. However, the discussion must not focus on only ethanol. “Any reform discussions must also include removing the billions of dollars in permanent subsidies provided to the nation’s petroleum industry, an industry whose members routinely post tens of billions of dollars in quarterly profits,” he said. “Ethanol producers understand the need for belt-tightening, but it should not come only at the expense of America’s only viable renewable alternative to imported oil.”

Claiming that VEETC and RFS accomplish the same thing is an old argument, said Brian Jennings, executive vice president of the American Coalition for Ethanol. Opponents said that when the RFS was first enacted in 2007 and again in 2010 when the final rule was issued. “To me this argument rings a bit hollow,” he said. “It’s been prosecuted in the halls of Congress already.”

Jennings pointed out that VEETC is a minor cost when compared to the tax credits and subsidies provided to the oil industry for the last 100 years. Although Democrats in the U.S. House of Representatives tried to pass legislation cutting back on government support for the oil industry it was defeated by Republicans. Instead, the House passed amendments to block funding for blender pumps and stop the U.S. EPA from implementing E15. All this is happening at a time when oil is at $102 a barrel. “Congress needs to get serious about this and quit with the foolishness,” he said, adding that ethanol is the only significant alternative to fossil fuels today.

Still, the ethanol industry recognizes it must do its part in reducing the deficit. ACE, National Corn Growers Association, RFA and Growth Energy have had some good discussions about reforming and restructuring VEETC in the future, Jennings said, though he was unable to provide more information because the groups are still hashing out the details.   

Hartwig also said the groups are working together to find some common ground and common policy for the future. “Perceived division in the industry is a problem on Capitol Hill,” he said.