Cutting VEETC would mean lost jobs

By Holly Jessen | March 16, 2010
Posted March 23, 2010

If the ethanol tax incentive isn't extended at the end of the year it will have serious consequences to jobs, ethanol production and more, according to a report that came out late last week.

The report, prepared for the Renewable Fuels Association by John M. Urbanchuk of Entrix Inc., says that more than 112,000 jobs would be lost, including jobs created directly by ethanol production, and jobs supported by economic activity generated by the industry. This would mean a reduction in household income by $4.2 billion. "It is important to note that this economic loss will be disproportionately felt by largely rural communities where ethanol plants are located and supply the grain, utilities, labor and other services needed to produce ethanol," wrote Urbanchuk, a technical director for Entrix, an environmental and natural resource management firm.

The study looked at two tax incentives that expire Dec. 31, the Volumetric Ethanol Excise Tax Credit (VEETC) at 45 cents per gallon and the Small Ethanol Producer Tax Credit (SEPTC) at 10 cents per gallon (with limitations). In connection, the U.S. imposes a tariff of 54 cents per gallon on ethanol imported from countries other than Caribbean Basin Initiative countries. Finally, there's the Cellulosic Biofuel Producer Tax Credit (CBPTC), which is for $1.01 a gallon of cellulosic ethanol, reduced by the amount of VEETC and SEPTC, and expires Dec. 31, 2012.

If VEETC is allowed to lapse, the study said, the price to producers would be reduced by 27.4 percent, resulting in a nearly 38 percent cut in supply by producers. As the RFA pointed out, that would cut U.S. ethanol production by 4 billion gallons, or the equivalent of closing up two out of every five plants operating now. "If the VEETC is eliminated, the immediate impact on the industry is expected to be severe," the study said. "A significant amount of capacity would likely go offline quickly. Some of that capacity may come back online as prices rebounded to an equilibrium point, but most of the lost production would not come back."

"Supporting nearly 400,000 jobs, America's ethanol industry is building a strong foundation for a robust renewable fuels industry in this country," said Bob Dinneen, RFA president. "Failure to provide the kind of assurance investors require to continue building out this industry by extending the tax incentives would be shortsighted, relegating future generations to a reliance on both foreign oil and foreign renewable fuels."

VEETC helps ethanol be more cost competitive with gasoline and provides an economic incentive to gasoline marketers and blenders. If it lapses, Urbanchuk believes the import tariff will likely be removed as well. "The combination of removing both the tax credit and tariff would increase export demand for Brazilian ethanol, which would raise domestic ethanol prices in Brazil and stimulate production." It added that producers in India and China would likely increase imports as well.

Other results of the study include:

An 8 percent decrease in corn prices.
Loss of investment and support for second-generation biofuels.
Elimination of $2.7 billion in state/local tax revenues.
Elimination of $2.4 billion in federal tax revenues.
Reduction of the aggregate Gross Domestic Product by $16.9 billion (2009 dollars).

It also called VEETC and the Renewable Fuels Standard (RFS) independent and complimentary programs, answering critics who argue that a tax credit is unnecessary when a mandate to blend already exists. RFS does mandate the blending of ethanol for environmental and greenhouse gas emission reduction reasons. However, it does nothing to require blended ethanol be produced domestically. "With the RFS alone, there is no way to ensure that the additional goals of energy security and domestic economic development are met," the study said. " Absent a market-based incentive, it is highly likely that imports would be used to satisfy the RFS' growing biofuel volume expectations."

The RFA has posted the full study as well as a summary at its Web site.