The federal 46-cents-a-gallon tax credit for corn-based ethanol, and a tariff on imported ethanol, has expired. Mark that as one good start to 2012. A bad policy that is over 3o-years old has (partly) come to an end.
The credit and tariff have cost motorists billions of dollars, contributed to the cluttering of the tax code, served as another example of top-down policy arrogance, harmed the environment, caused food prices to increase, contributed to hunger in the third world.
So the end of the credit and tariff is good news.
Why did the subsidy end? The Economist says the tea party can take credit. So can some players in the the environmental lobby, such as Friends of the Earth, which have (rightly) argued that ethanol drives up the price of food.
Unfortunately, public policy is still tilted towards ethanol: There’s still a separate tax credit for “cellulosic” ethanol made from switchgrass and other products, which stands at $1.01 a gallon.
In addition, the demand-side requirement of the federal government has increased. As the Argus Leader points out, “The federal government has set its target for biofuels production in 2012, increasing by 1.25 billion gallons the amount of ethanol and biofuels that must be blended into the fuel supply.” This has contributed to some assaults on the English language, such as when advocates warn of the importance of using government mandates to promote an orderly “market.” (“It’s important to let the market develop at a reasonable pace.”) Oh, I get the fact that markets and mandates coexist all the time. But the greater the mandate, the activity in question (say, making ethanol) becomes less of a market-based one and more of a politically driven one. One pro-mandate group has an effort to develop cellulosic ethanol, called “Project Liberty.” That’s an ironic name, given that it is being driven, in part, by federal laws requiring fuel sellers to sell ethanol.
The ethanol industry says that rising gasoline prices have helped make its product competitive with regular gasoline. Score one for standard economic theory, which said long ago that ethanol could become more attractive, without government-imposed distortions, if the price of petroleum rose high enough.