CBO, Ethanol, and the Rest of the Story

Posted on: July 16, 2010 in Environment, Ethanol, Renewable Fuel Standard, Renewable Fuels, VEETC

This week, the Congressional Budget Office (CBO) released a report critical of ethanol tax incentives, but devoid of any comparisons to other energy tax incentives (like those for Big Oil).  The report relied on what were, in large part, worst-case assumptions and also failed to give credit for co-products now an undeniable component of the industry that must be taken into account. 

We have spent some time in the past two days analyzing the report and we found that CBO’s tenuous results hinged on just a few very important assumptions.  You can read the whole RFA analysis here

But, for the sake of brevity, here are a few key items to ponder:

  • The CBO report confirmed that biofuels like ethanol have indeed reduced both petroleum consumption and GHG emissions. However, using highly pessimistic and debatable assumptions, CBO greatly exaggerates the cost of those benefits to taxpayers.  Using more realistic assumptions, we find that CBO likely overestimated the cost to taxpayers of displacing petroleum with ethanol by a factor of 3-4 and overestimated the cost to taxpayers of reducing GHG emissions by a factor of 6-8.

Namely, CBO assumes ethanol has value only as a BTU replacement for gasoline, and this greatly skews the study’s results. CBO ignores the fact that ethanol has significant value as an additive to gasoline.

Therefore, results obtained through using more reasonable assumptions about ethanol’s utility in the fuel market (i.e., additive value vs. BTU replacement) and the share of ethanol consumption attributable to past and present tax incentives are equivalent to just 26-34% of the CBO estimate.

 

 

 

CBO Report

Alternative Assumptions

  1. Federal Tax Credit ($/gallon)

$0.45

$0.45

  1. Adjusted Tax Credit ($/125,000 BTU)

$0.67

$0.54

  1. Change in Excise Tax Receipts ($/125,000 BTU)

$(0.09)

$(0.09)

  1. Net Cost of Ethanol Tax Credit ($/125,000 BTU)

$0.58

$0.45

  1. Share of Total Ethanol Consumption Attributable to Tax Credit (%)

 

32%

 

75-100%

  1. Cost to Taxpayers of Displacing 1 Gallon Petroleum with 1.5 Gallons Ethanol ($)

 

$1.78

 

$0.45-$0.61

 

We also find that CBO greatly undervalues ethanol’s greenhouse gas reductions.  For instance, CBO’s review of the literature found that the use of ethanol reduces GHG emissions relative to gasoline. Unfortunately, CBO adopted an overly conservative estimate of the magnitude of GHG reductions resulting from substituting corn ethanol for gasoline. CBO’s assumption on GHG reductions from corn ethanol understates actual reductions by 100%.

Based on our research, the result of using more reasonable assumptions on the GHG reductions associated with using corn ethanol is that the cost to taxpayers of reducing one ton of GHG emissions is just 13-17% of the CBO estimate.

 

 

 

CBO Report

Alternative Assumptions

  1. Cost to Taxpayers of Displacing 1 Gallon Petroleum with 1.5 Gallons Ethanol (from row 6 of Table 1)

$1.78

$0.45-0.61

2.  GHG reduction compared to gasoline (kg CO2e./125,000 BTU of ethanol consumed)

2.4 kg CO2e. (20%)

4.8 kg CO2e. (40%)

  1. Units of petroleum fuel (@125,000 BTU) that would need to be displaced to reduce GHG emissions by 1 metric ton

 

424

 

208

  1. Cost to Taxpayers of Reducing GHG Emissions by 1 metric ton  through Ethanol Tax Credit ($/metric ton)

 

$754

 

$94-$127

 

What may be the most egregious error in CBO’s methodology is its failure to include any comparison with other energy tax incentives, including the billions spent each year to subsidize oil interests.  Any examination of the cost to taxpayers of using certain technologies to achieve energy and environmental policy goals must include proper context and comparisons to other options. CBO failed to compare the tax incentives available to biofuels to the myriad of tax breaks and other government support that is afforded petroleum. Specifically, the cost to taxpayers of the gallon of gasoline that is replaced by ethanol should have presented for context and comparison.

Obviously, critics of ethanol have seized on CBO’s failed methodology as validation for their opposition to ethanol.  Yet, not one of them offer any real world solutions that can remotely compare to the energy security and economic benefits provided by a growing and evolving American ethanol industry.  Achieving the laudable policy goals of reducing petroleum consumption and decreasing GHG emissions from transportation will require taxpayer investment. Period. And no commercial technology has proven more effective in approaching these goals than ethanol. We challenge our detractors to name one. It is easy to stand on the sidelines and throw stones.  It is another thing to constructively engage in the dialogue, and offer real solutions grounded in science and not science fiction. 

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