Economists Propose Variable Blenders Credit
University of Illinois economists have come up with an alternative ethanol tax credit.
Compiled by staff
Published: Oct 21, 2010
The tax credits for ethanol blending are set to expire at the end of the year. Washington is considering what to do next and the agricultural economists at the University of Illinois have been toying with some ideas, too. Ag Economist Scott Irwin says farmers can think of the current tax credit as something like their Direct Payments and the proposal they've come up with as a target price and a deficiency payment. The payments are awarded to the blender. The policy Irwin and his team developed and are exploring would key off the price difference between wholesale gasoline and ethanol.
"The rule that we took a look at was to say subtract the price of ethanol from the price of gasoline and that gives you a measure of the incentives to blend ethanol," Irwin said. "When that number is positive that means ethanol is cheaper than gasoline and so blenders will want to include it in the gasoline at the retail supply. When that number is negative that means the price of ethanol is higher than the price of gasoline and you wouldn't want to use ethanol in terms of the basic market economics. So we key our rule to zero, in other words whenever that margin is negative meaning that they otherwise really wouldn't want to blend ethanol that's when the blender's credit kicks in."
That credit would max out at 45-cents a gallon, which is the same as the current and soon to expire blenders's tax credit payment. It could be less than that, or nothing at all, depending on the math. It's a simple, time tested solution that Irwin says actually works in practice, and it saves taxpayer dollars.
"We tested it and were able to show for example since 2007 our estimates are that the current fixed rate policy would cost the U.S taxpayer about $15 billion," Irwin said. "Our proposed variable blenders credit would be about $2.5 billion."
That's a $12.5 billion savings, although Irwin says the calculation does not account for behavioral changes by the industry. Still it is a starting place and he admits the biggest question from corn producers would likely be if such a dramatic drop in governmental support to the blenders would affect the price of ethanol and corn? He doesn't know the answer yet.
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