Why Should VEETC Be Renewed?

The U.S. ethanol industry is nearing a major deadline. The industry’s primary subsidy mechanism, the Volumetric Ethanol Excise Tax Credit (VEETC), is set to expire on December 31, 2010. Federal ethanol subsidies were worth roughly $5 billion in 2009, a figure large enough to create vigorous debate over their renewal. Some call the credits a boondoggle, others a vitally important lifeline for an industry still in its formative years.

Whichever it is, one has to wonder whether we as a country and as taxpayers are getting our money’s worth for it. The development of the biofuels industry and other forms of renewable energy are critical to providing power in future years, but how we go about supporting these industries should be re-thought.

To see the whole story, you have to go back to the beginning of the industry. Commercial-scale ethanol production began in the 1970’s. Over 150 ethanol plants, mostly small farmer co-op distilleries, were built in response to the OPEC oil crisis and fuel prices spikes. However, many plants were going out of business by the end of the decade. The first ethanol subsidy was put in place in 1979 to support the flagging industry with the Energy Tax Act, a predecessor to the VEETC.

While the volume of production steadily rose in the 1980’s and 1990’s, the excise taxes failed to stem the drop in plant numbers. By the mid-1980’s, there were less than 40 ethanol plants in the U.S.

Figure 1, below shows ethanol plants and production numbers from 1960-2000. 

U.S. Ethanol Plants and Production Volume, 1960-2000. Source: RFA 2010 Ethanol Industry Outlook.  Click for a larger version. 

Everyone knows the ethanol industry experienced a boom cycle in the mid-2000’s. What is less agreed upon is what set of market forces really caused the boom. Contrary to popular belief, the data shows that the VEETC, enacted in 2004, did not immediately result in a change of ethanol plant construction. Between 2002 and 2005, the number of new plants or plant expansions announced held relatively static in the neighborhood of 15 plants per year. The real growth in the ethanol industry more closely corresponded to implementation of the Renewable Fuel Standard (RFS), signed late 2005.

Figure 2, below, shows the relative inactivity between 2004 and 2005, and the large increase in construction projects from 2006-2008.

U.S. Ethanol Plant Construction and Production 1999-2010. Source: Renewable Fuels Association.  Click for larger version.

In today’s investing world, stock prices respond instantly to the slightest news. If financial experts had agreed the VEETC was vital for the industry, ethanol company stocks should have jumped soon thereafter, right?

On the contrary, Figure 3, below, shows that there was almost no change in ethanol company stock pricing in 2004 and most of 2005. It was late-2005 and 2006 before the pure-play ethanol company stocks began their meteoric rise.

Only pure-play ethanol company stocks were reviewed and are represented here by Andersons, Inc. (ANDE), Pacific Ethanol (PEIX), BioFuel Energy Corp. (BIOF), and the now-defunct VeraSun Energy (VSE). (Stocks are shown as a percentage of their highest point within the time period, in order to show the wide range of share values on one graph.) Click for larger version.

It is impossible to argue that the VEETC did not help spur investment into the ethanol arena, and equally as difficult to argue that it isn’t helping the industry through rough times. It is not a perfect incentive, however. The biofuels industry is mired in a worse rut than the overall U.S. economy, and government support systems should not be simply eliminated.

Alternative incentive schemes need to be devised that provide more bang for the taxpayer buck. Proposed systems include grants and loan guarantees for the construction of plants using second-generation feedstocks, a blending equalization scheme recently proposed in Biofuels Digest, and a new tax-and-tariff system proposed by researchers at Iowa State University and the USDA.

With the current subsidy set to expire, now is the best time to explore better and more effective support schemes for the U.S. biofuels industry.

This article was adapted from a longer article that was published on AltEnergyStocks.com.  You can read the full article here.

Jeff Coombe has been in the renewable energy and environmental science field for 7 years.  He has experience developing ethanol and biodiesel production facilities, performing project management for end-use vehicle fleet conversions to alternative fuels, and in environmental protection management. Mr. Coombe is currently seeking a project development position in the Denver, CO area. Click here to view his resume and biography.

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I have been in the renewable energy and environmental science field for 7 years, most recently as Manager of Technical Analysis with BBI International conducting techno-economic analyses for biofuels and other renewable energy technology applications. I have experience in economic analysis for biomass-based gasification power facilities, ethanol, biodiesel, butanol, and algae, as well as project development activities for production facility construction and end use vehicle fleet conversions. I am an active member of the Colorado Governor’s Biofuels Coalition steering committee, and has presented research findings at several U.S. and international conferences Strengths include data acquisition and analysis, emerging feedstock and production technologies, and inter-industry relations.

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