farmgate: What Is The Value Of All Those State Ethanol Mandates And Tax Incentives?
The federal Renewable Fuels Mandate kick-started ethanol production, and in a shorter time than expected, US ethanol refineries were up and running and demanding corn at record-setting volumes. The jolt to the corn market pushed prices higher, but well before the RFS came into being, many state governments adopted laws designed to support the fledgling ethanol industries in their states. Those regulations will be dusted off, to evaluate their impact on the corn market.
When corn farmers began pushing “gasohol” as a potential new market in the late 1970’s and early 1980’s, state governments initiated rudimentary support measures, such as using it in some state fleet vehicles when available, or exempting it from state gas taxes. For the past 30+ years, different measures have been adopted across the Cornbelt, and the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri evaluates those ethanol support initiatives.
FAPRI economists analyzed gas taxes in all states, which ranged from 8¢ per gallon in Alaska to 36¢ in nearby Washington. Six states reduced the tax, anywhere from 1¢ to 5¢ per gallon if it contained E-10 ethanol, but the vast majority did not. However, tax reductions become substantial for E-85 ethanol in many more states.
Six states have mandates that require certain amounts of ethanol to be included in all gasoline sold, including 10% minimums for Iowa, Minnesota, and Missouri. Hawaii has an 8.5% minimum, Oregon has a 2.5% minimum, and 2% for Washington. Of course, ethanol is more widely available, but as a result of the market, not state mandates.
On the other hand are incentives to use ethanol, which FAPRI counts at 22. Those incentive states use about 1/3 of motor fuel. The 19 states with tax incentives account for 28% of the motor fuel use, and there is 9% of US motor fuel used in the 6 states with mandated ethanol use.
The FAPRI economists note that the various tax reductions are passed onto consumers, and not kept by fuel blenders. They say that will occur if the blenders compete with each other, but in non-competitive situations, the blenders will keep the tax incentives designed to spur ethanol use.
As crude oil prices have increased over the summer, ethanol prices were initially holding back gas prices. But as they decreased this fall, ethanol prices were above the cost of gas, say the FAPRI folks, “If the combination of benchmark prices is $2.00 per gallon of ethanol and $70 per barrel of petroleum, then the average retail prices of both E10 and E85 are higher than the average gasoline price, taking into account taxes, margins, and energy content. On the other hand, if the petroleum price were $140 per barrel, then the E10 and E85 prices would be, on average, less than the gasoline price if the ethanol price were still $2.00.”
What would happen if state support of ethanol is reduced? It seems the states that currently apply ethanol promotion policies are not the states that are large users of motor fuels, so their impact would be limited, says the FAPRI team. Such effects would be minimal when ethanol prices are low. But at higher prices, the mandates tend to cause greater consumption than would occur otherwise, they say. If state supports are lifted, there would be less willingness to buy ethanol at lower priced gasoline, but an increased willingness to buy gas when crude oil is at $140 per barrel.
The FAPRI economists eliminated all of the state ethanol support programs—theoretically that is—and used the $140 crude oil high from the summer and the 13 billion gallon target of the Renewable Fuels Standard in a couple years. Their findings indicated that to sell all of that ethanol when crude oil was at $140, then the benchmark price of ethanol could be no higher than $1.78 per gallon, and still have the state ethanol incentives in place. Without any state ethanol supports, the maximum price for ethanol could be no more than 94¢ per gallon and be able to reach the 13 billion ethanol target with $140 crude oil.
Summary:
Various state governments began supporting ethanol use before the federal mandates were implemented, and they all vary in style and amount from state to state. However, they have impact on the ethanol demand when crude oil prices are high, and the lower ethanol taxes allow the ethanol blends to cost less than pure gasoline. But economic analysis of the state promotional initiatives indicate that removing all of the tax incentives and ethanol use mandates would have only a modest impact on the overall use of ethanol. And the impact on the farm would be to lower corn prices by about 1¢ per bushel and raise prices of other crops no more than 8¢ to 11¢ per bushel.
Posted by Stu Ellis on November 27, 2008 12:07 AM to farmgate