Even if you are a staunch proponent of U.S. biofuel policy, it is hard to argue that the current subsidy on grain ethanol serves the purpose it was designed to serve. Further, it does not help ethanol producers compete against oil companies. Why? Because we now have mandates. As I will explain here, this nullifies the purpose of the subsidy.
But first, how did we get to this point? In an effort to spur development of a domestic renewable fuel industry and wean the U.S. off of foreign oil, the U.S. government introduced tax credits for ethanol usage with the Energy Tax Act of 1978. The tax credit was an exemption to the Federal Excise Tax on gasoline, and amounted to $0.40 for every gallon of ethanol blended into gasoline at the 10% level (increased to $0.60 per gallon in 1984 and gradually decreased to the current level of $0.45 per gallon).
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