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Iowa Ag Review

Abstract

Volumetric excise tax credits—more commonly known as blenders tax credits—have been in place since 1978 for ethanol and since 2004 for biodiesel. The ethanol subsidy will fall from its current level of 51¢ per gallon today to 45¢ per gallon on January 1. The biodiesel subsidy is $1.00 per gallon (50¢ per gallon for previously used oils or grease). The subsidy is paid on every gallon of ethanol or biodiesel that is blended in the United States with any quantity of fossil fuel. All biofuels blended with fossil fuels are eligible for the subsidy regardless of where the biofuels were produced or where the blend is consumed. The blenders tax credit reduces the tax liability of blenders, so it is equivalent to the U.S. Treasury writing a check to blenders for each gallon of biofuels they use. The purpose of the subsidy is to increase the willingness of blenders to buy U.S.-produced biofuels and to increase the domestic price of biofuels. It has undoubtedly met these objectives for U.S.-produced corn ethanol. But opponents of the biodiesel blenders credit argue that its main effect is to subsidize biodiesel produced in Southeast Asia, South America, and Europe that is destined for European consumption.