Working Paper

Who Did the Ethanol Tax Credit Benefit? An Event Analysis of Subsidy Incidence

Apr 11, 2018 | David A. Bielen, Richard G. Newell, William A. Pizer

Summary

We estimate the degree to which the US ethanol tax credit benefited different segments of the transportation fuels system, including ethanol producers, corn farmers, gasoline blenders, and consumers.

Abstract

At the end of 2011, the Volumetric Ethanol Excise Tax Credit (VEETC), which had subsidized the blending of ethanol in gasoline, was allowed to expire. During its tenure, the subsidy was the subject of intense scrutiny concerning who benefited from its existence. Using commodity price data, we estimate the subsidy incidence accruing to corn farmers, ethanol producers, gasoline blenders, and gasoline consumers around the time of expiration. Our empirical approach contributes methodologically to the event studies literature by analyzing futures contract prices (as opposed to spot prices) when possible. Ultimately, we find compelling evidence that, at the date of VEETC expiration, about 25¢ of the 45¢ subsidy per gallon of ethanol blended was captured by ethanol producers and possibly others further up the agricultural supply chain. We find suggestive, albeit inconclusive, evidence that a portion of this benefit (about 5¢ per gallon) was passed upstream from ethanol producers to corn farmers. Most of the remainder seems most likely to have been captured by the blenders themselves. We find no compelling evidence that any part of the subsidy was captured by oil refiners or by gasoline consumers in the form of lower gasoline prices.