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Addressing duplicative federal efforts directed at increasing domestic ethanol production could reduce revenue losses by up to $5.7 billion annually

Why Area Is Important


Congress supported domestic ethanol production through a $5.4 billion tax credit program in 2010. The Volumetric Ethanol Excise Tax Credit (VEETC or the ethanol tax credit), a 45-cent-per-gallon federal tax credit, is provided to fuel blenders that purchase and blend ethanol with gasoline. Congress also supported domestic ethanol production through a renewable fuel standard (RFS or the fuel standard) that applies to transportation fuels used in the United States. First enacted in 2005 and expanded in 2007, the fuel standard generally requires overall transportation fuels in the United States to contain certain volumes of biofuels, such as ethanol and biodiesel. The fuel standard generally requires rising use of ethanol and other biofuels, from 12.95 billion gallons in 2010 to 36 billion gallons in 2022. At present, the fuel standard is largely met from conventional biofuels—defined as ethanol derived from corn starch—which made up 12 billion gallons of the 12.95 billion gallon fuel standard for 2010. Of the 36 billion gallon total required for 2022, 15 billion gallons can come from conventional biofuels. The other 21 billion gallons are to come from advanced biofuels such as ethanol made from the cellulose of plants. To meet the RFS, the Departments of Agriculture and Energy are developing advanced biofuels that use cellulosic feedstocks, such as corn stover and switchgrass. The Environmental Protection Agency administers the RFS.

What GAO Found


The ethanol tax credit and the renewable fuel standard can be duplicative in stimulating domestic production and use of ethanol, and can result in substantial loss of revenue to the Treasury. If reauthorized and left unchanged, the VEETC's annual cost to the Treasury in forgone revenues could grow from $5.4 billion in 2010 to $6.75 billion in 2015, the year the fuel standard requires 15 billion gallons of conventional biofuels. The ethanol tax credit was recently extended at 45-cents-per-gallon through December 31, 2011, in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312). However, as GAO reported in August 2009, given the requirements of the fuel standard, the ethanol tax credit is largely unneeded today to ensure demand for domestic ethanol production.

Since the 1970s the federal government has provided increasing levels of support to the domestic ethanol industry. The Energy Tax Act of 1978, among other things, provided tax incentives designed to stimulate the production of ethanol for blending with gasoline. These tax incentives were restructured in 2005 as the Volumetric Ethanol Excise Tax Credit. In addition, the Energy Policy Act of 2005 created the RFS, which established increasing annual floors for the amount of renewable fuels to be blended into U.S. transportation fuels. The act generally required transportation fuels in the United States to contain 4 billion gallons of renewable fuels, such as ethanol and biodiesel, in 2006 and 7.5 billion gallons in 2012. The Energy Independence and Security Act of 2007 expanded the RFS by substantially increasing its annual biofuel volume requirements, including up to 9 billion gallons of conventional corn starch ethanol in 2008 and up to 15 billion gallons of conventional corn starch ethanol in 2015. To offset the advantage foreign ethanol producers may gain from the ethanol tax credit, a 54-cent-per-gallon tariff is placed on imported ethanol.

Both the ethanol tax credit and the fuel standard create demand for domestic ethanol production. Fuel blenders receive the ethanol tax credit for each gallon of ethanol they combine with gasoline and sell, yet they are also required under the fuel standard to acquire and blend specified volumes of ethanol with gasoline. As GAO reported in August 2009, the ethanol tax credit was important in helping to create a profitable corn starch ethanol industry when the industry had to fund investment in new facilities, but it is less important now for sustaining the industry because most of the capital investment in corn starch ethanol refineries has already been made. As of January 2010, the domestic corn starch ethanol industry had 13 billion gallons of refining capacity with an additional 1.4 billion gallons under construction, according to the Renewable Fuels Association. This domestic refining capacity is nearing the effective fuel standard limit of 15 billion gallons per year for conventional ethanol beginning in 2015.

Importantly, the fuel standard is now at a level high enough to ensure that a market for domestic ethanol production exists in the absence of the ethanol tax credit and may soon itself be at a level beyond what can be consumed by the nation's existing vehicle infrastructure. The ethanol content in gasoline available for most vehicles is 10 percent. This 10 percent limitation results in an upper bound of about 15 billion gallons of ethanol that can be blended into the nation's fuel pool. While EPA recently allowed newer vehicles to use gasoline that contains up to 15 percent ethanol this fuel is not yet readily available.

Actions Needed


The VEETC will cost $5.7 billion in forgone revenues in 2011. Because the fuel standard allows increasing annual amounts of conventional biofuels through 2015, which ensures a market for a conventional corn starch ethanol industry that is already mature, Congress may wish to consider whether revisions to the ethanol tax credit are needed. Options could include the following:

  • Maintain the VEETC at current levels.
  • Allow the VEETC to expire at the end of 2011.
  • Reduce the VEETC as Congress did in the 2008 Farm Bill, when the ethanol tax credit was reduced from 51 cents to 45 cents per gallon.
  • Phase out the VEETC over a number of years.
  • Modify the VEETC to counteract fluctuations in other commodities that can influence ethanol production, such as changes in crude oil prices. For instance, the ethanol tax credit could increase when crude oil prices are low and decrease when crude oil prices are high.

Framework for Analysis


The information contained in this analysis is based on the related products listed under the "Related GAO Products" tab. In addition, information on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and information on tax expenditure estimates and domestic ethanol refining capacity were updated from more recent sources.

Area Contact


For additional information about this area, contact Frank Rusco at (202) 512-3841 or