How the RFA Wastes Your Tax Dollars – Part I: How Much is a Job Worth?

Over the next two posts, I will examine some of the tactics used by the Renewable Fuels Association to justify keeping the $6 billion ethanol subsidy that was made almost entirely redundant when the the Renewable Fuel Standard (RFS) was passed into law in  2005. Not satisfied with a market that is mandated by law to grow by 25% between now and 2015, the ethanol lobby insists that they need the subsidies as well. As I will show, they have no qualms about deceiving people to get their way.

In this post, I will cover a tactic that the RFA has previously condemned in others: Paying for self-serving research. I will also show that the amount of taxpayer money they want to spend to save jobs — even by their numbers — is more money than the jobs actually pay.

In Part II, I cover blatant dishonesty in a recent press release from the RFA, and I issue a debate challenge to the RFA in case they want to defend their arguments against rebuttals. I know they like the one-way street of sound bites and press releases, but I think we can learn a lot more about the truth by engaging in a back and forth dialogue.

Twitter Nonsense

I have to confess that I don’t visit my Twitter account as much as I should, but I recently dropped in and saw this little blurb (a “Tweet”, I believe they call it): “With nearly 10% unemployment, @RRapier wants another 100,000+ to be without a job. Who doesn’t get it?”

I thought “What is this nonsense all about?” The note came from a “Robert White”, and appeared to be in response to my post The Stroke of a Pen, in which I highlighted Bob Dinneen, of the ethanol lobby Renewable Fuels Association (RFA), suggesting that we needn’t debate the issue of the $6 billion ethanol subsidies, we just need to write the industry a check. I did a bit of checking, and it turns out that Mr. White is actually employed by the RFA as well. Given that he is paid to promote ethanol, that put the comments in context. But I still wondered about his comment about 100,000 jobs.

Following the Trail

So I started to dig, and found that the RFA is actually the source of the claim that a hundred thousand jobs could be lost if the Renewable Fuels Reinvestment Act (HR 4940) isn’t passed. This has of course been picked up and repeated as gospel by subsidy-friendly senators like Charles Grassley and Tom Harkin. It is amazing to follow the claims; they get more extraordinary with each repetition. Grassley: “Ethanol is good for rural economies, and a recent study found that the failure to extend the VEETC credit and the secondary tariff would result in the loss of more than 100,000 jobs nationwide and reduce ethanol production by nearly 40 percent.” I guess when pork for the constituents is at stake, truth is a casualty. But I am getting ahead of myself.

First, what is the Renewable Fuels Reinvestment Act (RFRA)? From the RFA site:

What RFRA Would Do?

Extend the Volumetric Ethanol Excise Tax Credit (VEETC) of $0.45 per gallon available to oil and gasoline refiners for each gallon of ethanol they blend through December 31, 2015. The VEETC is set to expire at the end of 2010.

Extend the corresponding secondary tariff on ethanol through December 31, 2015. The secondary tariff exists to offset the benefit of the VEETC which is available to all sources of ethanol, regardless of its country of origin. The tariff sunsets at the end of 2010.

Extend the Small Producers Tax Credit until January 1, 2016. This $0.10 per gallon tax credit is available on the first 15 million gallons of ethanol produced by ethanol companies producing no more than 60 million gallons per year. This tax credit expires at the end of 2010.

Extend the Cellulosic Ethanol Producer Tax Credit until January 1, 2016. Currently, cellulosic ethanol is eligible for both the $0.45 per gallon VEETC as well as an addition $0.56 per gallon production tax credit. This tax credit expires at the end of 2012.

Setting aside other ethanol subsidies like the Small Producers Tax Credit, we know an extension of the VEETC in its current form would cost $6 billion next year and rise every year along with ethanol production. But a news release from the RFA a couple of weeks ago warned of the dire consequences if both the VEETC and the tariff aren’t extended:

Ethanol, Ag Leaders Urge Extension of Key Tax Policies

“Without VEETC, ethanol blending will become less economically attractive to refiners, resulting in a substantial decline in discretionary blending, and upward pressure on consumer gasoline prices. As a consequence of reduced demand, ethanol plants will close. One analysis concluded that as many as 118,000 jobs could be lost if Congress fails to extend this important incentive.”

One analysis. Hmm. Now my curiosity — and suspicion — were really aroused.

One of the consultants that the ethanol lobby frequently uses is John Urbanchuk. I have discussed Urbanchuk’s work here before; he was the person who popularized the argument that in 2008, 214 million barrels of ethanol — with an energy content of 165 million barrels of oil — displaced 321 million barrels of oil. That argument was so flawed and goofy (e.g., it completely ignored jet fuel, diesel, etc. that comes from a barrel of oil) that even die-hard ethanol supporters who commented on my blog admitted as much. As I pointed out after taking a detailed look at the numbers in the aforementioned link, I couldn’t find any evidence of oil displacement in the actual data:

What to conclude from this exercise? The easiest conclusion is that the claims of petroleum import displacement have been at a minimum grossly exaggerated. It may even be that ethanol hasn’t backed any petroleum imports out, or that the impact is so small as to be unnoticeable.

If it Looks Like a Duck, and Quacks Like a Duck…

So when I saw the claim of 100,000 jobs lost, I thought “That sounds like Urbanchuk’s oil displacement argument all over again.” But the news stories I was coming across mentioned that the analysis came from a company called Entrix. Urbanchuk’s company was called LECG. Still, the claim was so Urbanchuk-like in its absurdity, I kept digging until I ran across this: Podcast with John Urbanchuk, ENTRIX Technical Director, On the Impact of NOT Renewing Ethanol Blender’s Credit

Biofuels Journal spoke April 6 with John Urbanchuk, technical Director for ENTRIX, Inc., New Castle, DE.

Urbanchuk was hired by the Renewable Fuels Association to do a study on the impact of not renewing the ethanol blender’s credit, otherwise known as the Volumetric Ethanol Excise Tax Credit (VEETC).

Highlights From the Podcast

• The Blender’s credit has been in place since 1978 to help ethanol be competitive with petroleum based gasoline to level that playing field and still provides that today.

• The credit of 45 cents/gallon goes to the blender who adds ethanol to gasoline, not the producer of ethanol.

• Removing the blender’s credit will make ethanol uncompetitive with gasoline and hurting the profitability of ethanol production.

• Removing the credit could result in idled or bankrupt ethanol plants, loss of jobs and increased gasoline costs to the consumer. Could be loss of up to 37% of production.

• Removing the credit would result in higher imports of ethanol because Renewable Fuel Standard still requires ethanol be blended in increasingly higher amounts.

How funny is it that I could peg this as Urbanchuk’s work simply by the absurdity of the claims? So Urbanchuk’s scenario would have more than a quarter of the U.S. ethanol industry shutting down (which Senator Grassley exaggerated to nearly 40%) — despite the fact that capacity is closely in line with the mandated volumes and is set to grow under the Renewable Fuel Standard (RFS) from 12 billion gallons this year to 12.6 billion gallons in 2011 and ultimately to 15 billion gallons in 2015. The ethanol industry has a mandated and growing market, but that’s not enough. Addicted as they are to ethanol subsidies, the RFA needs to fear-monger by suggesting that over 100,000 jobs could be lost, just as Mr. White did in his Tweet — and just as Senator Grassley did in his speech. Incidentally, Urbanchuk’s study actually said 112,000 possible jobs, including all sorts of jobs in support functions (like the person who works at a cafe where the ethanol plant employees eat lunch).

So the analysis that the Renewable Fuels Association had been touting was one that they paid for themselves. I think we all know that you can hire someone to write a report concluding just about anything you want. Cigarette companies have funded research that concludes that cigarette smoking isn’t harmful. Thank You For Smoking comes to mind.

History tells us that research can be bought, and Urbanchuk has a history of delivering exactly what the ethanol lobby wants him to deliver. (Here is another damning indictment of his paper). Imagine the uproar from the ethanol lobby if the American Petroleum Institute trotted out a study that they had paid for that showed zero impact on the ethanol industry from removing the subsidies.

We don’t have to imagine; even today when a report comes out that is critical of ethanol, the ethanol lobby tries hard to link the funding to oil money (e.g., “That university got money from BP, thus all their research is bogus if it is negative toward ethanol.”) The implication is always that any links — even tenuous — taint the results in situations like this. (In fact, here is the good Mr. White doing just that; trying to cast doubt on a person’s arguments by questioning the funding). Yet the RFA is doing the same thing they criticize others over, citing the results of this research that they paid for as a credible source of information. Of course they always neglect to mention that they paid for it.

One interesting point on Urbanchuk’s report. Lately the ethanol lobby has started claiming that gas prices will rise if the credit isn’t renewed. Urbanchuk, whose job numbers they proudly tout, concluded the opposite:

Removing the 45 cents per gallon VEETC would reduce the price to producers by 27.4 percent. While this reduction would increase ethanol demand by nearly 12 percent, the lower price would induce producers to cut supply by nearly 38 percent. This reduction in supply would, in turn, raise ethanol prices 4.9 percent so that the net change in ethanol prices from removal of the tax credit would be 37 cents or 22.5 percent.

How Much is a Job Worth?

But let’s set that aside for a moment, and take the number at face value. If we spend $6 billion per year on extending the VEETC (again, ignoring other subsidies) to save 118,000 jobs (the most inflated number of jobs lost), how much are we paying per job? According to my trusty calculator, that is just over $50,000 per job. From Urbanchuk’s report, the average salary of those mythical jobs is $37,500. Of course we can take tax dollars and “create” jobs. But what I would think you want to do is create jobs that pay more than what you are spending to create them. Also important to keep in mind that it isn’t really 118,000 jobs. It might be a few thousand, but it might be none. After all, plants don’t close down after one bad quarter; the oil industry has lived with those boom and bust cycles forever. But even if it was 10,000 jobs, that amounts to $600,000 to save each job. That’s pretty inefficient job creation.

Incidentally, another recently released study — this one by a group called Advanced Economic Solutions (AES) — also concluded that jobs would be lost if the VEETC isn’t extended. Their analysis showed a loss of 296 jobs and a loss of 380 million gallons of ethanol capacity. The taxpayer cost under that scenario is just over $20 million per job saved and $15.45 per gallon of ethanol capacity saved. AES has consulted for food manufacturers — and they are unhappy with high corn prices — so it can be argued that their research is as slanted as Urbanchuk’s (and the RFA would certainly make that argument). But if I was a betting man I would bet that their numbers are much closer to the truth.

In the short term, domestic demand for ethanol may drop. Some marginal producers may have to accept lower margins, or even operate at a loss for a bit. Now there is a novel concept; instead of firing people, just weather the storm until the mandated volumes pick back up. But you won’t find the RFA talking about scenarios like that; they are in the fear-mongering business: If you don’t extend the subsidies, calamity awaits and the terrorists win. As some of my readers have asked, if the RFA is really so concerned about foreign oil, why they aren’t out lobbying the Des Moines city council to mandate that the city fire trucks, police cars, and city buses use only E85? Why are they boasting about their ethanol exports? I would think with all the concern over foreign oil, they wouldn’t export ethanol just on principle. If they lowered their prices they could sell E85 here at home and displace more of that foreign oil they are so concerned about.

One thing is certain. Job creation with the VEETC — even in John Urbanchuk’s nightmare scenario — comes at too high a price. It is common sense that we don’t spend $50,000 to save a job that pays $37,500. Maybe their hope is that people will be so frightened by the loss of over 100,000 jobs in this economic climate, that they won’t bother to question the cost per job. But hey, I own a calculator.

Part II will show how the RFA manipulates news in such a way that they convey false information.