Case Detail

Case Summary

Should the Ethanol Blender’s Credit Be Eliminated?

Case Number: 5-111-001, Year Published: 2011, Revision Date: November 28, 2011

HBS Number: KEL523

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Authors: David Besanko; Melissa Ulan

Key Concepts

Ethanol, Blender’s Credit, Ethanol Excise Tax Credit, Subsidies, Tax Credits, Energy Policy, Biofuels, Renewable Fuel

Abstract

In December 2010, one U.S. legislative action was largely overlooked in the popular press: the one-year extension of the 45-cent-per-gallon Volumetric Ethanol Excise Tax Credit (VEETC), commonly known as the “blender’s credit.” Both proponents and opponents of the blender’s credit liked to cite data to support their positions. Proponents pointed out the number of jobs created by new ethanol plants, while opponents cited unfavorable energy balances from the use of ethanol and the overall budgetary impact of the blender’s credit. What was less clear—but potentially much more important than the selective data cited by advocates and critics of ethanol—was the overall impact of the blender’s credit on the U.S. economy. In particular, to what extent did the ethanol subsidy—by influencing the allocation of resources to the ethanol market—act as a drag on efficiency in the U.S. economy?

This case presents a history of ethanol in the U.S. and an overview of the market for ethanol-based motor fuel, including data on demand and supply fundamentals. It also discusses the broader U.S. energy market, as well as the U.S. market for corn. The case reviews other policy interventions besides the ethanol tax credit that have an impact on the market for ethanol-based motor fuel, such as tariffs and mandates. Finally, it surveys the ways other countries around the world, such as Brazil, have supported the use of ethanol-based fuel.

Learning Objectives

  • To provide a vehicle for teaching students the basic economic model of government subsidies using supply and demand curves.
  • To determine the deadweight loss of the ethanol tax credit for the year 2006.
  • To enable a rich discussion of the possible benefits of the ethanol tax credit including reducing reliance on foreign oil and reducing carbon emissions.

Careful interpretation of the economic evidence in the case is essential for students to develop a coherent point of view on these potential benefits.

Number of Pages: 36

Extended Case Information

Teaching Areas: Economics, Strategy

Geographic: United States

Industry: Energy, Renewable Fuels

Organization Size: Large

Year of Case: 2010