On January 2007, U.S. President George Bush delivered his annual State of the Union address, in which he unveiled a plan to reduce gasoline by 20% over the next decade, in part by promoting alternative fuel sources. Ronald Steenblik, the Global Subsidies Initiative's Director of Research, and Doug Koplow, founder of Earth Track, estimate that the public costs associated with this proposal could amount to well over a hundred billion U.S. dollars over the next 11 years.

Central to President Bush's proposal is the creation of a new, "alternative fuel standard" (AFS), replacing the "renewable fuels standard" (RFS) now in effect. The RFS requires that at least 7.5 billion gallons (28.4 billion litres) of the nation's transport fuels in 2012 come from biofuels. The AFS establishes a much higher mandate of 35 billion gallons (132 billion litres), albeit reached five years later, in 2017. The AFS also expands the list of eligible fuels to include hydrogen and "alternative fuels," a term often applied to liquid fuels from coal.

Nowhere in his address did President Bush tell the American people what meeting that 35 billion gallons a year target would cost, nor how he had come to decide it was the most cost-effective way to reduce gasoline demand. The Administration's proposals for the new Farm Bill include $210 million to support an estimated $2.1 billion in loan guarantees for cellulosic ethanol projects in rural areas, and another $500 million to fund a "Bioenergy and Biobased Product Research Initiative". But these sums are only drops in the alternative fuels bucket.

The subsidy that counts is the volumetric ethanol excise tax credit (VEETC), which pays companies $0.51 gallon for every gallon of pure ethyl alcohol they blend with gasoline for sale as a fuel. Companies that blend "agribiodiesel" get $1.00 per gallon. These two tax credits are due to expire within the next few years, but the previous history of U.S. government support to biofuels suggests that will not happen. Indeed, there is currently a bill before Congress, the "Renewable Fuels and Energy Independence Promotion Act", that seeks to make these tax credits permanent.

Consider the cost to the Treasury if all 35 billion gallons a year were to be met by ethanol or biodiesel. Consumption in recent years has been growing at an average compound growth rate of 25% per annum. We assume, conservatively, that 7 billion gallons of ethanol and biodiesel will be consumed in the United States in 2007, and then continue to grow by 2.8 billion gallons a year until consumption reaches the mandated 35 billion gallons in 2017. (This, too, is a conservative assumption: with consumption growing at 25% per year, the target level would be reached by 2015.) The total ethanol consumed over those 11 years would be on the order of 231 billion gallons. Multiplying this by the $0.51 per gallon tax credit (the lower of the ethanol and biodiesel tax credits) yields roughly $118 billion.

That would be the minimum subsidy over the coming 11-year period, assuming all of the 35 billion gallon target for 2017 will be met by ethanol (and that the volumetric ethanol tax credit continues to be extended). Because biodiesel has a higher per-gallon subsidy, the larger its share of the mix, the higher the overall cost. Similarly, the more rapidly production ramps up, the larger the overall subsidies will be.

In our simplified example, a range of other government subsidies have been ignored. These include grants or loans for construction of plants, the $0.10 per gallon small producers' credit, and the extra cost born by consumers as a result of maintaining the $0.54 per gallon "secondary" tariff on ethanol, which creates a barrier to imports from low-cost producers, notably Brazil.

While that tariff was due to expire at the end of September 2007, it was recently extended by Congress through the beginning of 2009, continuing a pattern that began soon after the tariff was first introduced in 1980. The same Congressional bill that seeks to make the VEETC and the biodiesel tax credit permanent also seeks to make the tariff permanent. Industry argues that without the export protection, the VEETC would benefit exporters of ethanol to the United States.

Also not counted in our $118 billion figure are state-level incentives, many of which are in the neighborhood of $0.20 per gallon, and some of which range as high as $0.50 per gallon. Rules vary in terms of how much production gets each state tax break, but including state supports as well on the gallons produced between now and 2017 would likely add tens of billions of dollars of subsidies to our total.

As the late U.S. Senator Everett Dirksen is reported to have once said, "A billion here, a billion there, pretty soon you're talking [about] real money."

*Calculations by Ronald Steenblik, the Global Subsidies Initiative's Director of Research, and Doug Koplow, founder of Earth Track (www.earthtrack.net).