The current legislation that enables ethanol blenders to receive a 45 cent per gallon incentive expires at the end of the year. In anticipation of new legislation, a proposal was developed by University of Illinois economists for a variable incentive program that could save U.S. taxpayers more than $13 billion.

"There are proposals that would eliminate the tax credit entirely and others to keep it exactly as is," said U of I agricultural economist Scott Irwin. "We decided to take a look at a different form of tax credit that would be keyed to the incentives of the blenders themselves rather than just giving them a fixed amount of tax credit regardless of the economics of blending."

The current tax credit incentive arrangement is a direct payment with considerable expense associated with it —about $4 to $5 billion per year, Irwin said. The proposal is an attempt to more efficiently target the incentives to the blenders of ethanol when they need it, but how?

One idea is to key the blenders' credit to the price of crude oil. "When the price of crude oil is very high, blenders might not need a credit, and when it is very low, they may need a large credit as an incentive to blend ethanol," Irwin said. The problem is that there is quite a bit of volatility among energy prices, he said.