Entering a Brave New Ethanol World?

For many, there has always been somewhat of a love-hate relationship with ethanol.

Love the fact that it provided a traditional gasoline alternative. Hate that it zapped much of the Midwest’s corn supply and was at least partially responsible for some commodity price hikes.

Love the economic development opportunities it brought. Hate the fact that government subsidies have kept the industry going for so long.

I recall attending a conference at Purdue four years ago in which university economist Wally Tyner explained the problems with the current tax credit with such precision that even I could understand. In fact, soon after Tyner was part of a BizVoice magazine roundtable that explored ethanol and other alternatives.

Now, it appears that may be changing. Industry groups and those in power in Washington are looking at a shift from a credit for the blenders of the fuel to support directly to ethanol plants and the infrastructure of the industry. Here’s the latest:

Industry and congressional officials said nothing has been finalized, but they said a landmark agreement among various ethanol trade groups to begin the transition represents a turning point in the industry’s $40 billion, 30-year history of government support.

Congressional opposition continues to mount given the high cost – nearly $5 billion just to extend the current 45 cents per gallon tax credit for one year. A rare combination of environmental groups and major food and farm groups – bringing together Friends of the Earth and the American Meat Institute, for instance – has long opposed ethanol incentives. Coastal lawmakers have also sought parity for imported sugar cane-based ethanol, which is cheaper to deliver from Brazil and the Caribbean because of a lack of pipeline infrastructure from the Midwest.

Given all of those factors, major industry groups including the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy and National Corn Growers Association have coalesced around a new set of principles. Sen. Amy Klobuchar, D-Minn., has taken the lead in the Senate on working out the plan, and the White House appears receptive. Whether the proposals are less costly than a multi-year extension of existing policy remains to be seen, however.

Under the emerging plan, after a one-year transition the blenders’ credit would be turned into a producer tax credit that goes instead directly to ethanol plants. Klobuchar’s plan would set the amount of the producer credit at 25 cents per gallon, for a period of about four years. While ethanol producers currently get the trickle-down benefits of the blenders’ credit, now they would be direct beneficiaries – that means major tax savings for Sioux Falls, S.D.-based Poet and Decatur, Ill.-based Archer Daniels Midland.

For 2011 only, the blenders’ credit would be extended, but at a reduced rate of perhaps 36 cents a gallon, down from 45 cents. While a final number has not been settled on, that would cut the one year cost by about $1 billion, to $3.8 billion, based on an initial proposal floated this summer by the House Ways and Means Committee.

Since the credit would only be available to domestic producers, it would eliminate the need for import tariffs that were put in place to offset the incentive oil companies have to use ethanol from wherever they can get it cheapest and quickest – generally either directly from Brazil or through Caribbean intermediaries where they can import the fuel duty-free. For 2011 only, the tariff would be extended but cut to 36 cents, down from the current 54 cents.

As part of the deal, which sources stressed has not been fully fleshed out, financial support would be given to accelerate development of "flex-fuel" vehicles that can run on heavier ethanol volumes, and "blender pumps" at gas stations to accommodate the fuel. The industry is also seeking loan guarantees to help build more ethanol pipelines.


One thought on “Entering a Brave New Ethanol World?

  1. While not as good as the current tax credit, something must be done to support this emerging industry. Furthermore some transitional support to the Ethanol plants must be given as oposed to more support for big oil. The long term nature of this is necessary for invstment confidence as a variety of feedstocks and processes are developed.

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