Whither the ethanol subsidies?

by Jay Sjerven
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As Congress seeks ways to slash federal spending, efforts to jettison ethanol subsidies have strengthened with both the Senate and House of Representatives recently adopting measures that if enacted would either end the principal subsidies to the ethanol sector or halt federal supports for building corn ethanol infrastructure. The changing tide of debate encouraged ethanol advocates in the Senate to introduce legislation that would preserve federal support to the ethanol sector, albeit on a more limited basis.

The principal targets of subsidy opponents in the Senate were the volumetric ethanol excise tax credit (VEETC) and the tariff on imported ethanol that effectively protects American manufacturers from foreign competition.

Under the VEETC, first authorized under the Jobs Creation Act of 2004 and extended under the 2008 farm act, fuel blenders receive a 45c tax credit per gallon of ethanol they blend and sell. The tariff on imported ethanol is 54c per gallon, which discourages imports from lower-cost producers such as Brazil, which manufactures ethanol from sugar cane. Both the VEETC and the tariff on ethanol are set to expire on Dec. 31, 2011.

The Senate on June 16 approved by a 73 to 27 vote an amendment introduced by Senator Dianne Feinstein of California and co-sponsored by Senator Tom Coburn of Oklahoma that would have ended the VEETC and the tariff on ethanol in effect immediately. The amendment, though, was viewed as largely symbolic as it was attached to the Economic Development and Revitalization Act of 2011, which failed to garner enough support to advance to a full Senate vote. Nevertheless, the Senate’s message seemed unmistakable: Federal subsidies to the ethanol sector must be substantially reformed or they will be ended.

Also on June 16, the House of Representatives, by a vote of 283 to 128, adopted an amendment to the 2012 agriculture appropriations bill introduced by Representative Jeff Flake of Arizona that would end federal spending on corn ethanol infrastructure. The House passed the bill, and it was sent to the Senate.

The food industry was broadly supportive of both amendments.

“With corn prices at record levels, these votes convincingly show that the tide has turned against using food for fuel and that Americans want responsible energy policy solutions that do not pit our nation’s energy needs against food security for millions of families,” Pamela G. Bailey, president of the Grocery Manufacturers, said in applauding the amendments.

The U.S. Department of Agriculture projected U.S. corn use for manufacturing ethanol in the current crop year (Sept. 1, 2010-Aug. 31, 2011) at 5,050 million bus, which equated to 40% of 2010 corn production. The U.S.D.A.’s long-term forecasts were for corn use for ethanol to level off and amount to about 36% of domestic corn production in the next several years.

The current Renewable Fuel Standards (R.F.S.) that mandate the minimum levels of ethanol production in the United States call for 36 billion gallons of ethanol production in 2022 with 21 billion gallons to be manufactured from second-generation sources, i.e. non-corn sources. Ethanol produced from corn, estimated at 13.23 billion gallons in 2010, was rapidly approaching its 15-billion-gallon maximum under the R.F.S.

Even before the Senate vote, Senator Amy Klobuchar of Minnesota and Senator John Thune of South Dakota introduced legislation, the Ethanol Reform and Deficit Reduction Act (S. 1185) they said would provide a transition “to a more sustainable model of incentives for domestic renewable fuel production.” They said their proposal would effectively end the VEETC with $1 billion in resulting savings allocated to reduce the federal budget deficit with the remainder, estimated at $1.5 billion, based on a July 1, 2011, effective date, dedicated to supporting other renewable fuel incentives.

The Klobuchar-Thune proposal attracted 16 other sponsors mostly from Corn Belt states and the Upper Midwest and was referred to the Senate Committee on Finance for its consideration.

Under S. 1185, the VEETC would not actually disappear but instead would become a variable rate based on the price of crude oil. When crude oil prices are low, the VEETC would be relatively high but no higher than 30c per gallon. When oil prices are high, the VEETC would be low, and when oil prices are more than $90 a barrel, as has been the case since December 2010, there would be no VEETC.

Senators Klobuchar and Thune met with Senator Feinstein, and the three announced on July 7 an agreement based on S. 1185 but without the variable VEETC. The agreement would have ended the current VEETC on July 31 and would have dedicated two-thirds of the estimated resulting savings, or $1.3 billion, to debt reduction with the remaining $668 million in estimated savings allocated to other renewable fuel incentives. The senators notified Majority Leader Harry Reid of Nevada and Minority Leader Mitch McConnell of Kentucky of their agreement and asked their support in moving it through Congress before the August recess.

Also portending a change in the nation’s outlook on ethanol subsidies were views of some principal Republican candidates for president. Of the Republican hopefuls, former Minnesota gov-ernor Tim Pawlenty indicated he was for phasing out the ethanol subsidies, and former Utah gov-

ernor Jon Huntsman and Rep-resentative Ron Paul of Texas said they were opposed to the subsidies. Representative Michele Bachmann said she thought the subsidies should be reexamined, and former Pennsylvania senator Rick Santorum while in office voted against the subsidies. Only former Massachusetts governor Mitt Romney and former speaker of the house Newt Gingrich remained generally supportive of the subsidies.

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