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Monday, July 19, 2010

What Federal Support, If Any, Will Ethanol Get Next Year?


Slightly more than 5 months are left in 2010, but there are only 30 legislative days scheduled for Congress before the end of the year, when the current ethanol tax credits expire. And the way things are shaping up, there could be some major changes in the way the federal government supports ethanol. Policy proposals are being prepared. Economic analyses are being compiled. And the ethanol economy could be about to change.

The federal energy policy supporting ethanol recently reduced the blenders’ credit from 51¢ down to 45¢, which reduced the amount the IRS collects from fuel blenders by $4.86 billion based on the 10.8 billion gallons of ethanol blended into US motor fuel in 2009. As subscribers of the Cornbelt Update* newsletter learned last week, there are significant proposals to lower the support and to also shift those funds from blending to an ethanol infrastructure. Currently the tax writers in the US House are looking at a 36¢ credit, but there are ethanol critics on both sides of the aisle for a complete withdrawal of support. One of the reasons given is the fact that ethanol is already cheaper than unleaded gas.

If there is not a blenders’ credit, what shape could support for ethanol take, if there is continuing support. One of the major infrastructure proposals is for an ethanol pipeline network that would pump ethanol from the Cornbelt out to metropolitan areas much like natural gas is delivered to cities. Another proposal would shift the blenders’ credit to service stations to install pumps that would deliver higher percentages of ethanol for flexible fuel vehicles.

The latest report that is in play is a report by the Congressional Budget Office (CBO), sought by the Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance. Senator Jeff Bingaman (D-NM) wanted a report that assesses the incentives provided by the bio-fuel tax credits for producing different types of biofuels and analyzes whether they favor one type of bio-fuel over others. In addition, the study estimates the cost to U.S. taxpayers of reducing the use of petroleum fuels and emissions of greenhouse gases through those tax credits; it also analyzes the interaction of the credits and the bio-fuel mandates.

The CBO indicated that national energy policies are met with the support of bio-fuels, which also contribute to national environmental policy objectives, and provide income support to agriculture. The tax credits range from the 45¢ for ethanol, to $1 per gallon for bio-diesel, and $1.01 per gallon for cellulosic ethanol. The CBO report questions if those differences raise questions about equality of fuel and whether taxpayers are achieving certain energy or environmental policy goals. However, the CBO report acknowledges that the bio-diesel tax credit expired in December and policymakers have not reinstated it.

The CBO report states that, “Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to the farmers who grow the corn—in the form of higher prices received for their products.” It adds that cellulosic ethanol could account for a significant share of bio-fuel production, but even with the $1.01 per gallon credit, it is not commercially successful today.

While not making any recommendations to Congress, the CBO economists conclude that the tax credits are somewhat unequal in their impact, based on their energy equivalents. Compared to the energy in a gallon of gasoline, the ethanol tax credit is worth 73¢, the cellulosic tax credit is worth $1.62, and the bio-diesel tax credit is worth $1.08. However, if the three were compared by their ability to eliminate the use of one gallon of petroleum-based gasoline, the cost would be $1.78 for corn based ethanol and $3.00 for cellulosic ethanol, and $2.55 for bio-diesel.

On the subject of reducing greenhouse gases, taxpayers have to pay $750 for corn based ethanol to reduce emissions of one equivalent ton of carbon dioxide, $250 for cellulosic ethanol and $300 for biodiesel. The CBO is quick to say those costs do not include any data for carbon dioxide emissions during the production of crops used to make the biofuels, which is part of the argument surrounding “indirect land use charges.”

The CBO reiterates that federal energy policy has set goals for inclusion of ethanol into motor fuels, but the blenders’ credits have had more promotional power to do that than the annual targets. But in the future, the mandates will provide a guarantee for ethanol refiners that the market exists with such certainty that investments for expansion are warranted, whether or not the blenders’ credits continue to have impact. Additionally, the CBO says while the tax credits may not cause production to increase, the cost of biofuels would be shared by the taxpayers as well as by the motoring public.

The impending expiration of tax credits for ethanol may result in an extension of that program or it may take an entirely new personality. Congress is currently considering whether to renew the blenders’ tax credit, and if so at what level, or if not, how and whether there should be continued public support for bio-fuels. Ethanol, made from either corn or biomass, and biodiesel, all have different tax credits, which provide different values for subsidizing energy and different costs for reducing carbon dioxide emissions.

*For a sample copy of Cornbelt Update, e-mail: .

Posted by Stu Ellis on 07/19 at 01:07 AM | Permalink

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