Ethanol subsidy hits some resistance

The ethanol subsidy is running into trouble in Congress.

Citing a congressional study of the cost of the 45-cent-per-gallon tax credit, the chairman of the Senate energy committee issued a statement Wednesday saying that the subsidy should not be "reflexively" extended when it expires at the end of the year.

Sen. Jeff Bingaman, D-N.M., "thinks Congress needs to take a careful look" at the cost of the subsidy "as it decides whether or not to renew it," said spokesman Bill Wicker.

A lapse in the subsidy could reduce demand for ethanol. Iowa's biofuel industry adds nearly $12 billion, or about 9 percent, to the state's gross domestic product, according to the Iowa Renewable Fuels Association.

The study by the Congressional Budget Office evaluated biofuel subsidies by the energy content of the products and found that it costs taxpayers $1.78 to reduce gasoline consumption by one gallon using corn ethanol. The cost rises to $3 with ethanol made from crop residue and other forms of plant cellulose, for which there is a $1.01 per gallon tax credit.

The Renewable Fuels Association said the congressional study did not fully account for the benefits of biofuels and the "clear destruction wrought by fossil fuels."

Separately Wednesday, House Agriculture Committee Chairman Collin Peterson, D-Minn., warned members of the National Corn Growers Association that Congress was unlikely to provide a long extension of the ethanol credit and that it could even lapse at year's end.

A $1-a-gallon tax credit for biodiesel lapsed at the end of 2009 and hasn't been renewed. The biodiesel subsidy isn't controversial by itself. But an extension of the credit has been bogged down because it's a part of legislation that includes an extension of jobless benefits and other measures that would add to the federal budget deficit, which has been a major issue in Washington.

The corn growers group is counting on Democratic congressional leaders to protect vulnerable Midwest lawmakers by getting the ethanol subsidy extended ahead of the November election.

A bill pending in the House would continue the tax credit for five years, but Peterson said, "I don't think that's very realistic." He added, "We'll be lucky to get a year extension ... and we may not even get it on time."

Peterson also said there would be an effort to reduce the subsidy, something he would oppose unless the money saved was used to subsidize the cost of retrofitting service station pumps to sell higher blends of ethanol.

Dave Nelson, a corn grower who is chairman of ethanol producer MGP Cooperative in Belmond, Ia., said the ethanol subsidy has strong enough support in the Senate that Congress is unlikely to let it lapse.

He said a lapse in the subsidy "could be disastrous." But ethanol producers could weather a temporary loss of the tax credit better than the biodiesel industry could because of the relative production costs, he said.

A lapse in the subsidy could temporarily reduce demand for ethanol by the refiners and other companies that blend the product with gasoline, said Bruce Babcock, an economist at Iowa State University. However, the reduced production could raise the price of ethanol, he said. In addition, a federal mandate for use of the fuel additive "will keep almost all plants operating," he said.

As for Peterson's warning that the subsidy could lapse, Nelson said, "He's trying to lower our expectations."

Peterson disclosed that he's been meeting with representatives of the oil and automobile industries and trade groups representing convenience stores and service stations to try to resolve issues that could prevent ethanol sales from expanding significantly. Gasoline retailers, for example, oppose higher blends of ethanol unless they are given immunity from lawsuits for damage that could be caused by the fuel.

Another problem Peterson sees: The Environmental Protection Agency is likely to require special labeling of pumps that dispense ethanol in blends of greater than 10 percent. The labels will say that the higher blends should be used only in newer vehicles.

source: desmoinesregister