Feinstein in the News
Jul 07 2011
Federal subsidies for corn ethanol have long been considered untouchable in Washington — not least because politicians want the votes of Iowans, who have traditionally held the first nominating caucuses in the contest for the presidency.
But this year, cutting the budget deficit holds more allure than courting corn farmers, making a turning point in ethanol politics.
In Washington, there is growing consensus that the ethanol industry has reached financial stability, making much government assistance unnecessary. A strong majority of the Senate recently voted to end most of the subsidies.
The pressure prompted three influential senators to announce a compromise on Thursday that would drastically cut the financial support and end a tariff on foreign ethanol entirely by the end of July. The White House, which has supported a reduction of the subsidies, said it was encouraged by the latest proposal.
Three Republican presidential candidates — Tim Pawlenty, Ron Paul and Rick Santorum — are also seeking to eliminate or phase out subsidies for the industry even if that hurts them in Iowa. Jon Huntsman has decided he will not even participate in the caucuses, in large part because of his antisubsidy record.
No one is seeking to end the most important government support for ethanol — a federal mandate that gasoline blenders mix increasing amounts of ethanol into gasoline. But at a time when many tax breaks are under scrutiny, there seems to be little political will to continue giving $6 billion a year in federal tax credits to fuel blenders that must buy the ethanol anyway.
Further undermining support for ethanol are food makers and livestock farmers, who say the industry’s huge demand for corn is driving up their own costs, and the oil industry, which has never been fond of a fuel that displaces some of the gasoline in cars and trucks.
Recognizing reality, ethanol makers say they are willing to give up most of the money, although they and their allies in Congress want to spend some of the savings on new subsidies instead.
“They always say, ‘It’s just a few more years,’ and now the few more years has added up to decades,” said Jay Hakes, a former director of the federal Energy Information Agency and now director of the Jimmy Carter Library. Noting that the early subsidies provided by the Carter administration were originally intended to be temporary, he added, “The time for heavy subsidies for corn-based ethanol has passed.”
Corn ethanol production has hit record levels this year, beating government goals and creating a surplus for export. With oil prices close to $100 a barrel, fuel blenders have not needed tax credits to make ethanol economically attractive, since wholesale ethanol is cheaper than gasoline in many markets. And the mandate, known as the renewable fuels standard, has increased the required amounts of ethanol that fuel blenders must use to 7.5 billion gallons by 2012 from four billion gallons in 2006.
Many top ethanol producers, like Valero Energy, Archer Daniels Midland and POET, are stable and profitable — a contrast to the heavily indebted companies of five years ago, some of which were forced into bankruptcy.
Corn prices, meanwhile, have more than tripled since Congress first created an ethanol mandate in 2005, as the portion of the American corn crop devoted to ethanol has grown to nearly 40 percent. Food manufacturers and cattle and chicken farmers say the government’s support for ethanol is, in effect, pushing up food prices.
“Over the last two years, the oil industry has been joined by food producers, environmentalists, as well as the poultry producers who use grain as a feed, to create a powerful coalition against ethanol subsidies,” said Divya Reddy, an energy analyst for the Eurasia Group, a consulting firm.
Reflecting the new landscape, the Senate voted 73-27 in June to end the tariff on foreign ethanol and cut annual tax credits for blenders of ethanol. The vote was largely symbolic since the amendment was attached to a bill that failed. But many analysts view it as a sign that neither benefit is likely to survive this summer’s negotiations between the Obama administration and Congress to deal with the national debt.
Senator Jeff Bingaman, a New Mexico Democrat and the chairman of the Energy and Natural Resources Committee, is among those who have shifted views on ethanol. Although he remains a strong supporter of the renewable fuels standard, he says the tax credit is no longer necessary.
“It doesn’t make sense to provide people with a tax subsidy to encourage people to do what they would otherwise do at any rate,” Mr. Bingaman said. “The fact that we have budget problems is making the need to phase out or eliminate the tax credit that much more urgent.”
Many economists say an end to the blender’s tax subsidy would have minimal impact.
“In the short term, six to nine months, we might see a minor reduction in production,” said David A. Swenson, an economist at Iowa State University. “But within a year or so, we would expect production to climb back to where it is right now because we still have the mandate, which guarantees demand and maintains the price level of ethanol.”
As for the tariff — a 54-cent-a-gallon tax on imported ethanol first imposed in 1980 — analysts say it is unnecessary now because Brazil, generally a leading source, is tightening production. Brazilian refiners make ethanol from sugar cane, but with sugar prices high on international markets, they are making less ethanol and more sweetener.
Mark Marquis, president of Marquis Energy, which operates two ethanol plants in Illinois and Wisconsin, said the industry understands that times have changed.
“We don’t need the blender’s credit,” said Mr. Marquis, who is also a director of Growth Energy, an ethanol lobbying group. “It’s time that it goes away.”
But that does not mean the ethanol industry wants to give up the money entirely.
The fuel blending mandate has resulted in a standard of 10 percent ethanol mixed into gasoline sold at most service stations in the country. But with gasoline demand essentially flat, so is demand for ethanol.
In January, the Environmental Protection Agency said cars and light trucks built since 2001 could safely use a blend with up to 15 percent ethanol, although few stations are now equipped to supply that. So the ethanol industry now wants the government to help it grow by subsidizing gas pumps.
Industry lobbyists are now supporting a compromise announced Thursday by Senator Dianne Feinstein, a California Democrat and a critic of ethanol subsidies, and two ethanol supporters, Senators Amy Klobuchar, Democrat of Minnesota, and John Thune, Republican of South Dakota. That proposal would end the blender’s tax credit entirely and dedicate $1.33 billion of the $2 billion in unspent money from this fiscal year’s budget for deficit reduction.
The remaining $668 million would go toward tax credits for advanced biofuels and for gas stations to install special blender pumps to allow drivers to choose higher concentrations of ethanol in their gasoline.
“We have reached a bipartisan solution that reduces the federal deficit and modifies current biofuels policy without pulling the rug out from under American renewable energy producers,” Senator Thune said in a statement.
The new plan might even end up costing taxpayers less than advertised, since it is not clear that gas stations will install the new blender pumps amid concerns that higher concentrations of ethanol could damage some vehicles.
“Most gas stations don’t want it,” said John Eichberger, vice president for government relations for the National Association of Convenience Stores. “Even with financial support from the government, these products may not provide any return.”
Senator Bingaman said he expected that Congress would end or phase out the blender tax credits this year but might not go along with a new subsidy for gas stations.
That would disappoint Rick Brehm, president and chief executive of Lincolnway Energy, an Iowa corn ethanol distillery, who says the industry still needs help from the government.
“Ethanol is still in the adolescent stage of development,” Mr. Brehm said, “and an adolescent still needs a safety net.”