The Iowa Corn Growers Association expressed disappointment last week on the U.S. Senate's passage of an amendment that would institute the immediate repeal of the federal tax credit for ethanol blenders and the import tariff on ethanol coming into this country. The Senate voted on June 16 overwhelmingly to abolish the 30-year-old subsidy for corn ethanol, a stunning bipartisan rebuke to an industry whose once significant political clout has given way to concerns about the federal deficit and rising food costs.
The 73 to 27 vote was largely symbolic because it was on a bill that's unlikely to become law. But even supporters of the ethanol industry concede the existing subsidy is doomed. The 45-cent-per-gallon tax credit refiners receive and a tariff on imported ethanol are both due to expire at the end of 2011, but talks are underway among key senators on the issue to scrap the subsidy early and use some of the savings to subsidize the cost of retrofitting service stations to sell higher blends of ethanol. That would increase the potential market for the biofuel.
Ending ethanol subsidies would raise fuel prices for Americans
"This vote on the repeal indicates extreme short sightedness by U.S. Senators to raise prices at the pump for millions of Americans in tough economic times," says Craig Floss, CEO of the Iowa Corn Growers Association. "The economic impacts of repealing the ethanol tax credit are tremendous when you consider jobs, income and an average household savings of $800 per year on fuel alone. This certainly leaves a huge unknown in the average American's household budget."
The elimination of the Volumetric Ethanol Excise Tax Credit (VEETC) could result in the ethanol industry reducing production by 38%, he says. This would significantly impact an industry that has provided and supported more than 400,000 U.S. jobs and nearly 50,000 jobs in Iowa. Plus, the loss in ethanol production could result in the shedding of approximately 112,000 of jobs, in all sectors of the economy.
Ethanol production in 2010 added more than $50 billion to the national Gross Domestic Product and displaced the need for more than 445 million barrels of imported oil, the equivalent of 13% of total U.S. crude oil imports.
Oil industry gets $280 billion in subsidies, ethanol only $16 billion
"The oil industry receives up to $280 billion a year in government subsidies," says Floss, "while the ethanol industry receives tax incentives (to increase blending of ethanol in oil supplies) of just $16 billion. This vote seems to be a vote against the U.S. Senate's own energy independence and most regrettably, higher gas prices for Americans."
Of course, there is considerable disagreement on this issue. A number of economists say farmers and ethanol producers will survive a subsidy cut without a major impact. "The fact that we still have the mandates in place means that any effect on the corn market is going to be muted," says University of Missouri economist Pat Westhoff.
Opponents of the subsidy argue that it is unnecessary given that refiners are already required under a 2007 law to use increasing amounts of ethanol each year, as mandated by the government's Renewable Fuels Standard (RFS). "We're ready to repeal unnecessary subsidies because we have a big federal deficit to address," says Max Baucus, D-Montana, chair of the U.S. Senate Finance Committee. His committee has jurisdiction over the ethanol subsidy.
Iowa's two U.S. senators voted to continue the subsidy and tariff
In last week's U.S. Senate vote, 33 Republicans, 38 Democrats and two independents voted to terminate the 45-cent per gallon tax credit on July 1, 2011 along with the 54-cent per gallon tariff on ethanol imported into the United States. The subsidy's support in the Senate voting came almost exclusively from Midwest senators, including Tom Harkin and Charles Grassley from Iowa.
USDA Secretary Tom Vilsack has warned Congress against abruptly ending the industry's subsidies, arguing that it would lead to widespread job losses, a claim disputed by some economists. Meanwhile, the Obama administration has released a statement saying it is "open to new approaches that meet today's challenges and save taxpayers money."
The lead sponsor of the anti-ethanol legislation that the Senate voted on last Thursday was California Democrat Senator Diane Feinstein. Feinstein says she is talking with ethanol industry leaders about a compromise. Thursday's vote was a dramatic reversal from a vote on Tuesday when the Senate voted to preserve the subsidy after Democrat leaders objected to the method that Sen. Tom Coburn, R-Oklahoma, used to force the issue onto the Senate floor for debate.
However, the ethanol industry was bolstered by a second Senate vote on Tuesday June 14, which went 49-41 rejecting a proposal by Sen. John McCain, R-Arizona, McCain's bill sought to block the Obama administration from subsidizing the installation of ethanol pumps and storage tanks across the nation. The U.S. House approved a measure earlier in the day 283-128 as part of an appropriation bill for the USDA.
There is support to shift some federal aid into blender pumps
As has been previously pointed out, the bill with the amendment attached to it that would do away with the federal ethanol subsidy probably won't pass. However, the Senate vote on the amendment was important because it shows the industry has support in that chamber, for shifting at least some of the federal aid the ethanol blenders now are getting into infrastructure. The ethanol industry also hopes Congress will create a subsidy for ethanol production that could kick in should the price of oil collapse at some time in the future.
Falling oil prices create less demand for ethanol because they make it more expensive compared to gasoline. "Because fuel refiners are already using more ethanol than they are required to use, down comes the price of corn, if oil prices fall," explains Iowa State University economist Bruce Babcock. "Because refiners have been using more ethanol than they are required to do so under the federal RFS mandate this year, abolishing the ethanol subsidy immediately could push down the price of corn." Corn prices soared to near $8 per bushel recently because of strong demand globally, tight grain supplies and weather-related problems with planting this spring.
If the subsidy were eliminated, use of ethanol could fall a billion gallons below the mandated levels (12.6 billion this year and 13.2 billion in 2012) because of credits refiners have been accumulating, says Babcock. After that, the use of ethanol would rise again. Abolishing the subsidy July 1, as the Senate voted to do, would save taxpayers about $2.4 billion this year, he says.
Broin says ethanol tax credit reform must include infrastructure
Ethanol can compete with petroleum-based gasoline and bring down gasoline prices if given the chance, says Jeff Broin, chairman and CEO of Poet LLC, the nation's largest ethanol producing company.
Following a busy week of legislative activity, Broin reiterated that the most important aspect of ethanol tax credit reform is creating an open fuel market that allows ethanol to compete with gasoline.
"The ethanol tax credit has played an important role in developing the American ethanol industry and creating the only existing alternative to foreign oil," says Broin. "With the credit scheduled to end after this year, we have seen lots of proposals for how it should be structured in the future, many of which have merit. We also understand that this debate is taking place at a time when the federal government is in tough financial shape."
"That's why we are supportive of the efforts of South Dakota Representative Kristi Noem to fashion a bill that would end the tax credit early, increase revenue for the government and build infrastructure for ethanol," says Broin. "The biggest challenge facing the ethanol industry and American motorists is a lack of competition at the pump, and any tax credit reform effort must address that challenge. Giving choice to consumers would allow ethanol to compete directly with gasoline and lower prices at the pump."