August 16, 2022

Ethanol Subsidies Besieged

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.

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