Ethanol subsidy renewal in doubt
 

By PHILIP BRASHER • pbrasher@dmreg.com • July 24, 2010

Washington, D.C. — The sultry days of July in the nation's capital haven't been kind to Iowa's biofuels industry.

The ethanol industry is fracturing and under attack inside and outside the Capitol. The industry's 45-cent-a-gallon subsidy is due to end at the end of the year, but energy bills that could provide a means of extending the tax credit have been delayed, throwing the legislation's future in doubt.

"My sense all along was that it would get extended at least for a year, but I'm not so sure anymore," said David DeGennaro, a policy analyst for the Environmental Working Group, a leading critic of the subsidy.

Biodiesel producers, meanwhile, are wondering when they will get their subsidy back. The $1-a-gallon tax credit lapsed at the end of 2009.

A renewal of the subsidy had been attached for months in Senate legislation to extend jobless benefits, but this week the Senate passed the unemployment provision on its own, leaving the biodiesel industry once more in limbo.

Biodiesel production has slowed dramatically this year without the subsidy to help producers offset their production costs and hasn't rebounded this month even though a federal usage mandate took effect, said Michael Frohlich, a spokesman for the National Biodiesel Board.

"Obviously, it's not a pretty picture at the moment," he said.

The government's ballooning deficit - the White House on Friday predicted it would hit $1.42 trillion next year - is making it difficult for Congress to pass anything that will increase it further, especially with the fall elections looming.

The biodiesel credit itself has not been unpopular in Washington, but it costs taxpayers much less than the subsidy for the far-bigger ethanol industry. The biodiesel measure was one of several business tax cuts or incentives that expired in 2009 and have not been renewed since. And more tax cuts are due to expire at the end of this year, including the estate tax, compounding the budget challenge for lawmakers.

"It's going to be a very difficult climate," said Tom Buis, chief executive of the ethanol trade group Growth Energy.

His group opened a division in the industry last week when it proposed to phase out the subsidy and use the money to retrofit service stations and convenience stores to sell higher blends of ethanol in their gasoline. The group hoped to include the plan in a broad energy bill that Democrats hoped to push through the Senate before the August recess.

Other ethanol groups and the National Corn Growers Association opposed the plan, preferring instead to keep the subsidy. Senate leaders announced Thursday that they were scrapping, for now, a broad energy and climate bill and instead would consider a narrow bill addressing Gulf oil issues and increasing energy efficiency.

With the election approaching, "the odds are against" any major energy bill passing, Buis said. In that case, the group favors extending the subsidy, he said.

At 45 cents a gallon, the subsidy would cost about $6 billion next year at projected production levels.

In the House, the tax-writing Ways and Means Committee is working on a plan to continue the subsidy for a year but cut it by 20 percent to 36 cents a gallon. Action on it also has been put off until September.

Another challenge for the ethanol industry: A 54-cent-a-gallon tariff on imported ethanol is set to expire this fall, and the Brazilian sugarcane ethanol industry is expressing optimism Congress will cut if not eliminate it.

U.S. industry groups say the tariff should be kept at a similar rate as the domestic subsidy to offset its benefit to Brazilian producers.

Given that the 45-cent ethanol subsidy "seems increasingly likely to be reduced and eliminated," the tariff "should go away as well," said Joel Velasco, the Brazilian industry's Washington representative.

Adding to the U.S. industry's troubles are studies that came out in recent days - one from the nonpartisan Congressional Budget Office and the other from Iowa State University economists — suggesting that ending the ethanol subsidy would not have a major impact on its production. The Congressional Budget Office study said the industry would continue growing even without the subsidy because of rising usage mandates Congress enacted in 2007.

Republicans such as Sen. Chuck Grassley of Iowa will keep the heat on Democrats on the biofuel issue while also pressing them to address the deficit. "I can't predict whether they'll" act on the subsidies, he said.

Democrats say that extensions of tax credits should be paid for with tax increases or spending cuts. Republicans argue that no such offsets are needed so long as tax rates or incentives are being continued at current rates.

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