Ken Silverstein | Dec 22, 2010

The hoopla over cutting the federal debt is just that - a lot of hot air. Case in point: The country's ethanol industry, which enjoys billions in subsidies and which a bipartisan group of lawmakers are calling for cuts. But the powerful Midwestern farm lobby will prevail, enabling this industry that purports to cut foreign oil consumption to thrive.

Ethanol subsidies, which had been set to expire at year-end, are snuggled well inside of the $858 billion tax law that extends unemployment benefits and provide tax breaks to all Americans. They have been extended for a least another year, which has set up the next round of debates - one that promises to get interesting.

Republicans, who swept into office in November on promises to get government spending under control, will then be forced to choose between upsetting the farm lobby or the spending hawks. Democrats are relishing their dilemma, except some of them will also get caught in the crossfire and particularly those who live in the Midwest.

At issue is whether to continue to extend the current 45-cent a gallon tax credit as well as other incentives to boost the use of bio-fuels. Critics of the largess say that current law already requires the use of ethanol in gasoline products and that there is no reason to pay such high subsidies to producers. At least a dozen U.S. Senators from both parties have asked their respective leaders to reduce the break to 36-cents per gallon.

"These provisions are fiscally irresponsible and environmentally unwise, and their extension would make our country more dependent on foreign oil," says the letter co-authored by Senators Dianne Feinstein, D-Calif. and John McCain, R-Ariz., to name two. "Eliminating or reducing ethanol subsidies and trade barriers are important steps we can take to reduce the budget deficit, improve the environment, and lessen our reliance on foreign oil."

If the current subsidies are extended, which also include a 54-cent per gallon tariff on ethanol imports, it would cost the federal treasury at least $31 billion, the letter says. That is money that would go to the oil companies, which are already required to use 69 billion gallons of corn ethanol under the Federal Renewable Fuels Standard.

Federal policies do favor ethanol production as a way to lessen the dependence on foreign oil. The Energy Act of 2007 laid out a plan to grow ethanol use from a base of 6.5 billion gallons to 15 billion gallons by 2015 and 36 billion gallons by 2022.

Federal law also gives generous tax breaks to ethanol producers, providing them with $3.2 billion in all, says the U.S. Energy Information Administration. The result has created a skewed marketplace. Farmers are replacing other crops with corn, thereby creating shortages of other food products.

Sharper Scrutiny

Critics say that such as strategy is not working. They are pointing out that because most of today's ethanol is made from corn, it is causing food shortages. They are also saying that it is not as clean as it purports to be. Some, in fact, are saying that the emphasis ought to be on developing the electric car or creating higher fuel efficiency standards.

Perhaps the sharpest scrutiny is coming from those who say that the amount of energy it takes to convert corn to ethanol produces less power and more emissions than if oil is just refined and combusted. Among those dishing it out are David Pimentel of Cornell and Tad Patzek of the University of California at Berkeley.

Their studies say that the conversion from corn to ethanol is inefficient, requiring 29 percent more energy than if the gasoline is just burned. The corn-based ethanol, furthermore, won't move a vehicle as far as pure petro.

That study has been refuted by others, which say that improving technologies are the difference. Among those saying that ethanol-blended gasoline is an efficient process is the International Energy Agency in Paris. Another is the U.S. Department of Energy. It says that for every one unit of input, 1.4 units of ethanol are produced. While not earth shattering, chances are the results will only get better over time.

The ethanol picture is potentially brighter if it can be commercially produced from cellulose, which includes wood chips and wheat grass. Such material is abundant and could supply billions of gallons of ethanol that would replace gasoline, although it is still expensive when compared to corn-based ethanol.

The Renewable Fuels Association says that ethanol is a good investment. It cites a study by economist John Urbanchuk showing that domestic ethanol production returned $3 billion more than it took in 2009. Further, "The tariff on imported ethanol is neither a burden on imports nor a factor driving America's dependence on imported oil," says a statement by the group, in response to the letter sent by critics in the Senate.

Under any set of circumstances, ethanol is the beneficiary of huge taxpayer-funded subsidies. Critics are saying that such spending is not only unnecessary but also unwise, claiming that the national treasure should tilt toward the production of the electric car. That argument is countered by the farm lobby, which says that ethanol is cleaner than oil and that it is helping to rebuild the American economy.

The merits aside, the ethanol industry will win. Its political lobby carries more weight than those of the budget hawks - or those pitching alternative fuels or electric cars. Tough times remain, though, requiring lawmakers to make cuts in the overall breaks given to that industry.

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