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End of Ethanol Subsidies May Be Near

DC Dialogue

Senators broker deal to allow for $668 million of $2 billion in savings to be redirected towards infrastructure and next generation biofuels.

Published on: July 8, 2011

Senate authors of two varying approaches to transforming ethanol policy joined forces and released a bipartisan agreement Thursday to end the current 45-cent per gallon ethanol subsidy and 54-cent per gallon tariff on foreign ethanol by the end of this month and transition savings into ethanol infrastructure needs. Senators hope to have the agreement included in a deficit reduction package that likely will accompany a vote on raising the debt limit later this month.

In June, Senator Dianne Feinstein, D-Calif., sent a strong symbolic message when her amendment to end the tax credit passed overwhelming in the Senate, although it did not go any further. At the same time, Midwest Senators Amy Klobuchar, D-Minn., and John Thune, R- S.D., were trying to push through an alternative proposal that would include the ethanol industry’s desired redirection of some of those funds into infrastructure development to help ethanol better compete with oil.

The agreement will reduce the federal deficit by $1.33 billion and invest $668 million in new technologies to reduce U.S. dependence on oil from the $2 billion in savings that occurs from ending the tax credit July 31.

The tax credit was extended for one year during a lame duck session in 2010. By making the change midyear, the agreement captures the value of what would have been paid out in VEETC for the remainder of the year, starting Aug. 1, and redirects some of those savings into other areas, including deficit reduction and opening the market with infrastructure investments.

The tax credit for cellulosic biofuel production, currently set to expire at the end of 2012, will be extended for three years, with annual caps on gallons, and will be expanded to include promising fuels from algae.

Infrastructure has been a major obstacle in greater ethanol use, and a key point in any agreement on reforming the ethanol tax credits. The agreement extends the existing alternative fuel station tax credit to include blender pumps and extend the credit through 2014 by using 2011 funding only. Specifically a taxpayer may take a 20% tax credit for the installation of alternative fuel infrastructure, up to $30,000, including E85 (85% ethanol and 15% gasoline) infrastructure. This credit is currently scheduled to expire on December 31, 2011. Other fuels that are eligible for the credit include electric charging stations and natural gas refueling stations. The agreement also clarifies that entire cost of dual-use blender pumps qualify for the credit rather than the incremental cost. 

Brian Jennings, executive vice president of the American Coalition for Ethanol, stated the three-year blender pump tax credit is encouraging and ACE plans to work with marketers to try and take full advantage of the increased incentives to convert to blender pumps.

In a joint statement, a coalition of livestock and poultry groups said despite the ending of ethanol subsidies, “the resulting compromise still provides new federal funds for corn-based ethanol, money that would be better spent reducing the deficit or encouraging the development of energy sources that do not compete with feed needs.”

The ethanol industry said there were many positive components of the proposal. Bob Dinneen, president of the Renewable Fuels Assn., appreciated the solution to the recent impasse.Walking away from investments made in America’s ethanol industry cold turkey would jeopardize the future of biofuel production in America, including stifling the progress of advanced and cellulosic ethanol technologies,” he said.

Sen. Chuck Grassley, R-Iowa, said the agreement does salvage efforts to reduce dependence on foreign oil, but he wished for a more robust investment in alternative fuel infrastructure and cellulosic ethanol.

“Overall, the fact that this happened in a vacuum, rather than in an even-handed debate over all energy tax incentives, will always be a raw deal, especially for taxpayers and renewable fuel producers,” Grassley said.

Growth Energy spokesperson Chris Thorne said Growth Energy is “reasonably confident” the agreement has the support to get into the debt ceiling legislation which would need to be passed before August 2. He added, “While this isn’t perfect, it’s certainly a good start and we know there will be an opportunity for lawmakers to make adjustments going forward that should help address Sen. Grassley’s concerns.”

A statement from White House spokesperson Matt Lehrich, noted that the White House is encouraged by the Senate’s efforts to find a “responsible middle ground” on biofuels policy. “Consistent with the Administration’s goals, this deal provides a roadmap for the American biofuels industry to navigate their own future expansion – addressing infrastructure needs while supporting innovation for the next generation of biofuels,” Lehich said in an email.