Makers try to salvage $6 bln/year US ethanol subsidy
* Industry suggests redesign of expiring tax breaks
* Cost of fuel ethanol subsidies would fall
* One change could double corn ethanol's market
* Foodmakers, green groups battle extension
WASHINGTON, Oct 12 (Reuters) - With expiration of the tax breaks looming at the end of the year, U.S. ethanol groups broached a redesign of federal biofuels subsidies worth $6 billion a year with no clear path to success.
Their ideas, circulated among congressional offices as a one-page memo, drew strong criticism from foodmakers, environmentalists and deficit hawks on Tuesday.
Congress has a huge workload for a post-election session in November. Ethanol backers pressed for a straightforward extension of tax breaks during the regular season but made no headway as Congress focused increasingly on deficit control.
"I think it is going to be difficult to gain traction," said Steve Ellis of Taxpayers for Common Sense, a good-government group, in assessing ethanol's chances in November.
Meanwhile, the Obama administration is expected to decide this week whether to allow a 15 percent blend of ethanol into gasoline sold to late-model cars. The standard blend is 10 percent.
The ethanol outline suggested conversion of the current 45-cent a gallon fuel tax break into a tax credit for domestic producers or a similar approach, but at lower cost. It also said corn-based ethanol could qualify as an advanced biofuel, which would more than double the potential market for it.
Two ethanol trade groups declined to discuss the document, calling it a work in progress.
White House spokesman Shin Inouye said the administration looked forward "to continuing to work with interested parties" and hoped to make "solid progress in the near future" to promote biofuels.
During a telephone news conference, Patrick Boyle of the American Meat Institute, a trade group for meatpackers, said ethanol groups were shopping for a one-year extension of the current fuel-tax break at 36 cents a gallon, followed by conversion to a producer credit worth 25 cents a gallon.
"It's still a very, very expensive subsidy program," Boyle said.
Scheduled to expire this year are the 45-cent a gallon fuel-tax credit, the 54-cent a gallon tariff on ethanol imports and a 10-cent a gallon credit for small ethanol producers.
A $1.01 a gallon tax credit for cellulosic ethanol producers expires at the end of 2011. A $1 a gallon credit for biodiesel expired at the end of 2009 and has not been renewed by Congress.
A third of U.S. corn is used to make ethanol.
Kate McMahon of environmental group Friends of the Earth said nearly half the crop would be devoted to ethanol if use rose by 5 billion gallons a year.
She said a surge in ethanol demand could be met in the short term only by putting more land into corn with the threat of increased chemical run-off.
Farm groups and a biotech group say a long-term rise in corn yields as well as improved agronomy will meet the challenge of producing more corn without crowding out other crops.
Archer Daniels Midland Inc (ADM.N), privately held POET and Valero Energy Corp (VLO.N) are the leading distillers. A 2007 law guarantees use of 12.95 billion gallons of renewable fuels this year, almost all of it corn ethanol.
The target rises to 36 billion gallons in 2022, including 21 billion gallons of advanced biofuels. (Editing by Dale Hudson)