Ethanol makers seek to reform $6 billion U.S. subsidy

WASHINGTON Thu Mar 31, 2011 5:32am EDT

WASHINGTON (Reuters) - U.S. ethanol makers are working on reforms to replace a 45-cent a gallon tax break that expires this year, said the No. 1 maker on Wednesday, which could help the United State reduce its dependence on crude oil imports.

Tax credits for corn-based ethanol and biodiesel cost around $6 billion a year. The excise tax credits, and an accompanying tariff on ethanol imports, are set to die on December 31. The Senate may vote this week on a proposal to kill them immediately.

Jeff Broin, head of POET, the largest U.S. ethanol maker, said ethanol groups are "working to come out with" a package shortly. Industry groups were riven for months on how to respond to expiration of the tax credits.

"Without question," Broin told reporters, there is "general agreement" the new set of biofuel supports should include funding for so-called blender pumps, loan guarantees for ethanol pipelines and a requirement for automakers to build cars and trucks that can use fuel containing up to 85 percent ethanol.

President Barack Obama called for lower-cost supports for alterative energy in a speech on energy security on Wednesday that proposed cutting oil imports by one-third over 10 years.

Obama pointed to "tremendous promise" from ethanol and next-generation biofuels.

"And going forward, we should look for ways to reform biofuels incentives to make sure they meet today's challenges and save taxpayers money," said Obama.

DESPITE PROGRESS, AGREEMENT NOT YET FINAL

Some points are in dispute among ethanol trade organizations. One group, for instance, would like to see a variable credit for ethanol that would decrease in value as oil prices go up. When crude oil sells for more than $100 a barrel, the credit would be zero. The group also wants to accelerate commercial production of advanced ethanol, which includes ethanol from new non-food feedstocks.

Ethanol is made mostly from corn nowadays. Cellulose, found in grasses and woody plants, is supposed to become the new, dominant feedstock. But financing for cellulosic plants waned during the 2008-09 economic turmoil and has not revived.

Broin, who is a leader in the ethanol group Growth Energy, said the biggest challenge for ethanol is broader access to the fuel market. He said the oil industry has a "90 percent monopoly" in motor fuel sales and said installation of 200,000 "blender pumps" that dispense high blends of ethanol would alter the situation.

"If we can truly open up the market, this (excise tax) incentive becomes less important," Broin said during a Senate hearing.

The Union of Concerned Scientists said huge expansion of incentives is needed to bring cellulosic ethanol to market. It proposed a 30 percent investment tax credit for the first billion gallons of production.

(Reporting by Charles Abbott; Editing by Lisa Shumaker)

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