February 21, 2011 / 7:34 PM / 7 years ago

Ethanol execs fear U.S. budget cuts to hurt growth

PHOENIX (Reuters) - Budget cuts by Congress and fresh fears about food security are among many obstacles threatening growth of U.S. ethanol, according to industry leaders.

Investments into expanded ethanol production remain stymied by uncertainty about how U.S. tax and energy policy will impact the industry, and access to markets is limited in part by state regulatory barriers to the use of higher level ethanol blends, industry experts said on Monday.

”The challenges facing our industry today are as vexing and complicated as any we have ever faced,“ said Renewable Fuels Association CEO Bob Dinneen in an address to the National Ethanol Conference in Phoenix. ”We need to step up our game.

“Capitol Hill is now ruled by bean counters,” he said.

With Congress focused on slashing the federal budget, incentives like the Volumetric Ethanol Excise Tax Credit (VEETC), are in jeopardy. After a one-year extension was granted in December, VEETC, which offers a 45 cent reduction in federal fuel excise tax, is set to expire at the end of this year.

Congress is looking at several options including, rescinding the incentive altogether, moving it to a variable incentive tied to crude oil or gasoline prices, converting it to a producer credit, converting it to a retailer credit for flex-fuel infrastructure or making the blenders tax credit apply only to volumes blended in excess of federal standards.

”An expiration of the tax incentive is a very real possibility,“ said Dinneen. ”Such an outcome would put the future of this industry in jeopardy.

Congress is looking at phasing out other subsidies, including an import tariff, as part of a sweeping effort to cut federal spending.

President Barack Obama’s fiscal 2012 budget proposal aims to reduce the deficit by $1.1 trillion over 10 years.

GOVERNMENT GUARANTEES

The industry produced 13 billion gallons of ethanol last and year and the alternative fuel represents about one-tenth of the nation’s gasoline supply. The United States leads the world in ethanol production with 204 biorefineries in 29 states. across the country.

Exports are growing with 350 million gallons of U.S. ethanol sold abroad last year, including to Europe and Asia.

There is noted support, in particular for cellulosic ethanol, from both the Department of Energy, which last year awarded a loan guarantee for the first time to a cellulosic ethanol project that will use municipal solid waste to produce ethanol at a facility in Nevada. And the Agriculture Department recently awarded three loan guarantees to cellulosic ethanol projects in Alabama, Florida and Mississippi.

Also helpful to the industry, last month the Environmental Protection Agency increased the maximum ethanol blend rate in gasoline to 15 percent from 10 percent in vehicles built from 2001 to 2006, just months after allowing it for cars and trucks built in 2007 or later.

Still, ethanol company executives say investors remain skittish about pouring much money into production facilities, given both the still-struggling U.S. economy and uncertainty with Congress.

“The one thing that is killing us right now is the lack of a long-term coherent policy,” said Jim Imbler, CEO of ZeaChem, which is building a 250,000 gallon-per-year biorefinery in Oregon.

Rising prices for corn amid global concerns about food security for a growing world population are an ongoing pressure point for corn-based ethanol expansion as well.

A coalition of critics that includes the National Petrochemical & Refiners Association and the Alliance of Automobile Manufacturers are backing a proposal in Congress that would ban the EPA from using federal funds to help raise the amount of ethanol in gasoline.

“We’ll need to respond to the growing chorus of naysayers... and we’ll need to do all of this in a political environment more focused on cutting than spending,” said Dinneen.

(Reporting by Carey Gillam; Editing by Theodore d‘Afflisio)

carey.gillam@thomsonreuters.com; +1 913 663 2658; Reuters Messaging: carey.gillam.reuters.com@reuters.net

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