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REFILE-ANALYSIS-US ethanol industry set to win blend battle

Refiles, replaces phrase "on track for mandate" from first paragraph with "approval for higher allowable blend rates" to clarify that EPA is considering maximum blend rates.

* EPA delays decision on raising level of ethanol in fuel

* Tests show newer cars can run on higher blends

* Advanced ethanol like cellulosic may be hurt by delays

By Chuck Abbott and Timothy Gardner

WASHINGTON, Dec 1 (Reuters) - The U.S. ethanol industry, darling of the powerful U.S. farm lobby, is on track to win approval for higher allowable blend rates that could eventually help it sell billions of gallons more of the fuel a year.

The U.S. government has hinted it may approve higher ethanol blends in gasoline as soon as mid next year, despite howls from the auto industry that a higher ethanol blend might ruin car engines and concerns from some anti-hunger activists who say making fuel from food is folly, [ID:nN01495211]

The Environmental Protection Agency said on Tuesday that cars built since 2001 will "likely" be able to burn fuel blends of up to 15 percent ethanol. The current allowed maximum level of ethanol in regular gasoline for all cars is currently 10 percent. [ID:nN01494040]

EPA said if government tests on burning high blends in cars "remain supportive" it could approve by the middle of 2010 a requirement for gasoline containing 15 percent ethanol -- known in the industry as E15 -- for cars built since 2001.

"It sounds like an implicit promise to go to E15," said analyst Mark McMinimy, at the consulting firm Washington Research Group.

The EPA also said it would take steps to address labeling issues on fuel pumps associated with the higher blends. Analysts read that pledge as a further signal that the agency would eventually approve the higher blends.

Growth Energy, the trade group that filed a petition with the EPA to raise the blend level, said E15 could put an additional 7 billion gallons of ethanol on the market in the near term.

Ethanol production has mushroomed this decade and is set to keep growing, aided by mandates that require use of the renewable fuel, which in the United States is mostly distilled from corn.

"EPA's punt doesn't change the headline, which is a trend toward more ethanol, it just changes the timing of the decision," said Mark Routt, senior staff consultant at KBC Advanced Technologies.

WIDE SLICE OF THE ECONOMY

Routt said the EPA was correct to delay its decision until testing on vehicles was completed. He noted that industries comprising a wide slice of the economy, from oil refining to farming, to engine making, depend on making sure higher blends do not hurt car engines.

Ethanol was once widely touted as a green fuel, but the industry is now under criticism for diverting a third of the U.S. corn crop away from the food supply. Critics say this will worsen food shortages, raise prices and hurt the poor.

The U.S. farm lobby has broad political support, with strong allies in the Obama administration as well as the previous administration of former President George W. Bush.

A host of environmental and food manufacturing groups applauded the delay but ignored signals that the EPA was giving the green light to the ethanol industry.

"Raising ethanol blend percentages without testing what it would do to air quality and vehicle engines is like going in for surgery before getting a diagnosis," said Jeremy Martin, a senior scientist at the Union of Concerned Scientists.

Frank O'Donnell, president of Clean Air Watch in Washington, said the government's move could end up confusing consumers at the pump.

The EPA "appears to be on a course that ultimately might permit two types of ethanol blends: E15 for new cars, and E10 for older cars as well as things such as boats and lawnmowers."

Supporters of the ethanol industry maintain that corn-based ethanol is only a stepping stone to more advanced fuels like cellulosic ethanol which will be made from non-food feedstocks such as wood chips.

Some said the EPA's decision could cause problems in the drive for such advanced biofuels. Routt said the delay on E15 could depress investment in cellulosic ethanol, because the supply of conventional ethanol could become glutted unless more of it is allowed to be blended into gasoline.

"If a mature business like corn ethanol isn't economic then that could spell trouble for cellulosic which is unproven and untested," said Routt.

Cellulosic ethanol plants are expensive and production lags behind the mandates.

Lenders are leery of investment in cellulosic ethanol because of the recession and an industry shakeout that included the bankruptcy of one of the largest U.S. ethanol producers last fall.

But Divya Reddy, an analyst at the Eurasia Group, said reaction was overstated and delay was not a blow to cellulosic which U.S. mandates say will eventually become a bigger market than corn ethanol.

"It would only be a problem if the EPA rejected E15 outright, and that was not the signal we got," she said.

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