U.S. ethanol industry faces subsidy battle next year

WASHINGTON (Reuters) - U.S. ethanol makers face a battle over reforming subsidies next year after current incentives are rolled over in the tax package signed into law by President Barack Obama on Friday.

A truckdriver unloads his cargo of corn into a chute at the Lincolnway Energy plant in the town of Nevada, Iowa, December 6, 2007. REUTERS/Jason Reed

The new law extends the 45-cents-per-gallon blenders’ credit worth up to $6 billion a year and the 54-cents-per-gallon tariff on imports through 2011. It also revives through 2011 an incentive of $1.00 per gallon for the smaller biodiesel industry which expired at the end of 2009.

But it left the battle to reform the incentives -- possibly transforming the blender tax credit into a lower-cost subsidy for pipelines and new fuel pumps -- until next year.

Foodmakers and livestock producers say ethanol subsidies shrink margins for their products because they raise prices for corn, the main grain used to make ethanol. Nearly 40 percent of the U.S. corn crop goes to ethanol, and corn futures prices are at two-year highs.

“We anticipate in a time of record deficits, Congress will take an ax to ethanol subsidies,” said Scott Faber of the Grocery Manufacturers Association, pointing to the January arrival of anti-deficit lawmakers elected last month.

Faber and other opponents say biofuels do not need subsidies because a U.S. mandate known as the Renewable Fuels Standard guarantees the fuels a share of the motor fuel market.

“The taxpayers will spend billions of dollars on a totally unnecessary subsidy to a mature industry,” said George Watts, present of the National Chicken Council.

Before Congress approved the package this week, U.S. Senator Dianne Feinstein sought to reduce the ethanol tax credit and tariff to 36 cents a gallon each. One-fifth of senators were on record against an extension of the credit.

Iowa Senator Chuck Grassley, a key figure in winning the extension, said earlier this week the credits may be phased out over five or 10 years as part of a program to make ethanol more widely available.


Growth Energy, an ethanol producers group, wants Congress to replace the blender credit with a program called Fueling Freedom to improve the ethanol infrastructure.

That plan could ease the way for consumers to use gasoline with higher blends of ethanol, known as E15. Most gasoline is 10 percent nowadays.

In October, the U.S. Environmental Protection Agency approved the use of the higher blends for vehicles made since 2006 and a decision on older cars is expected in January. If approved for them, E15 could be burned in the bulk of cars and light trucks.

The Growth Energy plan includes incentives for 200,000 blender pumps, consumer choice for fuel blends, federal loan guarantees for ethanol pipelines, and that all U.S.-built cars would be able to run on gasoline containing mostly ethanol.

Whether those incentives would convince fuel retailers to accept possible liabilities for selling the fuel remains uncertain.

Another ethanol group, the Renewable Fuels Association, has suggested creation of a refundable investment tax credit to bring next-generation biofuels to market.

There are suggestions as well to replace the blender credit with a producer credit at a lower rate. A $1.01 credit for ethanol made from cellulose is scheduled to expire at the end of 2011.

The White House supports the biofuels industry because it provides jobs in the Farm Belt, but has been quiet about how the subsidy battle should play out.

“We look forward to working with Congress to build on our efforts to support and promote biofuels by investing in research and development for advanced biofuels and addressing infrastructure challenges in a fiscally responsible manner,” said Shin Inouye, a White House spokesman.

Editing by Dale Hudson