WASHINGTON (Reuters) - Attacked as subsidy addicts, U.S. ethanol makers may need help from friends in high places, including the White House, to hold on to lucrative tax breaks set to expire at the end of the year.
The industry says it is ready to discuss revisions in the incentives, worth $6 billion a year. An amalgam of foodmakers, livestock producers, environmentalists and deficit hawks say there is no need for subsidies because biofuels are guaranteed by law a share of the motor fuel market.
“The ethanol industry is addicted to subsidies,” said Steve Ellis of Taxpayers for Common Sense, a good-government group. “It’s time for the decades-old ethanol party to end.”
Corn-based ethanol is a Farm Belt favorite, valued as a home-grown fuel that reduces reliance on imported oil and creates jobs and income for rural areas. Rural lawmakers back ethanol as a success story.
The average ethanol plant employs 40-50 people and spends $130 million a year on supplies, wages and transport. With 204 plants nationwide, that amounts to thousands of jobs and billions of dollars in outlays.
The largest ethanol makers are privately owned POET, Archer Daniels Midland Co and Valero Energy Corp.
“Ethanol is an expanding market, unlike some of our traditional customers,” said Jon Doggett of the National Corn Growers Association.
In Congress, backers include Democrat Collin Peterson, chairman of the House Agriculture Committee, and Charles Grassley, the Republican leader on the Senate Finance Committee, which oversees tax law.
The farm bloc has influence because rural districts often are a pathway to control of the House. Two-thirds of the most competitive House races are in rural districts this year.
“I think it would be very irresponsible to take away an incentive overnight,” Jeff Broin, head of POET, told Reuters in an interview. “We’re working hard with the White House (and) dozens of lawmakers to get a solution as soon as possible.”
The last chance this year would be the brief congressional session set after the November 2 mid-term elections, when an omnibus tax bill could be a vehicle for ethanol incentives. However, an anti-spending mood has blocked revival of a $1 a gallon biodiesel credit and could affect ethanol too.
Corn growers and ethanol trade groups back a one-year extension of the excise tax credit for ethanol, to be followed by revisions to lower the cost of supports.
The tax credit, now 45 cents a gallon, is the largest of the expiring incentives. Also expiring are the 54-cent tariff on ethanol imports and a 10-cent credit for small producers.
One industry suggestion is to convert the excise tax credit to a producer tax credit at a lower rate. Other changes could include opening the door for corn ethanol to qualify as an advanced biofuel, which could more than double its sales; a fund to help pay for so-called blender pumps; and loan guarantees for an ethanol pipeline.
“It is very much a work in progress, but we all agree extending the tax incentive is critical,” said a spokesman for one of the groups, the Renewable Fuels Association.
Analyst Divya Reddy of Eurasia Group said in a research note that a one-year extension was more likely early next year than in the fall session. Reddy noted proposals to set the tax credit at 36 cents and create a 25-cent production credit.
Trade groups, already at odds over how to get higher ethanol blends onto the market, split in July when a long-term extension of the tax breaks stalled in Congress.
Growth Energy proposed a phase-out of tax credits if an “open market” for ethanol were created through federal support of blender pumps and production of millions of vehicles that can burn higher blends of the alternative fuel.
The Obama administration “believes in continued financial support for biofuels that can help us meet our energy security and environmental goals”, White House energy advisor Heather Zichal wrote in an October 8 blog.
She said the White House and the industry were exploring options for reform of subsidies.
In July, a think tank at Iowa State University said ethanol output would fall 7 percent in 2011 if the tax credit and import tariff lapsed. Six percent of plant capacity is now idle, the result of economic slowdown and a 2008-09 shakeout.
Livestock producers, meatpackers and foodmakers attacked ethanol after grain prices surged in 2006. Oil refiners joined foodmakers and environmentalists to oppose E15, a 15 percent blend of ethanol approved last week for newer cars and trucks.
The National Petrochemical and Refiners Organization said U.S. environmental watchdogs had become “the Ethanol Promotion Agency”.
Purdue University agricultural economist Wally Tyner said high grain prices drove up feed costs for livestock producers.
“With corn up more than $2 this summer and one-third of the crop going to ethanol, they will continue to fight ethanol,” Tyner said. “Ethanol plants can still make money with high corn prices so long as ethanol keeps going up with corn.”
Editing by Dale Hudson