Ethanol in the Budget Spotlight

Emerson’s Alan Novak, who leads the alternative energy industry team, highlights some of the recent happenings with regard to U.S. federal budget discussions and their impact on the ethanol production industry:

The pending expiration of a long-standing ethanol support mechanism, the Volumetric Ethanol Excise Tax Credit (VEETC), presents a significant challenge for the U.S. ethanol industry. The $0.45 per gallon federal VEETC blender credit and its companion $0.51 per gallon imported ethanol tariff function to put the domestic ethanol industry’s costs on par with outside-the-U.S. competition (principally sugar cane-based ethanol from Brazil). While usually of interest to corn growers, ethanol producers, and industry trade groups, the VEETC has come under greater scrutiny as Washington debates its current spending priorities. Without renewal, the credit expires at the end of 2011 but several bills have been introduced to terminate it immediately.

The current industry view of VEETC expiration is summed up well by the American Coalition for Ethanol‘s Brian Jennings:

We are disappointed senators are willing to reward Big Oil for shamelessly hoarding subsidies, but are willing to penalize the biofuels industry, especially when we’ve voluntarily offered to sacrifice part of the existing tax credit for deficit reduction.

The current dynamic in the U.S. Congress is captured by Senator Dianne Feinstein:

Ethanol is the only industry that benefits from a triple crown of government intervention: Its use is mandated by law, it is protected by tariffs, and companies are paid by the federal government to use it. Ethanol subsidies and tariffs sap our budget, they’re bad for the environment, and they increase our dependence on foreign oil. It’s time we end subsidies that we cannot afford and tariffs that increase gas prices.

Conventional corn-based ethanol currently makes up the vast majority of the US biofuel supply. While a number of second-generation processes capable of making ethanol, gasoline and diesel fuel from biomass and waste are under development they are not yet available in large volumes. These second-generation processes get support from a separate production tax credit (PTC) which is also under debate.

Producers of any of these fuels, be they conventional or second generation, require some measure of regulatory and economic certainty to make the major capital investments needed to advance these alternative sources of energy. Abrupt changes to policies like the VEETC will increase the difficulty in securing the financing required to develop this industry.

Michael McAdams, President of the Advanced Biofuels Association, provides a good summary:

Our nation needs a comprehensive approach that focuses on the future of all biofuels, including advanced drop-in, algae, and cellulosic fuels to deliver as many gallons to back out foreign oil as quickly as possible. In order to best achieve this goal, Congress must consider policies that are technology, feedstock, and product neutral, and provide long term certainty for the markets. We remain committed to working with Congressional leaders and stakeholder groups to find a common sense approach that benefits all biofuels.

Will the move to repeal the VEETC succeed? That remains to be seen, but the amount of discussion around ethanol is certainly higher than it has ever been.

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