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Corn ethanol subsidy fuels debates in budget-conscious Congress

This article first appeared in the St. Louis Beacon, April 18, 2011 -WASHINGTON - During the Roaring '20s, auto pioneer Henry Ford called ethanol "the fuel of the future," predicting that such plant-derived fuel would one day surpass the use of gasoline to run the nation's cars and trucks.

Ford's prediction fell far short, but today -- mainly because of government subsidies and requirements -- ethanol is a component in more than 90 percent of the nation's gasoline blends. And nearly 40 percent of American corn is now sold to produce ethanol.

There's no doubt that the home-grown fuel is displacing foreign oil imports -- with about 13 billion gallons of ethanol taking the place of an estimated 445 million barrels of foreign oil last year. But many lawmakers question whether that displacement is cost effective.

Targeted by fiscal conservatives, environmentalists and "food versus fuel" groups, the nation's subsidy for corn ethanol -- in contrast to support for "advanced biofuels" that are made from substances other than corn -- appears increasing vulnerable in a cost-cutting Congress.

Specifically, the $6 billion Volumetric Ethanol Excise Tax Credit -- which got an extension last December that expires at the end of this year -- is under fire. "The ethanol tax credit is bad economic policy, bad energy policy and bad environmental policy," argues Sen. Tom Coburn, R-Okla.

Last month, Coburn and Sen. Ben Cardin, D-Md., introduced a measure to end the credit, while Sen. Dianne Feinstein, D-Calif., pushed a plan to trim the subsidy and lower the tariff on ethanol imports. In the House, the ethanol subsidy did not survive in the House Republican budget plan approved Friday. And -- even though the Democratic-controlled Senate will develop its own spending blueprint -- opponents ranging from liberal environmentalists to conservative budget cutters are targeting the subsidy there.

"I've got serious concerns about corn ethanol's ability to serve as one of the leading alternatives" to imported oil, said Sen. Frank Lautenberg, D-N.J., at a Senate hearing last week. "The fact is, corn ethanol is only slightly better for the environment than gasoline."

His position is backed by the National Wildlife Federation and other environmental groups that say the advantages of ethanol do not make up for the widespread land-clearing, pesticides and fertilizers used to grow the corn for the fuel. "At a time when Congress is considering deep and painful budget cuts across the board, wasteful and duplicative tax credits for corn ethanol ... should be the first to go," argues the federation's Julie Sibbing.

On the other side of the fence, Corn Belt senators such as Sen. Chuck Grassley, R-Iowa, dismiss the environmental arguments as well as the separate objection that, by increasing the demand for corn, ethanol production contributes to rising food costs. He says ethanol subsidies pale in comparison to oil and gas incentives.

"It's intellectually inconsistent to say that increasing taxes on ethanol is justified but that it's irresponsible to do so on oil and gas production," Grassley said in a Senate speech. "It's even more ridiculous to claim that the 30-year-old ethanol industry is mature and thus no longer needs government support, while the century-old oil industry still receives $35 billion in taxpayer dollars."

Ethanol, Corn an Economic and Political Factor in Illinois, Missouri

The outcome of the debate over the subsidy is potentially important for St. Louis, the headquarters of the National Corn Growers Association and a hub for two states where corn and ethanol production are economic factors.

While corn-rich Iowa and Nebraska are the top ethanol producing states, Illinois ranks third, with 14 ethanol biorefineries, including one in Sauget. Missouri has six ethanol plants, with a total capacity of about 234 million gallons. Nationwide, the Renewable Fuels Association says 204 ethanol biorefineries, mostly in the "corn belt" region, produced about 13 billion gallons of the fuel last year.

Noting that Illinois ranks high in ethanol production, Sen. Dick Durbin, D-Ill., backed the extension in December of the ethanol blenders' credit and the 54 cents a gallon tariff applied to imported ethanol. So did the other senators from Illinois and Missouri.

However, Durbin -- a member of the bipartisan "Gang of Six" senators, including ethanol critic Coburn, trying to develop a long-term budget plan -- has not ruled out backing a plan to phase out the ethanol and some other subsidies, aides say.

While Durbin has not yet taken an explicit stand on renewing the ethanol credit, a spokeswoman told the Beacon that the senator said last fall that "a long-term extension of the tax credit with a price tag of roughly $5 billion annually -- when it is unclear what the market for ethanol will look like over the next five years -- is difficult to justify. But at the same time, Sen. Durbin realizes the impact the tax credit has on jobs in Illinois."

Last month, Sen. Mark Kirk, R-Ill, warned that eliminating the ethanol subsidy would have "a tremendous impact on the central and southern Illinois economy" so he would not want to single out the ethanol subsidy unless it was part of a much broader reform of tax and energy policies. "All federal accounts should be cut in general to reduce the common danger of the deficit, but some sort of unique singling out [of ethanol] should not be done," Kirk said.

While Missouri's senators say that the ethanol subsidy should not be permanent, neither wants to cancel it abruptly. During a conference call with reporters, Sen. Roy Blunt, R-Mo., said the ethanol subsidy should be phased out gradually, over a period of years, in a way that won't hurt the industry.

"Ethanol was sort of the gateway to other kinds of biofuels," Blunt said. "Eliminating that subsidy makes a lot of sense to me, but I will oppose eliminating it all at once. I'll support the fastest possible glide path to zero, but I'm not prepared to jump off a cliff" and cut off the subsidy all at once. He said that "in the next three, four, five years I think we should be able to get to a zero subsidy."

Sen. Claire McCaskill, D-Mo., told reporters that she backs efforts to reduce U.S. dependence on foreign oil imports, and "that means we've got to try to help create markets (for) all of the alternatives that are out there to foreign oil: domestic drilling, nuclear, biofuels, wind, solar -- all of it."

However, McCaskill said, "We cannot get in a position where these incentives become entitlements." She said Congress needs to "figure [out] where is the point that the market can stand on its own. I don't think we're there yet [on ethanol], but I think we've got to be very careful that ... the government doesn't end up being a permanent player in that market."

Pros and Cons of the Ethanol Subsidy

Proponents of the ethanol subsidy and tariff protection contend that it is the most viable U.S.-produced biofuel and can displace a growing volume of oil imports.

But critics contend that, after nearly three decades of various subsidies, ethanol can survive without government incentives. Last month, the Government Accountability Office, in a report on questionable federal programs, described the ethanol tax credit as "largely unneeded to ensure demand for domestic ethanol production."

The GAO report pointed out that the 45 cents a gallon tax credit for fuel blenders that buy and blend ethanol with gasoline is in addition to a federal requirement -- the renewable fuel standard, enacted in 2005 and expanded two years later -- that requires U.S. transportation fuels to contain certain volumes of ethanol and other biofuels. That biofuel level was nearly 13 billion gallons last year and is slated to increase to 36 billion gallons by 2022.

Coburn and other critics of the ethanol tax credit ask: Why does an established industry need incentives when the government already requires fuel blenders to use their product?

Corn is the biggest U.S. crop -- last year's production was worth about $67 billion -- and this country is the world's major exporter of corn. So fluctuations in the price of corn can have worldwide ramifications. A decade ago, only about 7 percent of U.S. corn was used to make ethanol; last year, ethanol's share was 39.4 percent, or nearly 5 billion bushels out of total U.S. production of 12.5 billion bushels of corn.

Because of rising demand and other factors, corn prices have risen sharply and corn futures have more than doubled in the past year. A United Nations agency reported that global food prices reached a record in February.

Upset by higher feed costs, some food industry groups that represent big meatpacking companies such as Tyson Foods Inc. and Smithfield Foods Inc., want to scale back the ethanol because they think corn prices for feed have increased partly because so much corn is diverted to ethanol production.

At a Senate hearing last week, Agriculture Secretary Tom Vilsack, a supporter of corn ethanol, took issue with the assertion that the ethanol subsidy results in higher corn prices that, in turn, have driven up food costs. "Some have suggested that not enough food, feed and fuel can be grown to meet our needs," Vilsack said. "However, we have seen time and time again our nation's farmers and ranchers have risen to that challenge."

Vilsack argued that higher transportation costs, mainly due to the spike in oil prices, are a major factor in the higher rate of food price inflation this year. He said "corn prices have risen sharply since last summer due largely to a smaller than expected corn crop" -- not because more corn has been diverted to making ethanol.

The Corn Growers Association also dismisses the "food versus fuel" argument as unfounded. "The last time corn and food prices rose, the Congressional Budget Office found that factors other than biofuels were responsible for as much as 90 percent of the hike," the association said in a statement this week.

"The World Bank and the government of the United Kingdom have concluded that speculation and energy prices were chief drivers of the 2007-08 spikes in commodity and food prices. How anyone can point fingers at farmers for driving up food prices when they receive less than 12 cents of every food dollar defies common sense."

Rob Koenig is an award-winning journalist and author. He worked at the STL Beacon until 2013.

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