Policy changes pending for ethanol

Sam Fletcher
OGJ Senior Writer

The ethanol industry this fall will face important policy challenges for which it may not be fully prepared, including expiration of supportive tax credits and tariffs and a government decision whether to expand the amount of biofuel allowed in gasoline, said analysts at FBR Capital Markets & Co., Arlington, Va.

The ethanol blender's tax credit, small producer credit, and ethanol import tariff expire at the end of this year. In today’s tight economic environment, it is increasingly likely Congress will reduce the credit or let it expire, said FBR analysts. Meanwhile, the ethanol industry has not settled on a strategy in the face of criticism from government and private studies, they said.

Sander Levin (D-MI), chairman of the House Ways and Means Committee, proposed reducing the blender's credit to 36¢/gal from 41¢/gal and extending it a year. “The lower extension would cost an estimated $3.8 billion, including extension of the 54¢/gal tariff. However, the proposal was part of a larger energy tax package costing more than $20 billion. Thus far, Democrats have been reluctant to take up such a large tax bill in an election year,” analysts said.

Nor would Republican election gains guarantee relief. Having “long-suffered from a regional split” in the oil vs. ethanol debate, the Republican party is “increasingly fixated on deficits and controlling spending rather than transforming the energy economy,” analysts said. Despite the ethanol industry's strong support of Republican candidates, party leaders tried in the past to eliminate the tax credit. “Similar tax and spending frugality could fuel a potential Republican takeover of the House in 2010,” analysts said.

New competition
Earlier this decade, farmers joined with environmentalists and defense hawks to persuade Congress to enact strong ethanol supports, “including a mandate that the country consume many times more ethanol than it had the ability to produce, transport, or consume,” said FBR analysts. “The intent was to create long-term certainly that would provide an attractive environment for investors to develop an infrastructure that would lead to a transformational development: a large supply of low-impact cellulosic ethanol,” they said.

Although ethanol producers increased production capacity, there was little investment in ethanol pipelines, retail distribution, or vehicles because of the financial crisis and credit crunch. Now ethanol faces increasing competition from electric and natural gas vehicles and is no longer seen as the primary alternative to foreign oil.

“After 3 years of essentially lost investment, the ethanol industry now finds itself at an unsettling crossroads,” said FBR. “In the coming years, the renewable fuel mandate will exceed the 10% blend wall without a viable infrastructure for deploying higher blends. In order to break through the blend wall and achieve the type of investment needed to transform the country's energy economy, yet another serious policy commitment will be needed.”

Analysts claim the government has been slow to approve an increase to the blend wall that would allow the sale of greater than 10% ethanol fuels. “Policymakers are drawn to next-generation ‘solutions,’” FBR analysts pointed out. “In the continual quest to reduce dependence on imported oil, administration officials tend to look beyond corn-based ethanol to the promise of transformational technologies like electric cars and hydrogen vehicles. The president and his secretary of energy are publicly more focused on high-technology transportation solutions, including electric vehicles and plug-in hybrids.”

Nevertheless, FBR Capital Markets said, “Despite the challenges to continued pace of expansion, ethanol's position in the energy mix seems safe. The Gulf of Mexico oil spill highlighted the environmental risks associated with the ever-expanding quest to produce oil. The Environmental Protection Agency has found that most corn-based ethanol is superior to gasoline on a greenhouse gas basis. Most fundamentally, the corn and ethanol supply appears sufficient to meet RFS requirements at costs low enough to displace a significant amount of gasoline even without tax subsidies. As corn production expands, it also solidifies its political influence.”

(Online Aug. 23, 2010; author’s e-mail: samf@ogjonline.com)

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