Despite drama, ethanol policies firm
August 11, 2008
OMAHA (DTN) – Americans may be questioning energy policy more than ever and while oil has no rival in that fight, ethanol’s role in the country has never been debated as much as it is now.
While the ethanol industry’s fate may hinge on a mandate, arguments over the merits of ethanol were not settled last week when the Environmental Protection Agency chose to protect the renewable fuels standard for 2008 and 2009. Groups that vehemently oppose the RFS such as the Grocery Manufacturers Association have already said they will continue to push Congress and the next administration on the issue. At least one governor, New Jersey’s John Corzine, is considering another waiver request. He argues that it is dangerous and not environmentally sound to continually move unit trains of ethanol through his state.
Next week, at least two members of the Senate Agriculture Committee will hold a field hearing over the effect of biofuels on farm commodities. It will be at least the third Senate hearing since May over ethanol and the food-versus-fuel debate. Different House committees have held at least four comparable hearings since this spring. In this case, the two senators expected to hold the hearing, Committee Chairman Tom Harkin, D-IA, and Sen. Ben Nelson, D-NE, come from the two top-producing ethanol states and are holding the hearing in Omaha, the city at the crossroads of all that ethanol production. The perspective will be clear.
“With the current D.C.-generated smear campaign against ethanol, the chairman and I agreed to discuss the facts about these matters where real people daily are dealing with these issues and accomplishing what some in D.C. say can’t be done,” Nelson said. “We need to put a stop to people blaming ethanol for every problem. We need to get the facts out about how it fits into our ag and rural and national economies.”
Given the direct link between ethanol and corn, U.S. grain hasn’t been caught up in such controversy since Soviet agents secretively bought up U.S. wheat and corn in 1972, and left American taxpayers to pick up a large part of the tab in subsidies, forever creating the “Great Russian Grain Robbery.”
Ethanol went from boutique fuel to renewable standard bearer from the moment President Bush signed the Energy Policy Act of 2005. Ethanol became elevated even higher with 2007 energy law. But it didn’t take long for opponents to try to pull ethanol down from its new heights when livestock and poultry producers began to hue and cry about soaring commodity prices. Rep. Bob Goodlatte, R-VA, ranking member of the House Agriculture Committee, said at a hearing last month that the 2007 energy bill created an “unrealistic mandate” for corn-based ethanol.
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“We are seeing the impact of using food for fuel now even before the mandate is realized,” Goodlatte said.
The fight escalated in April when Texas Gov. Rick Perry asked for the EPA to waive this year’s 9-billion-gallon RFS, citing the need to provide relief for strapped livestock producers in his state who were losing money due to high feed prices. The EPA decision was delayed in late July because of 15,000 comments on the subject. Perry’s push also led to 24 Republican senators and 51 congressmen, including Goodlatte, to write the EPA backing the governor’s request.
By the time the United Nations held a conference in late May looking at the global food crisis, ethanol had become a poster child for every bad policy decision driving food prices higher globally.
Still, Congress overwhelmingly passed the farm bill, which included an extension of the 54-cent tariff on imported ethanol until 2010. The 51-cent blenders’ credit will drop six cents to 45 cents a gallon starting in 2009 as a gesture to reflect that the corn-based ethanol industry doesn’t need as much tax incentive. To spur cellulosic plants to get off the ground, the farm bill also offers credits of up to $1.01 a gallon through the end of 2012.
The farm bill also provided $320 million in loan guarantees for biorefineries for advanced biofuels and another $300 million to support the development of feedstocks for such plants.
Despite the goodies in the farm bill, the RFS remains the major incentive for ethanol because it specifically requires refiners to blend ethanol in their gasoline. The Energy Independence and Security Act of 2007 established a 15-billion-gallon RFS dedicated to starch-based, or corn, ethanol. Another 21 billion gallons must come from sources not yet commercialized. The RFS provides a floor, not a cap for the biofuels industry, but the 36-billion RFS by 2022 is larger than the current capacity and production volume from plants either under construction or planned. In that sense, the future of ethanol is in good shape, said Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.
“Regardless of what happens to crude oil prices and corn prices, that RFS will keep things running unless they routinely waive the RFS and it doesn’t look like they are going to routinely waive it,” Babcock said. “That is a pretty rock solid bet. The industry and the investors need four or five years, which the RFS gives them.”
Other economists would suggest ethanol doesn’t need an RFS because the fuel is cheaper than oil so refiners will buy it. Yet, policymakers and industry observers argue that one of the reasons ethanol prices remain considerably lower than gasoline is because refiners don’t like ethanol displacing gasoline in their markets. The mandate is the only way ethanol producers are assured to break into markets controlled by oil companies.
“We’ve never seen them do anything in terms of discretionary blending unless you were giving the ethanol away,” said Todd Sneller, executive director of the Nebraska Ethanol Board.
Beyond the RFS, ethanol policy, or a better description may be “renewable fuels policy,” gets mired in several different ways. The main culprit is legislative language and how that language is interpreted by government agencies. For instance, the ISEA law placed restrictions on where feedstuffs could come from and still be defined as renewable biomass. Crops and crop residue, for instance, cannot come from land that has not previously been used to grow crops. Wood chips or wood residue also must come from a planted, managed, private wood forest. Such restrictions are now being challenged for potentially greatly limiting the ability to produce cellulose that meets the bill’s restrictive definition.
Congress is now trying to resolve some of the restrictions from the EISA law. Leaving restrictions on land and definition of biomass in the renewable fuels standard could effectively kill some second-generation fuels, said House Agriculture Committee Chairman Collin Peterson at a committee hearing in July.
“If this is implemented the way I think it will be implemented, then cellulosic ethanol will never happen in this country,” Peterson said.
In a similar vein, Congress also now is trying to correct a 24-year-old tax provision for pipelines as well. Most major pipeline businesses in the country operate as publicly traded partnerships rather than corporations. This legal structure provides some tax benefits over corporations for the investors by passing all income and costs back to the partners. Publicly traded partnerships are allowed for oil and gas pipelines, but ethanol or other renewable fuels were never included. Supporters in Congress are trying to get the provision attached to a tax extenders bill.
“I don’t know how anybody could make any argument against it if we are treating pipelines for ethanol, from a tax standpoint, the same way we treat pipelines for oil or natural gas,” said Sen. Charles Grassley, R-IA.
Chris Clayton can be reached at Chris.Clayton@dtn.com