Senate to Vote on Ending Ethanol Tax Incentives

by Brian McGraw on June 10, 2011

in Blog

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In what is being described as an ambush, Senator Tom Coburn (R-OK) has successfully forced a vote (next Tuesday, June 14) on legislation that would, upon July 1, terminate the ethanol tax credit and corresponding tariff. A back of the envelope calculation suggests it would save approximately $3 billion in the remainder of 2011.

According to the article, Coburn is cautiously optimistic that he has 60 votes. Politico gets it right, this is a big deal regardless if it passes:

Regardless of whether the underlining economic development legislation gets through the Senate and House and to the president’s desk, a vote on Coburn’s amendment could be a major symbolic vote.

Ethanol backers have been looking to try to stave off such moves by working behind the scenes on ways to quickly move off of the blender tax credit and transition to federal assistance for blender pumps and other infrastructure to grow the market base for ethanol and other biofuels.

Even if he gets the necessary votes in the Senate, it seems unlikely that both the House passes similar legislation that President Obama then signs. However, if this gets a significant number of votes, it could spell doom for the future of the industry. A repudiation of tax incentives for ethanol will certainly limit the industry’s ability to lobby for infrastructure assistance, which they have successfully framed as ending the subsidies. Of course, re-directing the current subsidies into money for blender pumps and ethanol pipelines is not in any form an “end” to the subsidies.

The industry, caught off guard, is angry:

The RFA statement from President and CEO Bob Dinneen is as follows:

“This is the same kind of political gamesmanship that nations like Iran and Venezuela are exercising to keep consumer energy prices artificially high and Americans addicted to oil.  If this were truly about sound policy and concerns over energy tax subsidies, then this amendment would include efforts to repeal the billions of taxpayer dollars oil and other mature energy industries receive each year while posting tens of billions of dollars in profits quarterly.  As few observers give this bill any chance of getting to the president’s desk, Sen. Coburn’s efforts are yet another example of oil-patch politics trumping sound national energy policy.  We encourage Sen. Coburn to lay down his arms and work with the ethanol industry to craft thoughtful and fiscally responsible legislation that allows for continued innovation and growth of domestic biofuel production and use without pushing the industry off a cliff.

“Ethanol is the only alternative to imported oil available today and the only technology keeping money out of bank accounts in Caracas and Tehran. Pulling the rug out from under a still maturing industry would force consumers to pay more at the pump, do nothing to mitigate impacts of rising food prices resulting from exorbitant oil prices, and jeopardize the commercialization of promising new ethanol and biofuels technologies. This is an amendment meant with an eye toward reelection, not deficit reduction.”

Despite their doom-saying, the industry will not be pushed off a cliff. Federal law still requires the production of something like 10 billion gallons of ethanol per year. It is telling that they refer to themselves as a still maturing industry, over 30 years after they began receiving subsidies, and given that they are now receiving tax credits for ethanol that is being exported to Brazil.

 

 

 

Johnette Beiley June 10, 2011 at 6:37 pm

This is certainly a marvelous article. Thanks a lot for making the effort to detail all this out for all of us. It’s a great guide!

Bill_USA June 11, 2011 at 12:37 pm

Regarding whether or not the ethanol fuel industry is mature or not, the actual time since we became ‘serious’ about making fuel from ethanol has been about 10 years. Three quarters of the production capacity in the Ethanol fuel industry is 10 years old or less. Even more important, is the fact that process and engineering/plant design improvements are being developed every year which can result in efficiency and yield gains to the ethanol production process. Whether process and design changes ae being developed is the legitimate measure of how mature and industry is.

However, these innovations require investment. It should be noted that investors are not speculators; businessmen not gamblers. Nobody is going to invest millions of dollars in an enerprise to break even (because in part, oil prices still fluctuate wildly due to he actions of speculators) making forecasting revenues and therefore profits very difficult. Keeping a business in the black is not a matter of the average trend over a period of several years. As I said above, since the vast majority of the production capacity of the ethanol industry is less than 10 years old this means that most of (the most efficient by the way) ethanol producers have very large fixed costs in the form of debt payments. All you need is a quarter or two of inadequate revenues or costs slightly higher than projected and you can be introuble with your creditors and be forced into bankruptcy.

No investor, no businessman commits time and treasure to go into bankruptcy or to make a few cents on the dollar. If you are assuming considerable risk you want adequate compensation. And that is more than breaking even or making a few percentage points more than you would in Treasury Bills.

The real reason for the assault on ethanol is that it is cutting into the Oil industries profits by reducing the price of gas. Francisco Blanch, Chief Commodities Strategist for Merrill Lynch said (Wall Street Journal, April 2008) ethanol is bringing down the price of gas about 15%. So, while the Blenders Tax Credit for Ethanol cost about $6 billion in 2010 ethanol saved us about $70 billion in a lower price for gas. Of course, this means it also COST the OIL companies $70 in lost revenue. That is why McCain and especially Coburn will be well compensated by the Oil industry for their services if they are able to kill ethanol (without the down-side risk cushion of the VEETC you will see private investment in Ethanol fuel dry up quite quickly). Note that Coburn recieves $250,000 in contributions from the Oil industry in the last several years (see: Opensecrets.org).

Bill_USA June 11, 2011 at 12:44 pm

Ethanol recently began being exported to Brazil because the cost of sugar has risen is out-competing Ethanol for the sugar cane and impacting ethanol production.

Also, large oil companies have bought up significant stakes in ethanol producers in Brazil and guess what, they haven’t been making the kind of investments in production capacity they should have been (surprise, surprise!).

Joshua June 13, 2011 at 6:51 pm

“Ethanol is the only alternative to imported oil available today…”
BS! I run BioDiesel in my pickup today made by a local Arizona refiner.
More out there…

Still it is only a tax credit vs. a subsidy. So you have to break even or make money before tax is even an issue.

Dave June 16, 2011 at 10:33 am

The distortions caused by the ethanol subsidy have had significant impacts on all commodities in the US and around the World. Tropically-grown biofuels (ethanol and biodiesel) are far more efficient. Killing the subsidy must be accompanied by an elimination of the import tarrif so we can import all forms of bioenergy.

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