The hand writing was already on the wall last December even though Congress extended the Volumetric Ethanol Excise Tax Credit (VEETC) for another year.

As explained here, ethanol’s policy privileges lost their perceived legitimacy. Beef, hog, poultry, and dairy farmers objected that ethanol policy inflates livestock feed costs, making their products less competitive in global markets. Humanitarian organizations objected that ethanol policy aggravates world hunger by driving up grain costs. Environmental groups objected that corn ethanol production damages water quality and, on a life-cycle basis, probably emits more carbon dioxide than the gasoline it replaces. Budget hawks objected to Congress lavishing billions on a favored few in the midst of a budget crisis. Free market groups objected to the fleecing of consumers compelled to buy a product that delivers less bang for buck than gasoline.

The corn lobby could rally its congressional patrons one last time, but the ideological climate had shifted against them, with even Al Gore recanting his earlier support for ethanol subsidies. If the VEETC had come up for renewal in Dec. 2009, Congress would likely have extended it for five years, not just one. But in 2010 a broad-based Left-Right coalition arose to challenge King Corn, and the tide turned.

And today the DeMoines Register reports that Sen. Chuck Grassley (R-Iowa), the Senate’s chief patron of corn ethanol, said he would vote for the deficit-reducing continuing resolution even though it would (1) block EPA from increasing the amount of ethanol in gasoline from 10% to 15% and (2) prohibit subsidies for corn ethanol infrastructure (E-85 blender pumps and storage tanks). 

The text of the DeMoines Register article follows:

Sen. Chuck Grassley, arguably the most outspoken advocate in Congress for the biofuel industry, said today that he would vote for a deficit-cutting bill even if included some anti-ethanol measures passed by the House.

He said his vote would be “governed by the bigger issue. The bigger issue is whether we’re going to leave this tripling of the national debt to our children and grandchildren and possibly the bankruptcy of our country.”

A House-passed bill that cuts $60 billion from federal spending includes a measure that would block the Environmental Protection from increasing the amount of ethanol that can be added to gasoline from 10 percent to 15 percent. A second provision would bar subsidies for retrofitting service stations to sell higher amounts of ethanol.

Both measures, as is the bill as a whole, are limited to the 2011 budget year, which runs through Sept. 30.

Strong majorities of Republicans, who now control the House, voted for adding the anti-ethanol measures to the legislation. Iowa’s two House Republicans, voted for the overall bill though they opposed the ethanol provisions.

The EPA has approved the higher ethanol limit for 2001 and newer model cars and trucks, but the bill would bar the agency from spending any money to implement the change.

Grassley said that delaying that higher limit is a more immediate concern than the subsidies for ethanol pumps.

“As significant as it is to me because I’m a great ethanol fan, if in fact those things were in the bill to cut the deficit … I’d have to bite the bullet,” he said.

The Senate, which is controlled by Democrats, will write its own version of the House bill that is certain to reject much of what it contains. But the House and Senate will have to reach some agreement to keep the government operating.

Yesterday (Feb. 16), House Energy and Power Subcommittee Chairman Ed Whitfield (R-KY) engaged in a colloquy with Interior and Agriculture Subcommittee Chairman Mike Simpson (R-ID) on Sec. 1746 of H.R. 1, the One-Year Continuing Appropriations Act of 2011.

Sec. 1746 of H.R. 1 states:

None of the funds made available to the Environmental Protection Agency by this division or any other Act may be expended for purposes of enforcing or promulgating any regulation (other than with respect to section 202 of the Clean Air Act) or order, taking action relating to, or denying approval of state implementation plans or permits because of the emissions of greenhouse gases due to concerns regarding possible climate change.

Sec. 1746 would block EPA regulation of greenhouse gases from stationary sources for the remainder of fiscal year 2011, which ends on September 30. “The funding limitation will allow Congress to carefully and thoroughly debate a permanent clarification to the Clean Air Act to ensure it remains a strong tool for protecting public health by regulating and mitigating air pollutants, and that it is not transformed into a vehicle to impose a national energy tax,” explains Chairman Whitfield’s press release. Whitfield is a co-sponsor of the Energy Tax Prevention Act, which would overturn the legal force and effect of EPA’s Endangerment Rule, Tailoring Rule, and other rules imposing greenhouse gas permitting requirements on state governments and stationary sources.

In the colloquy, Chairman Simpson states: ”EPA’s GHG regulations need to be stopped in their tracks, and that’s what section 1746 does – it provides a timeout for the balance of the fiscal year, during which time EPA will be prohibited from acting on them or enforcing them.” In Whitfield’s words: “This CR [Continuing Resolution] provision is Congress hitting the pause button during the very brief period of the CR, allowing time to go through regular order and pass the Upton-Inhofe bill.”

Whitfield spotlights the constitutional principle at stake: “EPA’s regulations are an attempt by unelected bureaucrats to slip in through the regulatory backdoor what Congress has thus far wisely blocked from coming in through the front door.” The Energy Tax Prevention Act takes no position on climate science. As Simpson remarks, one need not be a global warming skeptic to be an ”EPA GHG [greenhouse gas] regulation skeptic.”

The political benefits of Congress passing Sec. 1746 are obvious. It would be a clear rebuke to EPA’s shocking power grab. It would put Team Obama on notice that Congress is determined to defend the separation of powers. It would energize congressional and public support for a more permanent solution to the ’EPA problem.’ It would draw a big bright line in the sand helping the public identify which Members of Congress want to raise energy prices and which do not.

This defunding, or appropriations rider, strategy, as it is sometimes called, however, is not without economic risk.

“Rider striking funds for EPA regs could cause unintended consequences for industry,” yesterday’s Greenwire (subscription required) reports. The article explains:

The rider does nothing to nullify the 2009 finding that greenhouse gases endanger human health, or to reverse EPA’s final rules, including its prevention of significant deterioration guidelines or the tailoring rule, which lays out the agency’s timetable for regulating greenhouse gases from large stationary emitters.

By simply defunding the agency’s greenhouse gas permitting programs, Congress would do nothing to remove EPA’s obligation to address greenhouse gases through the permitting process, the [unidentified industry] attorney said.

“It doesn’t change the fact that those rules and regulations are final,” the attorney said.

Which means, notes Rep. Jim Moran (D-VA):

“The legislation is there, you’re not repealing the legislation, so EPA has a legal responsibility to implement the Clean Air Act, the Clean Water Act, other pieces of legislation that are still on the books,” he said yesterday. “That’s their responsibility, and they really can’t shirk that responsibility just because Congress doesn’t provide them the resources. The Congress has to either repeal the law, or be it reluctantly, they’re just going to have to fund the resources to carry out the law.”

Both Moran and Greenwire miss a more important point. The Clean Air Act imposes obligations not just on EPA but also on regulated entities such as power plants, refineries, factories, and other emission sources.

Under the Act, before a firm may build or modify a “major emitting facility,” it must undertake a “best available control technology” (BACT) analysis and, on that basis, apply for and obtain a “prevention of significant deterioration” (PSD) pre-construction permit. Similarly, before a firm may operate a major emitting facility, it must obtain a Title V operating permit.

EPA has issued regulations applying PSD and Title V to greenhouse gases. Those are already on the books, and they impose legal requirements on private entities as well as on EPA and state permitting agencies. Thus, even if EPA lacks the funds to administer PSD and Title V for greenhouse gases, major greenhouse gas emitting facilities must still obtain PSD and Title V permits or they cannot lawfully build, modify, or operate.

Moreover, even if EPA lacks the funds to prosecute firms for failing to obtain permits, eco-litigation groups could still drag those firms into court under Clean Air Act citizen-suit provisions. Trial lawyers could have a field day as affected firms find themselves in a Catch-22. On the one hand, the law (the Clean Air Act as interpreted by EPA rules) would require firms to obtain PSD and Title V permits for greenhouse gases. On the other hand, the law (the appropriations rider) would prevent them from doing so.

It’s not even clear that Sec. 1746 would stop the government from enforcing EPA’s greenhouse regulations. The language says nothing about withholding funds from the Department of Justice, so DOJ prosecutors could enforce EPA’s regs even if EPA couldn’t.

The side effects of this bizarre situation are potentially serious. Construction projects might have to be mothballed or cancelled for lack of proper permits. Otherwise healthy firms facing novel litigation risks might be unable to obtain financing or venture capital.

Considerations of this sort led Alaska Sen. Lisa Murkowski to abandon an appropriations rider strategy she had been exploring in late 2009 and instead introduce legislation to overturn EPA’s Endangerment Rule — the headwaters of EPA’s greenhouse regulatory surge.

The question for opponents of EPA’s power grab, therefore, is whether the political benefits of a defunding strategy outweigh the economic risks. This is a prudential matter about which reasonable people may disagree. I will hazard two observations.

(1) The best way to minimize the potential collateral damage to regulated entities is to quickly enact legislation that overturns EPA’s greenhouse gas rules. If passage of Sec. 1746 galvanizes congressional action toward that end, then it would likely do more good than harm. (2) However, if enactment of Sec. 1746 leads to construction bottlenecks and an upsurge of anti-business litigation while Congress is still debating the Energy Tax Prevention Act or similar measures, the rider strategy could damage the credibility of EPA’s congressional critics.