We recently posted about the EPA’s decision to reduce the cellulosic ethanol blending requirement from 500 million gallons in 2012 to somewhere between 3.45-12.9 million gallons, which is 0.69- 2.5 percent of the original “mandate.”

Via Greenwire ($ubscription required), we see that refiners are still required to purchase “credits” from EPA indicating that they are complying with the mandate, despite its impossibility:

The proposal fine-tunes blending mandates for 2012 called for by the federal renewable fuel standard, and EPA said yesterday it expects to require a total use of between 3.45 million and 12.9 million gallons of cellulosic biofuels next year. Officials said the final figure could come out to more or less than the 6.6 million gallons required in 2011.

Charles Drevna, president of NPRA, said given that EPA’s own data show the ethanol industry has produced no qualifying fuel in the past year, the requirement for blenders to either use the fuel or pay EPA about $1 per gallon for a credit makes no sense.

“It’s a tax. It’s a surcharge. It’s ridiculous,” Drevna said.

Drevna said the refining industry will have spent more than $6 million this year to comply with the 2011 minimum volume requirements for cellulosic ethanol and will almost certainly have to purchase credits from EPA again next year.

Next-generation ethanol advocates say that small-scale commercial production of the fuel is just around the corner. When the EPA proposal was released yesterday, one advocate blamed the oil and gas industry for slow progress.

“America’s advanced and cellulosic ethanol industry is rapidly progressing with many technologies proven and biorefinery projects shovel-ready. Yet, advanced biofuel producers continue to sail into a head wind created by tax policy favoring oil and gas,” said Brooke Coleman, executive director of the Advanced Ethanol Council, in a statement.

This would be funny if it weren’t so economically backwards. First, the cellulosic ethanol industry has been just around the corner from massive production capacity for quite a while now. I’m confident that if the mandate stays in place they will eventually produce some, but their inability demonstrates both the complexity of scaling up processes that can be completed in laboratories and the foolishness of attempting to mandate technological feats that don’t exist yet.

Second, the idea that fossil fuel industries are holding them back is bewildering. The price of oil is at an all time high right now, which helps the industry. Second, they have a mandate by the government requiring that fossil fuel companies purchase their product, if only they could produce it.

Finally, its worth really stressing what is going on here. No companies have to this date been able to produce cellulosic ethanol that qualifies by EPA’s definition. Yet, presumably to save face, the EPA has not lowered the cellulosic ethanol “mandate” to zero gallons.

Now, what the mandate actually means is that companies will be heavily fined if they do not blend sufficient quantities of ethanol into the fuel supply — each gallon of ethanol having its own identification number, which is generated when the ethanol is created (of course, companies have to devote significant resources to navigating this regulatory-maze). Being that this ethanol does not exist, rather than facing fines for not being able to buy it, refiners are required to purchase “credits” from the EPA. Essentially, the EPA is requiring them to send them money in lieu of meeting the cellulosic ethanol mandate. The product they are required to use does not exist, and rather than giving them a pass, the EPA requires that they pay for phantom credits, despite not getting anything out of it.

Sooner or later, something will have to give. Consumers have no interest in purchasing more ethanol as its more expensive and their is fear over potential engine damage is not unwarranted. The mandate is continually increasing, yet the ethanol market in the United States is mostly saturated, reaching the “blend wall.” Now the ethanol groups like to pretend this is because they’re being unfairly treated (yeah, they’re definitely getting the short end of the stick — a mandate to buy their product), but there is nothing stopping them from selling increased levels of E85, other than the fact that no one wants to use it.

This is the world we live in. Mandates for fuels that do not exist, and “compliance fees” for companies required to use the nonexistent product. Bravo, EPA. And they wonder why we’re skeptical of governments.

As was widely reported, the Senate voted last week on a bill that would terminate the ethanol tax credit and corresponding tariff. While many were excited by the prospect of finally moving towards better energy policy, it seems likely that things will still get worse before they get better. The ethanol industry does not seem worried.

Consider the following: John McCain (R-AZ) offered additional legislation, while the Senate was voting down the tax credit, that would have ended federal subsidies for ethanol fuel pumps at gas stations. This was voted down 41-59:

“It lost because of the influence of the ethanol lobby,” McCain said on Fox News Thursday, alleging ethanol “is probably the greatest rip-off that I’ve seen since P.T. Barnum.

“It is one of the most outrageous examples of the influence of special interests,” McCain said.

He said that the rejection of his amendment thwarts the will of voters who handed Republicans major gains in last year’s midterm elections.

McCain said:

“The American people as of last November expected us to act. If we don’t, I think they will try to find somebody else that will. This example, the failure to address ethanol, at last to phase out these incredible subsidies to ethanol is really, I’m sorry to say, a signal to the American people we are not serious. And the special interests still govern here in Washington.”

He is right — though some Democrat’s have turned against ethanol, most haven’t, including the Obama Administration. And it seems, as some predicted all along, that though the tax credit might sunset, it will be replaced by some form of corporate welfare. The ethanol industry has suggested a number of different types:

• Require that all automobiles sold in the U.S. be flex-fuel vehicles — as many as 120 million — at no additional cost to the taxpayer.
• Eliminate artificial barriers to the transportation fuel market by building out the distribution infrastructure for ethanol, including 200,000 blender pumps and federal loan guarantees for ethanol pipelines. This infrastructure will provide consumers the access to choose ethanol in an open and free market.

Ignoring their abuse of language (free markets don’t involve federal subsidies and mandates), these subsidies will be much worse than the tax credit, as they will stick around forever and potentially be much more expensive. As more infrastructure and capital is invested into projects that cannot survive without federal support, the more money and fear mongering will be employed by the industry every time their federal support begins to dry up. Perhaps the relatively inexpensive $6 billion per year was a blessing in disguise compared to what they might get stuffed into a larger energy bill.

There is an ongoing ethanol spat between Senator Coburn (R-OK) and Grover Norquist, President of Americans for Tax Reform. The dispute is over conservative support for a bill that would repeal the ethanol tax credit, which has the effect of raising an industry specific tax. Americans for Tax Reform comes down hard on any effort to increase taxes. The Wall Street Journal added their two cents in favor of Senator Coburn:

Our readers know Mr. Norquist as the plucky author of the no-new-taxes pledge, which has helped to make tax increases a red line in Republican politics. In a letter to Mr. Coburn, a deputy of Mr. Norquist writes: “Repealing the ethanol credit is the right thing to do, but other taxes must be reduced in the same legislation by at least this much to prevent a net tax increase.”

We understand the larger principle that Americans for Tax Reform is trying to defend. Axing every credit, exemption and deduction in the tax code, while leaving tax rates high, would result in a higher general tax burden and more money for Washington to spend. A true tax reform would trade such tax loopholes and subsidies for lower rates.

Coburn’s amendment (which would have been attached to a larger bill) is dead, so the fight is in recess and will reappear before the end of the year. It seems that it would be much harder to pass legislation that would kill the VEETC and also lower taxes, rather than solely ending the VEETC. It also raises the question of which other taxes should be lowered. The VEETC goes back to oil refiners, though some of the savings are passed onto consumers.

This issue came up in 2010. Americans for Tax Reform clearly articulated their position here:

In recent days, Americans for Tax Reform’s opinion on extending the Volumetric Ethanol Excise Tax Credit (“VEETC”)has come into question.  Below is our position on the issue:

1. VEETC is poor energy policy. Encouraging inefficient fuels which accomplishes neither reductions in carbon—its purported impetus— nor monetary gains for American families is bad energy policy.
2. The VEETC is a tax credit which expires at the end of 2010.  There is no obligation on the part of pro-taxpayer elected officials to vote to extend an expiring tax credit which they believe is bad policy.  In the past, the question has been the elimination of the VEETC while it was still in force.  This affirmative tax hike would have been a violation of the Taxpayer Protection Pledge, but that issue is not applicable to this debate.
3. Therefore, Americans for Tax Reform neither supports nor opposes extending the Volumetric Ethanol Excise Tax Credit.

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