The expiration of the Volumetric Ethanol Excise Tax Credit (VEETC) at the end of 2011 has led to a number of ethanol plants shutting down, and others operating in the red:
After predicting they would survive the end of a major federal subsidy without problems, it looks like officials at the nation’s ethanol producers may have been too optimistic.
Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.
Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.
At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.
“Since the first of the year it’s been even-to-slightly negative,” Doyal said.
It’s not exactly satisfying to see economic activity being shuttered during a time of high unemployment, as undoubtedly hard-working individuals at these plants are temporarily out of work. But those who support aligning our energy economy more closely with market principles are in a minority, so we don’t necessarily get to choose when and where some of these decisions (that can be painful in the short run) are made. [click to continue…]
January marked the first month that the ethanol industry had to stand on its own feet was only supported by a massive taxpayer mandate for their product, rather than tax preferences, tariff protections, and a mandate.
Do not fret, as sales for E10 (10% ethanol 90% gasoline, commonly purchased at the pump) will hold remarkably steady, because this is the primary venue the rent-seekers use to dilute our nations gasoline supply with ethanol. I only slightly kid, as it makes sense to blend small percentages of ethanol into our fuel supply, though not in amounts exceeding 10 percent.
However, in the United States there are also niche markets for E-85, which is made up of 85% ethanol and 15% gasoline. E85 sales more accurately reflect what an actual competitor to gasoline would look like, as E10 blends only supplement regular fuel production. While there are a number of flex-fuel vehicles on the road (FFVs) capable of running on any blend of ethanol and gasoline, E85 sales have never taken off in the United States. This is because, after adjusting for the lower energy content in ethanol, it costs more money per mile traveled to fuel your vehicle with E85 than E10. It has always been this way and its unclear if it will ever change.
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Just a few days after our previous post outlining the ethanol industry’s brave, unprecedented, legendary, and 100% voluntary decision to give up the ethanol tax credit, we see that there are still other subsidies that they are interested in keeping:
But the head of the Renewable Fuels Association—Bob Dinneen—says the industry will work to ensure that tax credits for cellulosic ethanol will continue past the end of 2012.
“We think that the production tax credit and the depreciation that is now allowed for cellulose needs to continue,” Dinneen says.
Extension of the cellulosic tax credits will send an important signal to the marketplace and encourage investment in the next generation of ethanol technology, Dinneen says.
And to those who consider it just another federal subsidy for ethanol…
“They need only look at the tax incentive for grain-based ethanol that has just expired–that demonstrates you don’t need a tax incentive forever,” Dinneen says.
“You need to encourage investment—convince the marketplace that there is going to be consistent government support that will allow the industry to get on its feet.”
Cellulosic ethanol has not yet been produced commercially, but according to the U.S. Department of Energy web site, several commercial cellulosic plants are under construction.
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Writing in The Hill’s Congressional Blog, lobbyist in chief for the ethanol industry Bob Dineen waxes poetic about the historic nature of the ethanol industry voluntarily giving up losing one of its subsidies, the Volumetric Ethanol Excise Tax Credit (VEETC):
With growing concerns about gridlock in Washington and greed on Wall Street, Americans are wondering whether anyone with a stake in public policies is willing to sacrifice their short-term advantage for a greater good.
Well, someone just did.
Without any opposition from the biofuels sector, the tax credit for ethanol blenders (the Volumetric Ethanol Excise Tax Credit – VEETC) expired on January 1.
In fact, American ethanol may well be the first industry in history that willingly gave up a tax incentive. Facing up to the fiscal crisis in this country, industry advocates have engaged in discussions with the Administration, Congress and our own constituents in an effort to frame forward-looking policies that balance the needs for deficit reduction and the development of clean-burning, American-made motor fuels.
Incentives should help emerging industries to develop and grow, not to be forever subsidized by the nation’s taxpayers. The Volumetric Ethanol Excise Tax Credit — which actually accrued to biofuels blenders, not producers – has helped the renewal fuels industry to stand on its own two feet. So now it is time for this subsidy to be phased out. [click to continue…]
It’s now all but certain that the ethanol tax credit will expire at the end of the year, and the ethanol producers continue to claim credit for “giving it up” despite that it was obviously lost due to larger political considerations, and the fact that they lobbied initially for its extension and then eventually for a substitute which would have still funneled money into their industry. The tariff on ethanol imports also expires at the end of the year, and is likely to expire, though a bill was just introduced to extend it. It has no chance of passing through normal legislative means but its not impossible for it to be attached to larger omnibus bills in order to appease ethanol interests.
There are a few problems here. First, restrictions on trade are not normally good, but the fact that much of ethanol consumption is due to the renewable fuel standard mandate (and not market forces) complicates things. If imports of sugarcane ethanol are merely going to cut down on corn ethanol consumption/production, then it seems that the removal of the trade barrier would be a neutral/good thing. However, if imports of sugarcane ethanol require that Americans purchase additional ethanol relative to a baseline with the tariff, then an argument could be made for keeping the tariff. There are also other longer term political considerations: if sugarcane ethanol is kept out, the corn ethanol folks might lobby to lift the cap on corn ethanol and allow it to qualify as an advanced biofuel. Or, Congress might scrap the advanced biofuel RFS altogether as cellulosic ethanol is yet to exist.
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The ethanol compromise did not make it into any debt ceiling negotiations and its future is now looking bleaker than ever before. The Congressional ‘super-committee’ established by the debt ceiling negotiations will have to decide by November 23rd some manner to reduce the deficit by $1.5 trillion or face potentially unpopular automatic spending cuts to defense and discretionary spending (though USA Today writes that these “threats” have failed in the past). None of the rumored super-committee members seem to be from regions that would require their support of the ethanol industry
The ‘ethanol compromise’ had legs because it funneled money into the domestic ethanol industry while still maintaining a facade of deficit reduction. It would have collected $2 billion in revenue from the ending of the domestic tax credit as of July 21 and used a small amount less than that to spend on items near and dear to the ethanol industry (mainly ongoing support for cellulosic ethanol and money for the installation of blender pumps at fueling stations), hence their support.
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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.
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Everybody and his brother are reporting yesterday’s cloture vote on Sen. Tom Coburn’s amendment to repeal the ethanol tax credit as a widespread rejection by GOP lawmakers of the Taxpayer Protection Pledge, conceived and administered by Americans for Tax Reform (ATR). This is spin.
Many in Washington would like nothing better than for Republicans to disown their chief product differentiator, their promise in writing not to raise taxes. That may happen. Raising taxes is what politicians do, especially those who claim we have a deficit problem rather than an overspending problem. But repudiating the Pledge is not what went down in the Senate on Tuesday. [click to continue…]
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:
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In an appearance on E&E TV, retired General Wesley Clark discusses the future of corn ethanol policy. Transcript here. Given that he is a member of Growth Energy, completely objectivity isn’t expected. However, he makes a number of incorrect statements and supports very poor economic analysis.
CLARK: And so we’re behind in cellulosic because we’ve been artificially constrained in the fuels market, first by the EPA blend wall at 10 percent, which meant there was no market for cellulosic. And then secondly then by the lack of infrastructure to be able to actually go out to the service agent and say, hey, I want to try 20 to 30 percent ethanol blend.
Cellulosic ethanol production is “behind” because its not economical, and investors are aware that the current market for cellulosic ethanol relies almost entirely on a government law that clearly isn’t guaranteed given how difficult it is to produce cellulosic ethanol at a price that is even close to something consumers would want.
Clark also complains about the 10% “blend wall” yet doesn’t acknowledge that the majority of ethanol sold is due to an “artificial” government mandate. I’d gladly end the EPA’s ability to determine what American’s can put in their gas tanks just as I’d gladly end the mandate requiring refiners to blend petroleum with ethanol.
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