End of Ethanol

Critics take aim at tax breaks for ethanol subsidies

Corn displayed at an ethanol plant before processing / AP
December 4, 2012

Once heralded as the key to kicking America’s foreign oil addiction by Republicans and Democrats alike, ethanol’s political fortunes have faded and the industry’s future is unclear amid a growing chorus of critics.

The industry lost more than $6 billion in annual tax breaks along with a valuable import tariff when Congress declined to renew the subsidies at the end of last year. Several trade groups are now attacking ethanol’s last federal redoubt: The Renewable Fuel Standard (RFS), which mandates oil producers blend a certain amount of ethanol with traditional gasoline.

"I won't say this is the end of the [ethanol] mandate, but the momentum has been swinging against the industry and its lobby for a good year, and a variety of other lobbies are continuing to press the attack on a variety of fronts, making this a moment of great vulnerability for ethanol," auto industry analyst Edward Niedermeyer told the Free Beacon in an email.

The National Council of Chain Restaurants recently touted a study prepared for it by PricewaterhouseCoopers reporting the federal ethanol mandate costs each restaurant $18,000 a year because of the higher food prices.

The American Automobile Association (AAA) additionally lambasted the Environmental Protection Agency on Friday for approving E15 gasoline, which contains 15 percent ethanol.

AAA argued consumers haven’t been properly informed about the fuel, which can damage engines on older vehicles.

"It is clear that millions of Americans are unfamiliar with E15, which means there is a strong possibility that many motorists may improperly fill up using this gasoline and damage their vehicle," AAA president and CEO Robert Darblenet said in a Friday statement. "Bringing E15 to the market without adequate safeguards does not responsibly meet the needs of consumers."

Vehicles manufactured after 2001 can handle E15 fuel, the Environmental Protection Agency has said.

AAA noted Ford, Honda, Hyundai, Kia, Mazda, Mercedes-Benz, and Volvo have said E15 damage might void warranties, while BMW, Chrysler, Nissan, Toyota, and Volkswagen do not cover damage from E15 under their warranties.

The Renewable Fuels Association, one of the leading trade groups for biofuels, was quick to strike back.

"Clearly, Big Food and Big Oil are on the defensive," said Bob Dinneen, president of the RFA in a statement. "They lost in their bid for a waiver of the RFS, so now they are resorting to super-sized myths about the impact of the RFS on food prices."

"Every reasonable analysis of the factors influencing food prices has concluded that the cost of diesel fuel, gasoline, and other energy inputs is the major driver. This study conveniently avoids that issue. The bottom line is the RFS is working. Renewable fuels have already displaced 10% of annual gasoline demand and dramatically lowered fuel costs for all Americans."

The Renewable Fuel Standard ethanol target was 13.2 billion gallons in 2012. That will rise to 15 billion gallons by 2015. Many oil producers will likely have to switch to E15 to accommodate the rising requirements. That is not sitting well with stakeholders in a number of industries.

Corn prices spiked by as much as 60 percent this summer after a severe drought earlier in the year, according to Purdue University economics professor Christopher Hurt.

A group of Republican and Democratic governors joined ranchers and poultry farmers, as well as the United Nations director-general for food and agriculture, to petition the EPA to waive the RFS mandate.

The petitioners argued the ethanol mandate was artificially inflating those prices. The EPA declined to waive the RFS mandate, claiming the petitioners hadn’t sufficiently proven economic duress.

The industry faces pressure from the left as well. Environmentalists have long opposed ethanol, arguing it is folly to use a valuable foodstuff such as corn for fuel.

Ethanol remains a potent political totem in the Midwest. The mandate could have a severe economic effect on Midwest farmers if it were struck down.

"The ethanol industry as a whole will continue to exist, as long as the government keeps the RFS in place," Robert Rapier of Investing Daily wrote recently. "If the RFS is ever abolished, my prediction is that the entire ethanol industry would collapse."

GOP primary candidates had to tiptoe through the issue when they sought favor in Iowa and Indiana in 2011.

Thirteen Republicans from farm states voted to block the elimination of the $6 billion in ethanol subsidies last year when Sen. Tom Coburn (R., Okla.), one of the upper chamber of Congress’ staunchest fiscal hawks, forced a vote on it.