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One Step Forward, Two Steps Back?

by Joel Velasco on Oct 08, 2010

After months of well-publicized family-feuding Congressional and industry outlets are reporting today that the nation’s powerful corn ethanol lobby has reached a consensus on key policies set to expire on December 31st – namely the $6 billion per year tax subsidy and the 54 cent per gallon tariff on imported ethanol. Just in time for the lame-duck session.

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After months of well-publicized family-feuding, Congressional and industry outlets are reporting today that the nation’s powerful corn ethanol lobby has reached a consensus on key policies set to expire on December 31st – namely the $6 billion per year tax subsidy and the 54 cent per gallon tariff on imported ethanol.  Just in time for the lame-duck session.

Though some details remain murky, major corn ethanol industry groups are said to agree on eventually eliminating the existing subsidy for blending ethanol (currently a 45 cents per gallon tax credit known as the VEETC), along with the import tariff that keeps cleaner and more affordable sugarcane ethanol out of the market. In place of the VEETC would be a reduced producer’s credit and financial support to build out the nation’s infrastructure.

According to trade press reports, broad outlines of the plan show it would:

Quite a wish list, huh? But with farm state senators and White House officials said to be on board, the plan has a shot at navigating the otherwise crowded lame-duck legislative agenda. After all, that has been the history of ethanol subsidies in Washington – read this and this article for a refresher.

On balance, this development seems to be a step in the right direction towards fostering competition among renewable fuel producers and giving consumers choices at the pump.  As one environmental group aptly put it, "There is an explicit acknowledgement that the VEETC as it is today should end [as well as] the ridiculously protectionist" import tax.

But, there’s still plenty of fine print we need to review, so stay tuned for more details. Meanwhile, for the policy wonks, here are some things to consider:

  • How will Congress fund a reduced VEETC? At 36 cents per gallon, it would still cost about $4 billion per year according the House Committee on Ways & Means.  Further, what’s the logic on continuing a subsidy that the major ethanol producers say they don’t need and the alleged recipients (i.e. Big Oil) don’t want?
  • If the tariff is really meant to offset the VEETC, then it would be set at parity. Readers of this blog will remember parity has been a lone point of consensus in the industry for years.  And since consumers benefit from competition, why not give them choice now instead of in 2012?
  • Accelerating Flex-Fuel vehicle deployment and other infrastructure investments has been discussed for a long time, but remains a priority. For it to work, it must be fashioned in a way that leads to real competition in the fuels marketplace and not yet another trade distorting program. Senator Lugar’s proposals on this are on the mark and Brazil’s experience may be illustrative.
  • The Renewable Fuels Standard (RFS), via the Renewable Identification Numbers, as well as the California Low Carbon Fuel Standard (LCFS) already reward biofuels as they reduce their carbon footprint. If additional incentives or new regulations are to be developed, they should be technology and feedstock neutral, as the Advanced Biofuels Association (ABFA) has proposed.

copyright 2010 Brazilian Sugarcane Industry Association