U.S. Subsidy for Ethanol Could Shift

Source: Des Moines Register

Change designed to encourage production of fuel from crop residue.
By: Philip Brasher

Washington, D.C. - The subsidy for fuel ethanol could be trimmed to help pay for new incentives to promote the next generation of biofuels. The Senate Finance Committee is proposing to reduce the 51-cent-per-gallon tax credit for ethanol by a nickel. The reduction would likely kick in about 2010.

That reduction would help pay for a new tax credit of 50 cents per gallon for ethanol made from crop residue, wood and other sources of plant cellulose. The first 60 million gallons of cellulosic ethanol produced would qualify for that new tax break, plus the existing credit for conventional ethanol.

The proposals are part of a package of energy tax incentives that the committee is scheduled to vote on Tuesday and then add to a major energy bill now being debated in the full Senate. The cut in the conventional ethanol tax credit would have a negligible impact on consumers. That's because the alcohol is primarily used as a 10 percent additive in gasoline, said Amani Elobeid, an economist at Iowa State University.

The bigger impact, though still small, would be on the refiners and other companies that get the tax credit when they blend the alcohol with gasoline, Elobeid said. They would effectively be paying more for the ethanol.

The tax credit serves as a subsidy for corn. Recent studies have found that the price of corn would fall about 10 percent if the credit were eliminated along with a tariff on imported ethanol.

The 5-cent reduction in the tax credit would kick in the first year after the industry produces 7.5 billion gallons nationally, under the committee's legislation.

"Does that nickel make or break somebody? The short answer is, 'We don't know,' " said Monte Shaw of the Iowa Renewable Fuels Association.

But, he said of the proposal, "This is an issue we can look at again and find a different way to go about it."

The biotech industry had been asking for a tax break of as much as 75 cents a gallon more for cellulosic ethanol because of its higher production costs. But congressional pay-as-you-go budget rules have lawmakers struggling to find money to expand energy subsidies.

"We are hoping the Senate may improve this provision further as it advances through the process," said Brent Erickson, a spokesman for the Biotechnology Industry Organization.

The committee's tax measures also include extensions for numerous existing tax breaks for a variety of energy sources, including wind. The tariff on imported ethanol would be extended to the end of 2010 along with a $1-per-gallon tax credit for biodiesel.