Bipartisan Groups Want to End Ethanol Subsidy and Save Taxpayers Billions

A diverse coalition of organizations and lawmakers say the ethanol subsidy is fiscally irresponsible and environmentally unwise.

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WASHINGTON— It’s a rare day when somebody pleads with Congress not to take action.

But that’s exactly the stand Kate McMahon, biofuels campaign coordinator for Friends of the Earth, is proposing. By not lifting a finger to renew a corn ethanol tax credit of 45 cents per gallon—which will expire at the end of this month if federal legislators choose to let it—she estimates taxpayers will reap an annual savings of roughly $6 billion.

And she’s not alone.

Friends of the Earth is part of an unconventional and diverse amalgam of 59 organizations from the faith, progressive, environmental, agricultural, conservative, humanitarian and public interest sectors that made a case against the subsidies in a late November letter to House and Senate leaders.

“At a time of spiraling deficits, we do not believe Congress should continue subsidizing gasoline refiners for something that they are already required to do by the Renewable Fuels Standard,” they wrote. “Experts like the Congressional Budget Office and the Government Accountability Office have concluded that the subsidy is no longer necessary, and leading economists agree that ending it would have little impact on ethanol production, prices or jobs.”

And those same concerns seem to have traction on the Hill. In a bipartisan move uncommon in Congress these days, 17 Democratic and GOP senators also signed a Nov. 30 letter spearheaded by Sens. Dianne Feinstein, D-Calif., and Jon Kyl, R-Ariz., requesting an end to the ethanol subsidy. The document addressed to Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., pillories the 45-cent-per-gallon subsidy for blending ethanol into gasoline as fiscally irresponsible and environmentally unwise.

 Will Farm States Let Go?

But the subsidy—known as the Volumetric Ethanol Excise Tax Credit, or VEETC—is the classic political football. Legislators from agricultural states such as Iowa Republican Sen. Chuck Grassley are longtime advocates of ethanol subsidies.

Grassley, who lists his occupation as farmer, is so fired up about the idea of losing ethanol subsidies that he made a floor speech December 2 asserting that the cutback will make the nation “more dependent on those oil sheiks.” He also said it is “ridiculous to claim that the 30-year-old ethanol industry is mature and thus no longer needs the support they get.”

Grassley has already butted heads with fellow Republican Sens. Tom Coburn of Oklahoma and Jim DeMint of South Carolina. Both conservatives have urged Congress to let the tax credit fade away.

“We need to let the ethanol subsidies expire and we need energy developed based on market forces,” Coburn told Washington Post blogger Greg Sargent. Coburn contended senators who are not on board are “just protecting a parochial interest ahead of the national interest.”

Though McMahon said she is encouraged by these reinforcements, she and other coalition members still fear that Congress will extend the ethanol tax credit by sliding it into another package of bills during the current lame-duck session.

“It will be a test for those who say they want to reduce spending,” she told SolveClimate News in an interview. “I would question how genuine their call to reduce spending is if they are unwilling to act on this.”

Gale Lush, chairman of the Nebraska-based American Corn Growers Foundation, is incredulous that anybody is bashing a domestic fuel source he refers to as a “U.S. economic security superstar.”

“We need more members of Congress like U.S. Senator Chuck Grassley of Iowa who recently took on those who are attacking ethanol credits and incentives and we applaud him for standing strong,” Lush said in a statement.

He argues that ethanol-gasoline-equivalent production amounts to more than U.S. oil imports individually from Algeria, Brazil, Nigeria, Iraq, Angola, Venezuela, Saudi Arabia and Mexico.

The U.S. ethanol industry also faces losing the protection of a 54-cent-per-gallon tariff on imported ethanol at the end of the year. Critics say the tariff protects the industry from cheaper-to-produce sugar-cane ethanol.

In their November letter to Senate leaders calling for an end to subsidies, the 17 lawmakers also advocated for letting the tariff expire.

“The tariff is nine cents per gallon higher than the ethanol subsidy it supposedly offsets, and this lack of parity puts imported ethanol at a competitive disadvantage against imported oil,” they wrote. “This discourages transportation fuel imports from Brazil, India, Australia, and other sugar producing countries, and leads to more oil and gasoline imports from OPEC countries that enter the United States tariff-free.”

Ethanol Mandates

Congress first created an ethanol subsidy more than 30 years ago in response to the nation’s oil shortages.

The latest version of the subsidy, the VEETC set to expire at year’s end, went into effect in 2005 under the Bush administration’s American Jobs Creation Act of 2004. In a nutshell, the VEETC exempts the ethanol portion of gasoline blends from gasoline excise taxes and sets up a tax credit for ethanol use.

Critics claim that the VEETC no longer encourages biofuel consumption because the congressionally mandated renewable fuel standard now dictates the purchase of ethanol by fuel blenders, thus far at a greater volume than the market demands.

When Congress amended the Clean Air Act by passing the Energy Independence and Security Act in 2007, it upped the renewable fuels standard by requiring that 36 billion gallons of biofuels be produced by 2022.

In 2011, the United States will be required to blend 13.95 billion gallons of biofuels with conventional transportation fuels, according to figures the Environmental Protection Agency announced in late November.

Next year’s total includes 1.35 billion gallons of advanced biofuel, 800 million gallons of biomass-based diesel and 6.6 million gallons of cellulosic biofuel. The cellulosic ethanol figure is a dramatic drop—97 percent—from the ambitious goal of 250 million gallons targeted in 2007.

The renewable fuels standard is legislation gone awry, FOE asserts, because corn ethanol will continue to fill a void left by producers’ inability to make enough cellulosic ethanol to meet federal expectations. The group maintains that corn ethanol should have to compete for market share independently without an artificial boost from the government.

Where the Savings Are

In its 2010 version of a report titled “Green Scissors,” FOE laid out $200 billion in across-the-board cuts that it labeled as wasteful or environmentally harmful.

The left-leaning advocacy group’s figures reveal that eliminating the VEETC could save the U.S. Treasury up to $5.4 billion in 2011 and as much as $36.5 billion between now and 2015.

Those numbers are reinforced by the National Taxpayers Union, a conservative organization that prides itself as a budget hawk. In October, NTU released a 15-page report titled, “Toward Common Ground: Bridging the Political Divide to Reduce Spending” with the liberal U.S. Public Interest Group that outlines 30 specific recommendations that they say could save taxpayers $600 billion by 2015. The report estimates that eliminating refundable tax credits for ethanol would save $22.6 billion through 2015.

“The credits combined with the renewable fuels standard set up a taxpayer subsidized mandate, which is bad fiscal policy,” wrote co-authors Andrew Moylan, government affairs director at NTU and Nicole Tichon, a tax and budget reform advocate with U.S. PIRG.

Both NTU and Environment America, the conservation arm of U.S. PIRG, are among the organizations that signed the anti-ethanol letter circulated by Friends of the Earth.

Now, all eyes are on Capitol Hill during this December wait-and-see game on the ethanol tax credit.

“We ’re not talking about a small chunk of change,” FOE’s McMahon concluded. “It’s a choice (legislators) are going to have to make and we hope they make the right choice.”