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Deficit Hawks Threaten Ethanol's Future


A tax credit's possible expiration puts producers up against the wall

Jim Sensenbrenner pays extra to cruise his pontoon boat across Pine Lake in southern Wisconsin. He's willing to hand over 30¢ more per gallon for gasoline free of ethanol, which he calls "a lousy fuel" that corrodes his two-stroke outboard engine.

One boater's opinion might not matter, except that Sensenbrenner happens to be the top Republican on the House Select Committee on Energy Independence and Global Warming. His ethanol aversion is a sign that the darling of alternative fuels is hitting a political wall. "People are worried about deficits, debt, and special-interest handouts," Sensenbrenner says. "Ethanol is all three."

That sentiment is endangering the $27billion industry that has grown up since federal support began under President Jimmy Carter amid the 1970s energy crisis. Today the U.S. offers a 45¢ per gallon tax credit to refiners that blend ethanol with gasoline. The government also requires gasoline makers to use a steadily increasing amount of the additive, and it imposes an import tariff to deter foreign competition.

The tax credit, worth more than $4.7billion last year, expires on Dec.31, as does the protective tariff. If Republicans control the House after the Nov.2 elections, the renewal of those measures will be in doubt. Ethanol could go the way of biodiesel, an alternative fuel made from soybeans, whose production has ground to a near-halt since biodiesel's $1-a-gallon incentive expired at the end of last year, according to the National Biodiesel Board.

Failure to renew the tax credit would drain a key driver of growth from an industry that has seen at least a dozen companies seek bankruptcy protection in the past two years. That raises the stakes for ethanol makers in a related struggle: persuading the Environmental Protection Agency to allow 15percent ethanol, up from the current 10percent limit, in motor fuel blends. Boosting the cap is needed to attract investment in new sources of ethanol that don't depend on a food crop, says Growth Energy, an ethanol advocacy group supported by the top U.S. producer, Poet of Sioux Falls, S.D. Without it, investment in next-generation ethanol, such as cellulosic ethanol derived from wood and nonedible parts of plants, will dry up, rural jobs will go away, and corn prices will plunge as biofuel production stagnates, says Wesley Clark, the former NATO commander and Presidential candidate who is Growth Energy's chairman.

Growing Cadre of Ethanol Foes

The battle over ethanol's future pits the industry, corn farmers, and the U.S. Agriculture Dept. against a growing cadre of environmental groups, cattle ranchers, and deficit hawks like Sensenbrenner. Environmentalists question ethanol's overall benefits, and cattle ranchers say it raises the price of feed corn. General Motors, Ford, and Chrysler worry that ethanol will corrode engines in cars not designed to handle the stronger blend. Some 12.8billion gallons of ethanol will be produced this year by 201 distilleries, according to the Renewable Fuels Assn. U.S. drivers will use about 138billion gallons of gasoline.

Ethanol's Corn Belt popularity means many Midwest and rural lawmakers of both parties will back it, says David Yepsen, director of the Paul Simon Public Policy Institute at Southern Illinois University Carbondale. Still, "the whole condition of the nation's finances is changing the equation on federal spending, and that's true when it comes to ethanol," says Yepsen.

Farmers and ethanol supporters, including House Agriculture Committee Chairman Collin Peterson (D-Minn.), accuse the EPA of foot-dragging on the 15percent blend limit, which they estimate would create about 136,000 rural jobs. A ruling was delayed last November; the EPA says it will decide after the Energy Dept. finishes tests later this year on whether the fuel has a negative effect on newer vehicles.

Clark's Growth Energy wants the tax credit extended but can accept ending it if the Administration supports ethanol in other ways, such as bolstering the number of fuel pumps, pipelines, and other infrastructure needed to move ethanol from Midwestern distilleries to consumers. Clark seeks to shift political pressure to opponents such as Sensenbrenner, saying they're blocking a chance for the U.S. to kick its addiction to foreign oil. "If he had to justify that to his constituents," Clark says, "he might decide that domestic fuel is pretty good."

The bottom line: The $27billion ethanol industry's future is threatened as it loses some of the political support that has sustained it for decades.

Bjerga is a reporter for Bloomberg News. Parker is a reporter for Bloomberg News.

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