Des Moines Register
07-15-07
The end of the biofuels money train?
Iowa benefits more than any other state in getting federal funding for biofuels.
Livestock producers and the food industry oppose the practice. As Congress
looks at new farm and energy bills, biofuels could lose.
By PHILIP BRASHER
Register Washington Bureau
Few industries are more dependent on government subsidies and mandates than
biofuels producers, and no state has benefited more than Iowa.
The industry wants billions of dollars in additional subsidies, both to build a
national distribution system for ethanol and to underwrite the production of
ethanol from new feedstocks such as crop residue, wood chips and other
sources of plant cellulose. One of the first cellulosic ethanol plants is planned for
Emmetsburg.
"We're creating a new energy infrastructure that we haven't had in over 100
years," said Brent Erickson, an executive vice president of the Biotechnology
Industry Organization.
But the tight federal budget makes it challenging for lawmakers to continue
existing subsidies, let alone enact new ones.
The 51-cent-a-gallon ethanol subsidy alone will cost taxpayers $6.4 billion a year
when the distilleries now under construction around the country are completed in
coming months, pushing annual production to 12.6 billion gallons. Congress is
considering legislation that could triple production by 2022.
The biofuels industry is likely to run into stumbling blocks during the next several
years, one of them being the drain on the treasury in general, said Philip Sharp, a
former Democratic congressman from Indiana who is president of Resources for
the Future, a Washington-based think tank.
Moreover, the subsidies face opposition from groups concerned that expanded
ethanol production will drive up the cost of livestock feed and food ingredients.
Livestock producers and food processors alarmed about soaring grain prices
have called for an end to existing subsidies for ethanol, and they want to stop
additional incentives from being enacted unless restricted to alcohol distilled from
nonfood crops.
Among the subsidy issues facing Congress:
- Ethanol's 51-cent-per-gallon subsidy expires in 2010, and industry officials say
it needs to be continued to ensure that plants can cover their production costs.
"It's still a growing industry," said Ron Litterer, a Greene, Ia., farmer on the board
of the National Corn Growers Association.
The tax credit will cost taxpayers $6.4 billion a year by the time all the nation's
ethanol plants under construction are completed, pushing the industry's annual
production capacity to 12.6 billion gallons. A Senate-passed energy bill would
seek to further boost production to at least 15 billion gallons by 2015 and 36
billion gallons by 2022.
- The biofuel industry wants an additional subsidy of 75 cents a gallon to cover
the higher cost of producing cellulosic ethanol. Energy tax bills proposed by
congressional Democrats would provide an extra 50 cents per gallon.
Congress also is considering increases in grant and loan guarantees to finance
the production facilities. Those measures could be part of an energy bill or the
new farm bill. The chairman of the House Agriculture Committee, Rep. Collin
Peterson, D-Minn., wants to add $2 billion to the farm bill for biofuels
development, but so far he's been unable to find a way to fund it.
- The ethanol industry wants help in training workers, too. A bill introduced by
Rep. Bruce Braley, D-Ia., would authorize grants to community colleges to create
programs for biofuels technicians.
- Industry officials also say subsidies are needed to get service stations to install
the pumps and tanks necessary to sell E85 fuel, a blend of 85 percent ethanol
and 15 percent gasoline. Under current law, stations can get a credit for up to
$30,000, or 30 percent, of the cost of installing the equipment.
- Also under consideration: A dedicated pipeline to distribute ethanol around the
country. Ethanol cannot be shipped through gasoline pipelines because the
alcohol will absorb the water used in the pipelines.
For now, the Democratic-controlled Congress seeks to put off the issue of how to
pay for these subsidies until later. The existing subsidies for ethanol are in place
through 2010, and lawmakers plan to extend the tax credit for E85 pumps and
tanks only through 2010. Under the House bill, the new 50-cent subsidy for
cellulosic ethanol also would have to be renewed after 2010.
Ethanol vs. oil: Comparing subsidies
Ethanol already is the nation's most subsidized fuel.
Federal and state subsidies for ethanol last year cost at last $5.1 billion, or about
$15.90 to $17 per million British Thermal Units, a unit of measuring energy
content, according to a study by the Global Subsidies Initiative, a think tank
based in Geneva, Switzerland.
By comparison, the cost of subsidizing oil and natural gas is under 40 cents per
million BTU, according to the group.
Critics say it makes no sense to keep throwing money at one type of fuel.
"If ethanol made economic sense, you wouldn't need to mandate it; you wouldn't
need to subsidize it," said Jerry Taylor, an energy policy analyst with the Cato
Institute, a free-market-oriented think tank.
Without government subsides and mandates, "the ethanol industry collapses in
rubble," he said.
Besides the subsidies, the biggest boost to the ethanol industry has been a 2005
law that required refiners to use 7.5 billion gallons of the fuel annually by 2012.
The mandate triggered a flood of investment into new distilleries, and production
is expected to reach 7 billion gallons this year, up from 3.9 billion gallons in 2005.
Congress, pushed by the Bush administration, may increase the mandate to
keep the corn ethanol industry growing and to commercialize the development of
ethanol from crop residue, switchgrass and nonfood sources.
Under the Senate energy bill, 15 billion gallons a year of corn ethanol would
count toward the mandate. The House is expected to take up a similar proposal
this fall as part of a package of measures to reduce greenhouse gas emissions.
High corn prices upset food, livestock interests
Livestock producers and many food and beverage companies, ranging from
Tyson Foods to the Coca Cola Co., say the growth of the biofuels has affected
the prices of corn and soybeans, which are used to feed hogs, chickens and
cattle as well as make sweetener and oils.
Chicken production will drop this year for the first time since 1975 because of the
higher cost of corn.
If oil prices increase $10 a barrel in the next decade, raising the price of gasoline,
ethanol production could reach 30 billion gallons annually, according to
economists at Iowa State University. That prospect alarms livestock producers
and the food industry.
"Congress created this situation, and Congress needs to do something about it,"
said Richard Lobb, a spokesman for the National Chicken Council. "There is an
awful lot of corn going into fuel tanks that ought to be feeding animals instead."
Separate studies by the U.S. Agriculture Department and University of Missouri
economists who analyze farm policy for Congress estimate that the price of corn
would drop 10 percent if the ethanol tax credit were eliminated.
Complicating the biofuels industry's fight for money are pay-as-you-go budgeting
rules that Democrats put in place after they took over Congress this year.
The rules require new spending programs to be paid for with spending cuts or tax
increases.
Congressional Democratic leaders already have to find money for more costly
priorities, including health insurance for low-income children and a long-term fix
to the alternative minimum tax.
The availability of funding "is going to determine what we are going to do in the
energy area, as opposed to policy driving what the cost is going to be," said Sen.
Charles Grassley, the ranking Republican on the Senate Finance Committee.
Reporter Philip Brasher can be reached at (202) 906-8138 or
pbrasher@dmreg.com