Senate Ethanol Deal Would End Subsidy July 31; Retain 'Cornucopia' of Alternative Fuel Tax Credits

Under a compromise proposed this morning by three U.S. Senators, the current ethanol blender subsidy and tariff would be allowed to expire as of July 31. The legislation, which has not yet been passed by Congress, would save an estimated $2 billion over the next five months. The subsidy has been in effect since 2004.

Ethanol opponent Sen. Dianne Feinstein (D, Calif.) said in a letter to Majority Leader Harry Reid and Minority Leader Mitch McConnell that she had reached an agreement with Sens. Amy Klobuchar (D, Minn.) and John Thune (R, S.D.), under which a 45-cent-a-gallon tax credit to oil refiners for blending ethanol into gasoline would expire on July 31, along with a 54-cent-a-gallon tax on imported ethanol.

The deal is noteworthy because the two “corn state” lawmakers are ethanol supporters who had been trying to retain federal support.

Some $1.33 billion—an estimated two-thirds of the total savings —would be used to reduce the $14.29 trillion U.S. debt. A third of the savings—an estimated $668 million—would be used to extend three existing tax credits that support alternative fuel production and infrastructure, including:

• A tax credit for the production of cellulosic biofuels that aren’t made from corn, which was set to expire at the end of 2012, would get a three-year extension, at a cost of $308 million. The credit also would be opened to algae-based fuels.
• Tax credits designed for alternative fueling infrastructure— electricity charging stations, ethanol blender pumps, and natural gas fueling stations— would be extended through 2012, at a cost of $253 million. The Joint Committee on Taxation estimates that about half of qualifying investments will be in non-ethanol infrastructure.
• A small-producer tax credit would be extended an extra year, through Dec. 31, 2012, with a 7 cents-per-gallon credit (down from the current 10 cents-per-gallon credit)—reducing the cost to an estimated $107 million.

"If Congress fails to enact this proposal before it adjourns for August recess, the substantial levels of deficit reduction and investment achieved by this compromise will no longer be possible, and we cannot commit our support after that point," the Senators said. "Therefore, we ask for your assistance in moving this agreement through Congress before we adjourn."

Brooke Coleman, Executive Director of the Advanced Ethanol Council (AEC) , commented, “ This agreement has enough of the right ingredients to move the conversation forward.…We particularly appreciate Senators Klobuchar and Thune for their dogged commitment to reforming rather than terminating the federal commitment to renewable fuels, and their steadfast protection of tax incentives designed to create jobs and promote alternatives to foreign oil.”

Bob Dinneen, President and CEO of the Renewable Fuels Association (RFA) offered the following reaction: “This is not the perfect compromise, but it does demonstrate the willingness of American ethanol producers and advocates to do their part to address budget concerns while not sacrificing the progress and evolution of the industry. I would challenge other industries to step up to the plate in the same manner. The status quo of American energy and tax policy simply won’t work.”

In mid-June, 33 Republican Senators joined 40 Democrats in voting to eliminate the subsidy. Although the amendment was attached to a bill with little chance of passing, it sent a clear message. "The best way for ethanol to survive is to stand on its own two feet, without spending something we don't have to get something we're going to have anyway," Sen. Tom Coburn, (R-Okla.) told msnbc.com.

In 2010 worldwide ethanol fuel production reached 22.95 billion U.S. liquid gallons, with the United States accounting for 57.5 percent of global production. A big winner of the deal would be the Brazilian ethanol industry, which has struggled to gain large-scale access to the U.S. market because of the impediment of the 54-cent-a-gallon tariff.

For more information, see the bipartisan letter to Congress.