Future Ethanol Policy Changes

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In last week’s column, we looked at some of the past and current successes of the ethanol industry in the U.S.; however, public opinion of ethanol has also changed in the last decade, and public sentiment has seemed to turn quite negative toward ethanol production in many areas of the U.S. Everyone from political leaders to some who formerly supported ethanol to university professors to the national news media to local citizens are blaming ethanol for high food costs, environmental problems, damage to vehicle motors and many other issues. While many of the claims are not factual, they have raised a lot of doubt about the future of ethanol production in the minds of many Americans.

Many political leaders have become quite vocal in their criticism of ethanol legislation at the federal level. Late in 2010, Congress narrowly passed a bill extending the Volumetric Ethanol Excise Tax Credit (VEETC), the so called “blenders credit” of 45¢/gal. for one year until the end of 2011. They also extended the 54¢/gal. tariff on ethanol until the end of 2011, which discourages ethanol imports into the U.S. Legislation has recently been introduced in congress to eliminate both provisions by the end of 2011 – or earlier – which would save the U.S. government nearly $5 billion/year. Some members of congress have called for retaining some of the funding to support development of cellulosic ethanol, and other new-generation biofuels. The big oil companies are scheduled to receive in excess $50 billion in federal subsidies over the next decade.

The U.S. Environmental Protection Agency (EPA) recently released guidelines that allow for an increase from the current 10% ethanol standard blends for gasoline to 15% ethanol blends in gasoline. This would obviously increase demand and usage for ethanol; however, several states have asked for a waiver from the 15% ethanol requirement, and some members of congress want to pass legislation repealing all mandates for ethanol blends in gasoline.

Most observers feel that there would be very little immediate impact on U.S. ethanol production from the loss of the ethanol import tariff. Brazil is the other major producer of ethanol in the world, producing most of their ethanol from sugar cane. Currently, U.S. ethanol prices are well below Brazilian ethanol prices – due to high world sugar prices. However, that could change in years to come, if the price of Brazilian ethanol drops, or if other countries start producing more ethanol.

A recent study at Iowa State University estimated that elimination of the VEETC tax credit would lower average U.S. corn prices by about 7% over the next few years; however that would increase to a 17% reduction in corn prices if the mandate to blend ethanol in gasoline was also lifted. Farm operators and rural communities would certainly feel that impact.

A bigger philosophical question might be what the impact will be on future development of renewable fuels if the subsidies and mandates are eliminated. Many people are very excited about producing ethanol from woodchips, switchgrass, algae and other substances; however, most of this type of ethanol production is still in the early research and development stages, and is several years away from  commercial production. Using corm cobs and corn stover is the most promising new feedstock source for ethanol production. It can be very risky to invest in new forms of renewable fuels – most of which face very high start-up costs – if there is no guarantee of a future market for the fuel. This could drive away investors and lenders from supporting future growth of renewable fuels.

Most experts agree that neither the VEETC tax credit or the ethanol import tariff were meant to be permanent, and would probably be phased out over time. This may be a good time to phase out or to re-adjust the blenders credit and the tariff; however, future development and production of renewable fuels needs to be considered. As we continue to fight wars in the Middle East, and deal with erratic world oil prices, we need to continue to explore alternative fuels and create opportunities for commercial development of viable renewable fuel alternatives. We need leaders at the federal and state level who are visionary in developing a comprehensive energy plan for the U.S.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

Discuss this Blog Entry 4

Bill_USA (not verified)
on Sep 7, 2011

The critics of ethanol are willing to make a very big bet that oil supplies from the policitally unpredictable middle East will not see a supply interruption or reduction. Given the political ferment in the mid-East, anyone concerned about our energy security considers this an incredibly stupid and reckless bet. Knowledgeable individuals know that no-one can know what is in store for the geopolitics of the middle East. Betting that there is no increased risk to our steady supply of oil is foolhardy.

If we experienced a 10% drop in our oil supply, this would throw us into a deep recession (assuming we had a strong economy to start with). Just considering the impact of a small loss of supply of oil is enough to maintain support for corn based ethanol (which will only be necessary for a couple more years, given the rate of increase in the price of oil and increasing efficiencies being achieved in the ethanol industry) and contnued efforts to achieve commercial viability for cellulosic ethanol.

A strong starch based ethanol industry would greatly facilitate bringing cellulosic ethanol to commercial viability once the technical hurdles are cleared. Cellulosic ethanol will only become commercially viable when made on an industrial scale. A healthy starch based ethanol industry will cut the time required to achieve commercial viability for cellulosic ethanol by about 10 to 15 years AND AT A MUCH REDUCED COST FOR THE GOVERNMENT (private financing would be more readily available reducing the need for public financing in the later Development stage of cellulosic ethanol).

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