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May 06, 2011

Ethanol subsidies: better to burn out than to fade away?

Ethanol’s main subsidy—the Volumetric Ethanol Excise Tax Credit (VEETC)—is on the chopping block. Given the current fiscal climate, even ethanol proponents have resigned themselves to the fact that VEETC—an annual $6 billion tax credit, set to expire at the end of this year—is probably on its last legs.

This week, those that would kill the 45-cent blenders’ credit subsidy quickly, and those that would prefer a long farewell, drew their lines in the sand. Sen. Dianne Feinstein (D-CA) and Sen. Tom Coburn (R-OK) introduced a bill Tuesday that would fully end VEETC and the import tariff on foreign ethanol by July 1, 2011.

A day later, Sen. Chuck Grassley (R-IA) and Sen. Kent Conrad (R-N.D.) released a bill that would gradually make the tax credit counter-cyclical over the next five years. Under their bill, VEETC would drop to 20 cents next year and 15 cents in 2013. After that, the credit would be pegged to oil prices, ranging from 30 cents a gallon when oil is at $50 per barrel or less, to zero when oil reaches about $90 per barrel. It would also keep the import tariff, but lower it to 20 and then 15 cents in 2012 and 2013, respectively. Co-sponsors of the Grassley-Conrad bill include Minnesota DFL Senators Amy Klobuchar and Al Franken.

Essentially, this week’s legislative action is the culmination of efforts on two sides of a heated debate around VEETC (and corn ethanol generally, but I’ll stick to VEETC in this blog). Team A: a strange-bedfellows coalition of environmental and hunger organizations (including Friends of the Earth, Environmental Working Group, NRDC, Oxfam and others) and livestock and processed food producers (groups like the American Meat Institute and Grocery Manufacturers of America). Team B: the ethanol industry (Renewable Fuels Association, Growth Energy, etc.) and the National Corn Growers Association. Bet you can guess which team likes which bill.

Regardless of how it happens, there’s no denying it’s well past time to make a shift in our biofuels policy. The question is, will federal policy drive better, or just more, biofuels? (Even if VEETC dies, we still have a federal manadate for biofuel production). The sooner we can get to an approach that rewards performance (see our colleague Loni Kemp’s “Greener Biofuels Tax Credit” for an idea of one such approach), rather than gallons, the closer we will be to better biofuel policy.

Julia Olmstead


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