It’s a hot-button issue where politicians and ethanol proponents seem to agree. Current ethanol tax incentives need to be tweaked, both to help the federal government whittle down its debt load and make sure clean biofuels continue to be delivered to a gas-hungry marketplace.
To do so, government officials and industry leaders say they need to transition away from the 45-per-gallon Volumetric Ethanol Excise Tax Credit, or VEETC. Created by the Job Creation Act of 2004, it’s an incentive, worth about $6 billion annually to the industry, that’s given to fuel blenders who add ethanol into their gasoline supplies.
In late June, a bill was passed through the Senate to end VEETC support this year. Crafted by Senators Diane Feinstein (D-Calif.) and Tom Coburn (R-Okla.), it is unlikely that this bill will become law and is being countered by legislation introduced by Senators Amy Klobuchar (D-Minn.) and John Thune (R-S.D.). Their bill includes deficit reduction and an investment in ethanol industry infrastructure.
Where does the VEETC go?
Historically, the ethanol industry does not receive direct subsidies from the federal government to blend ethanol into the nation’s gasoline supply. The current tax credit goes to petroleum refiners or the oil industry.
Other credits for ethanol include a 54-cent a gallon tariff on imports, a $1.01 a gallon credit to cellulosic ethanol producers and a 10-cent a gallon small-producer tax credit for ethanol.
The tariff on imported ethanol exists to offset the credit oil companies get – and insures that no U.S. tax dollars go toward foreign ethanol development, since those countries, most notably Brazil, get significant price supports from their own governments.
The ethanol industry, its leaders said, have benefited greatly from VEETC, but so has the American public in the form of cheaper gasoline prices.
The gains in both the production and use of ethanol has kept American gasoline prices 89-cents lower than it otherwise would have been in 2010, according to a recent report from Iowa State University, the University of Wisconsin, and the Center for Agriculture and Rural Development. The effect on the gasoline market has saved the average American family more than $800 in fuel costs in 2010 – not the first benefit to the general consumer due to a tax credit.
Tax credits are tax credits
Name one up-and-coming U.S. industry – and a few established ones – and there’s a good bet there is or has been a government subsidy to help it out. That includes the airline industry, AMTRAK, the oil industry, the wind and solar industries, and subsidies for small business owners and personal tax credits.
Indeed, since 1968, the oil industry has received about $150 billion in tax incentives, according to Growth Energy, a coalition of ethanol supporters. By comparison, the ethanol industry has received less than 14 percent of that.
Broadband Internet service providers have been the latest industry to be pushed past infancy through federal assistance. As part of the 2009 federal stimulus package, ISP companies have shared in $7.2 billion in grants and loans in an attempt to bring broadband service to rural areas that were unserved or under-served. It’s estimated that a total build-out of the industry would cost $24 billion in government subsidies.
However, the ethanol industry has been proactive in seeking a change in policy. Proponents, like POET Chief Executive Officer Jeff Broin and Gen. Wesley Clark in their role as co-chairmen of Growth Energy, pitched the Fueling Freedom Plan last July that would end VEETC within five years.
The Fueling Freedom Plan proposes that instead of keeping with the status quo, what’s really needed is help in getting more ethanol pumps at gas stations across the U.S. – and thus getting more clean, green biofuels into America’s gas tanks.
And that means infrastructure assistance including dedicated ethanol pipelines and a requirement to the auto industry to bring more flex-fuel cars and trucks to the marketplace.
“With a blender pump in every neighborhood and a flex-fuel vehicle in every garage, ethanol can compete against oil without the tax incentive,” Broin said last year. “Ethanol is already competitive with gasoline. I believe the time has come to transition to an open market where consumers can choose their fuel.”
Currently, there are some 4,000 blender pumps in the nation, mostly in the Midwest. The goal is to have more than 200,000 blender pumps for consumer choice.
“With those elements in place, the oil industry would no longer enjoy exclusive access to 90 percent of the fuel supply,” Broin said. “The best way to lower prices for consumers is to allow ethanol to compete with oil in the marketplace.”
“It’s all about wise policy choices,” Clark said in July. “If we play our cards right, we have the right policy as we’re suggesting, we’ll take that (VEETC) money and we’ll transition it into building out our infrastructure to give Americans the freedom of choice on fuels.”
The reality of VEETC reform
The debate over VEETC has already spilled over into the 2012 presidential campaign – with former Minnesota Governor and Republican presidential candidate Tim Pawlenty telling a crowd in Iowa that ethanol tax credits needed to go away gradually. A week later, likely GOP candidate Mitt Romney told Iowans he endorses current-level ethanol subsidies.
One thing’s for certain, as Midwest corn goes from seedling to maturity this summer, the debate over VEETC is likely to grow as well.
“In Washington at the moment, we are facing the reality of VEETC reform,” said Sen. John Thune (R-SD), an ethanol proponent. “Rather than allowing a premature elimination of VEETC to occur, I am pursuing options with colleagues on both sides of the aisle which are designed to smooth the transition from the current VEETC to a less-costly and more widely-supported alternative approach, which will include investing in infrastructure.”
And that’s why POET is prepared to go forward, VEETC or not.
“The bottom line is the 45-cent tax credit will not be in place on January 1, 2012, at least in its current form,” says Rob Skjonsberg POET’s Senior Vice President of Public Policy, Corporate Affairs. “We saw this train coming, and that’s one of the reasons why we advocated for policy reform last year. If an industry has market access and consumer choice, then tax credits become less relevant – demand can drive supply. Reform only works if market access is attached. Otherwise, the only thing the government will accomplish – with the repeal of VEETC – is a tax increase.”
Capped demand
In 2004, when VEETC was created, the ethanol industry hit a then-production record of 3.4 billion gallons of ethanol, an increase of 21 percent over 2003 production, according to the U.S. Department of Energy. Ethanol sales are expected to be about 13.95 billion gallons this year, according to the U.S. Environmental Protection Agency’s Renewable Fuel Standard.
The RFS requires that by 2022, 36 billion gallons of corn and cellulosic ethanol be blended into the national gasoline supplies to help stretch reserves – and reduce foreign imports.
While supply standards have been put into place, a 10 percent cap on ethanol demand severely limits the industry’s ability to make them reality.
“The government’s law – the RFS – and the rules within the same government are completely contradictory,” Skjonsberg says. “The law says X, but the rules don’t allow industry to accomplish X. The politics may be complicated but the solution isn’t. Just open up the market and let it work.”
Industry experts are confident that, without the cap, ethanol can compete with oil. But it needs a level playing field in the form of market access to get there. Without market access, ethanol is held captive – prohibiting growth into next generation fuels and expanding supply to the government set standards. Transferring VEETC funds into infrastructure – flex fuel vehicles and blender pumps – is the logical step. Change is inevitable, but then again, the status quo is not something the ethanol industry has ever been willing to accept.
