Billions subsiduze ethanol
BYLINE: SETH SLABAUGH seths@muncie.gannett.com
MUNCIE -- Billions of dollars in government subsidies to the rapidly growing ethanol industry need to be much more critically evaluated, according to a recent study of sustainability.
"Hundreds of government programs have been created to support virtually every stage of production and consumption relating to ethanol and biodiesel, from the growing of the crops that are used for feedstock to the vehicles that consume the biofuels," notes the report, Biofuels: At What Cost, prepared for the International Institute for Sustainable Development.
Government support for ethanol includes the federal Renewable Fuels Standard (RFS), the Volumetric Ethanol Excise Tax Credit (VEETC) and the import tariff on ethanol; the state of Indiana's ethanol production tax credit and tax credit for retailers who sell E85; and tax increment financing (TIF) and tax abatement at the local level in East Central Indiana, where several proposed ethanol plants are being developed.
The author of the study is Doug Koplow, an energy subsidy analyst from Cambridge, Mass.
"There are many questions I don't have answers to but are worth asking," Koplow said in an interview after presenting the study to the National Press Club.
For example, he asked:
* What is the state and local risk from ethanol plant failures?
* Is there enough water to supply all of the proposed ethanol plants?
* Are neighbors being upset by odor and other negative consequences?
* Will retired farm land, woodland, wetlands and grassland habitat be converted to corn production?
* Will more frequent planting of corn and less planting of soybeans hurt soil productivity?
Two Indiana subsidies
In Indiana, two credits are available for ethanol, according to Deb Abbott, spokeswoman for the Indiana State Department of Ethanol.
"First, there was $50 million in Clean Indiana Production Credits," she said. "Qualifying ethanol producers could receive a 12.5-cent per gallon credit, not to exceed $3 million per production plant. All of these credits have been awarded, with $35 million being awarded to ethanol producers and the remainder going to bio-diesel. The administration is not seeking to renew this program.
"Second, there is a 10-cent per gallon tax credit for retailers selling E85 (motor fuel blends of 85 percent ethanol and 15 percent gasoline). There is a cap of $2 million on this credit or it ends on July 1, 2008, whichever is first."
Gov. Mitch Daniels wants to lead the next generation of ethanol production instead of playing catch-up like the state did in the corn-based ethanol game, Abbott said.
"The next phase of the state's ethanol policy will focus on making Indiana the leader in the next generation of biofuels development and production," she said. "The governor will ask the next Legislature to help fund the development, production and transportation of new biofuels, including new production credits restricted to cellulosic and biomass technologies."
'Unbelievable' fed credit
The largest of all the subsidies is the federal VEETC -- a tax refund of 51 cents for every gallon of ethanol blended with gasoline. VEETC is awarded without limit, regardless of the price of gasoline, Koplow noted.
"When oil prices went high, ethanol could make it without the (VEETC) subsidy, but it's a fixed subsidy," said Chris Hurt, an agricultural economist at Purdue University. "The federal subsidy by itself will pay for the total construction cost of the ethanol plant (nearing completion) in Marion in three years. Can you imagine that? The entire cost of a facility being paid off by the government in three years is unbelievable."
Federal lawmakers should be encouraged to consider thinking about a variable VEETC subsidy, Hurt said.
"Above $40 a barrel on oil is about where ethanol could make it on its own, particularly with $2 a bushel corn," Hurt said. "So let's maybe go to, if oil is $65 per barrel there is no subsidy."
Another federal financial incentive is the RFS, the federal law mandating the consumption of at least 7.5 billion gallons of renewable fuel a year by the year 2012.
'Unsustainable'
Koplow's study questions whether billions of dollars in government support for the ethanol industry is the best way to achieve the goals of reduced dependence on foreign oil, reduced greenhouse gas emissions and rural development.
He is convinced that the extremely high returns on equity investments into ethanol plants are coming to an end.
"This is simply unsustainable, and likely reflects a mix of reasonable corn prices, historically high gasoline prices, and very generous state and federal subsidies," Koplow said.
His study found that ethanol subsidies were supported by the powerful interests of agriculture, the national security community and much of the environmental community.
Koplow's report gives several examples of the unintended consequences of ethanol subsidies.
Corn is one of the most heavily subsidized and chemically intensive crops in the United States, and growing corn requires lots of water, an issue in the western corn belt.
Because of a legal loophole that allows manufacturers of flexible-fuel vehicles (FFVs) to obtain generous credits toward meeting fuel-economy standards, FFVs on the highway are predominantly large, and optimized to use gas, according to Koplow. Their inefficiency when running on E85 means that keeping one FFV filled with E85 costs around $500 a year just in federal tax credits associated with the production of ethanol contained in the fuel, he reported.
'Buy American'
Randolph County provided a TIF district, the maximum allowable property tax abatement and $325,000 in cash from its economic development income tax fund to the proposed Cardinal Ethanol bio-refinery. The county also offered a $10 million, unsecured loan, but that incentive was taken off the table because Cardinal was able to raise enough equity from investors to meet its goal.
Greg Beumer, director of the Randolph Economic Development Corp., said he didn't know enough about all of the federal, state and local ethanol subsidies to give an educated answer to some of the questions being raised by Koplow. "Which may be part of the problem," Beumer said.
"We've always had this 'Buy American' thing, and ethanol is about as American as you can get," said Randolph County farmer Troy Prescott, president of Cardinal Ethanol.
He noted that federal price supports for corn, unlike the VEETC credits, are variable. "The federal subsidy for corn this year is gone due to the increased price of corn, which is attributed to the ethanol industry," Prescott said.
Koplow's report "didn't look at the increased tax revenue to state, federal and local government that ethanol incentives produce," said Matt Hartwig, spokesman for the Renewable Fuels Association, the voice of the ethanol industry. "He didn't consider the increased economic activity that local communities, counties and states are realizing.
"The incentives the federal government put in place have worked as intended. We are seeing the ethanol industry getting its legs underneath it and growing with confidence."
Koplow estimates that by the end of this decade, assuming continuation of current policies, government support for ethanol will be as much as $8.7 billion a year.
According to him, ethanol subsidies lack transparency and coordination, are growing without constraint, lack coherence in achieving policy aims, create a risk for state and local government, are low in cost-effectiveness, are causing environmental stress, and need to be questioned and researched.
* Contact news reporter Seth Slabaugh at 213-5834.