The Ethanol Question I Did Ask

Last December, I received an intriguing request from the Public Relations Director at the world’s largest ethanol producer. Nathan Schock asked if I would be interested in posing a video question that would be answered by POET CEO Jeff Broin. He said that any topic was fair game, except for questions dealing with proprietary information.

I considered a number of questions, and wrote an essay detailing my thought process as I ran through a list of potential questions: The Questions I Didn’t Ask. But I had one question that had been weighing on my mind more than any other, and I posed that one in the video I sent in.

Since then, Nathan and I have exchanged a number of e-mails about the status of the question. As the months went by, I began to suspect that even though anything was supposed to be fair game, the particular question I did ask was a bit tricky for them to answer. But today, they answered that question and issued a press release calling for a change in direction on the nature of the ethanol tax credit:

Ask POET Episode 3: the Ethanol Tax Credit

I have long maintained that with the Renewable Fuel Standard (RFS) in place, the ethanol tax credit (the VEETC)  is redundant. I have made this argument many times on my blog (see Strategizing for the Ethanol Industry), and I made the argument at Forbes.

My argument has been that we don’t need the tax credit with the RFS in place, but if we do have a tax credit it should be directed at building out incentives and infrastructure for E85 – particularly in the Midwest close to the source of the ethanol. The current nature of the VEETC is to pay oil companies for complying with the law requiring them to blend specific quantities of ethanol.  This was the gist of a plan announced today by Growth Energy:

Growth Energy Proposes Fundamental Shift in America’s National Fuel Policy

The “Fueling Freedom” plan calls for the phasing out of current ethanol supports over time, by redirecting a portion of those funds to build out the infrastructure for the distribution and use of ethanol, and shifting the remaining portion away from the oil companies to opening the market. The primary elements of the plan include:

* Funds currently going to the oil industry as an incentive for blending ethanol into gasoline (the VEETC) would be redirected to provide backing for the build out of distribution infrastructure for ethanol – such as tax credits for retailers to install 200,000 blender pumps and federal backing of ethanol pipelines. This will provide Americans the access to choose ethanol in an open and free market, and would allow for the elimination of the tax supports over time in exchange for that level playing field.

* Requiring that all automobiles sold in the U.S. be flex-fuel vehicles – as many as 120 million. This requires no additional cost to taxpayers and a minimal cost (about $120 per vehicle) to vehicle manufacturers.

Growth Energy’s Fueling Freedom plan, once implemented, would build out the infrastructure in the United States to create a path that leads to a genuinely free market – an open market that is free of government supports. Redirecting monies currently paid to oil companies to blend ethanol into gasoline toward infrastructure improvements would enable consumers to choose between gasoline and renewable, homegrown ethanol.

POET also issued a release voicing support for the plan:

POET voices support for Fueling Freedom Plan proposed by Growth Energy

I was told that the development of this plan is why it took longer for my question to be answered; that they didn’t want to answer it when it anticipated the change in strategy that they were working on.

I will note a couple of things related to the announcement. First, I don’t think the fact that it will cost the auto industry an additional $120 to produce E85 vehicles means there will be “no additional cost to taxpayers.” Someone will pay for that, and I don’t think it will be the car manufacturers. I am not suggesting that it is a bad idea (I actually support this) but the cost will be borne by taxpayers in one form or another.

Second, there are phrases in there like “phasing out of current ethanol supports over time” and “eventual phasing out of government support for ethanol.” Those comments will require significant clarification. What exactly does that mean? A cynical person might suggest that the ethanol industry could see that the government was losing an appetite for the subsidies, and by embracing a strategy of “eventual phasing out” they might be able to keep the bulk of the subsidies for many more years. So right away the question becomes “What does your time-line look like for the phase-out?”

We know that the VEETC expires at the end of 2010. We have been hearing for quite some time now that ethanol is competitive with gasoline. We know that the oil industry is the recipient of the VEETC payments. Why then is an “eventual” phasing out required? I think it is time to move on to the question of “What would be the impact if the tax credit is not renewed at the end of 2010?”

In fact, in the answer to my question, Jeff Broin calls on the oil industry to walk away from their subsidies. Given the recurring argument that the VEETC is really an oil company subsidy since they receive the payments, wouldn’t allowing the credit to expire this year mean they are walking away from a subsidy?

In any case, I do thank POET for taking on the question. I believe their answer is a step in the right direction, and I appreciate the opportunity to be involved in the debate.