Congress still hasn’t taken action to extend the redundant tax credits for compensating oil companies for blending the ethanol that they are required by law to blend, but that hasn’t stopped the ethanol lobby from trying. The argument now is that it is just too late in the year to debate the matter, so it should be simply extended with the “stroke of a pen.” Per an interview with Chief Ethanol Lobbyist Bob Dinneen:
Monica Trauzzi: Let’s switch gears and talk about tax credits. Right now there’s a tax credit in place that pays $0.45 per gallon to blenders to incorporate ethanol into their fuel. What are your expectations for how that might be addressed during the lame duck?
Bob Dinneen: Well, we think Congress needs to act. Look, the government is not going to shut down. They’re going to get something to the president’s desk in terms of a continuing resolution. It will likely have a tax component. I think there will be an opportunity in a lame duck to address some of these issues. Congress failed to work on the extenders last year, throughout the balance of this year. They’re going to have to get that done and we think it’s critically important that they do so. If, on January 1, Congress has failed to extend these important incentives, plants will shut down, jobs will be lost. I don’t know how many or what, but certainly …
Monica Trauzzi: Will it really be that dramatic though? I mean the ethanol industry is doing OK.
Bob Dinneen: We are right now.
Monica Trauzzi: Particularly with first-generation ethanols.
Bob Dinneen: We are right now, but …
Monica Trauzzi: Why do you guys keep needing tax incentives?
Bob Dinneen: In the absence of the tax incentive discretionary blending evaporates. With more than 2 billion RENs through the RFS program that are out on the marketplace, they would quickly be bought up by refiners. So there’s no question that in the absence of the tax incentive demand for ethanol will fall. And if that happens, there’s no question that plants, some plants would shut down. Now, will it be as dramatic or as devastating as the failure of Congress to extend the biodiesel tax credit? No, because we do have a stronger underpinning of regulatory support. The RFS is there and there will be ethanol that will continue to be blended. But suddenly the RFS is going to be a cap, not a floor. All the growth opportunities for ethanol aren’t going to be there. If we’re going to continue to grow the ethanol industry and evolve the ethanol industry and have markets there for cellulosic ethanol and other advanced biofuels, without the tax incentive that doesn’t happen. So we are very committed to making sure the industry is able to continue to grow and evolve these marketplaces that are opening up. And that’s why extending the tax incentive needs to occur.
Now, do you want to look at ways to reform it? Absolutely and we’re working with the administration, we’re working with our allies on Capitol Hill, we’re working with other stakeholders to try to determine how you can address the future of the tax policy in a responsible fashion, in a way that provides some confidence that the markets will continue to be there, that will allow the continued evolution of the industry into newer technologies, different feedstocks, all the rest. That’s a healthy conversation to have. You can’t have that in the week or two that you’re going to have in a lame duck session. So they can extend this tax incentive with, you know, a stroke of the pen, a little bit of Whiteout, just change the date. That’s what they need to do this year and let’s have a robust discussion about future biofuels tax policy and make sure we’re thinking about it in terms of what’s the best policy to promote cellulosic ethanol? How do we commercialize other advanced biofuels? How do we make sure that E85 and other fuel uses for ethanol as a replacement fuel are there? And that’s just going to be a much broader conversation.
That’s fear mongering by Dineen. Might some ethanol plants close down if the tax credit isn’t extended? Doubtful. The tax credit would cost cost nearly $6 billion in 2011 based on the mandate volume of 12.6 billion gallons of corn ethanol (see the RFS Schedule for details on volumes). The volume of mandated corn ethanol for 2011 is 600 million barrels higher than in 2010. So mandated demand for corn ethanol next year will be higher — not lower than this year.
If the ethanol industry builds out capacity in excess of the mandated volumes, then it is possible that some excess capacity may have to be idled. But that should not be the problem of the taxpayer. We should not have to spend $6 billion just to protect people who might have made a bad investment decision to invest in capacity beyond the mandated 12.6 billion gallons. Is it a wise use of tax dollars to spend $6 billion just to incentivize an extra billion gallons or so (Dineen’s “discretionary blending”) beyond the 12.6 billion gallon mandate? Absolutely not! There is enough wasteful spending as it is; stop burdening taxpayers and even worse our children with this redundant subsidy.
As I have argued before, the ethanol industry would be far better served to focus their efforts on the penetration of E85 in the Midwest. If they can’t capture a significant share of that market in their backyard, then this whole thing is indeed a farce and will need to be subsidized forever. There are better ethanol policies that might help make ethanol a viable alternative in some markets. Extending the current redundant subsidies “with the stroke of a pen” is not one of those policies. To be blunt, it would be an idiotic waste of $6 billion.