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Ethanol subsidy faces more Senate tests

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On Tuesday afternoon, after the Senate failed to back an amendment that would have put an abrupt end to $6 billion a year in subsidies for corn ethanol, the president of the Renewable Fuels Association savored the moment.

“Sometimes your opponents give you a gift,” Bob Dinneen said, referring to the strategy of Sen. Tom Coburn (R-Okla.), who introduced the amendment and unsuccessfully pressed for an end to debate on the matter. “The way Coburn went about this didn’t help his cause,” Dinneen said.

But next week, the foes of ethanol subsidies are planning to try again in what could prove to be one of the toughest battles ever for the ethanol industry. Some oil industry lobbyists, never fans of the ethanol subsidy, say that about 20 Democrats, who this week opposed Coburn for largely procedural reasons, could join with Republicans to eliminate the subsidies in a measure being drawn up by Sen. Dianne Feinstein (D-Calif.).

If successful, it would end a long streak of success for ethanol proponents, an odd assortment of a few big companies, Midwestern corn farmers and national security strategists eager to reduce America’s reliance on imported petroleum.

Ever since the Carter administration, the makers of ethanol — who use a souped-up version of the liquor distilling process — have received tax breaks and other support from the federal government.

Over the past decade, they have won a 45-cent-a-gallon tax credit and a 54-cent-a-gallon import tariff that helps keep Central and South American products at bay. In 2005, the ethanol lobby secured a federal mandate ordering refiners to blend increasing amounts of ethanol into motor fuel; a 2007 law doubled that.

As a result, the U.S. ethanol industry has grown more than seven-fold since 2001. Its biggest players are commodities giant Archer Daniels Midland, the big oil refiner Valero (which bought up facilities from the bankrupt VeraSun) and a private firm called POET.

The big three account for more than a quarter of the output from an industry that last year produced 13.2 billion gallons, or about 900,000 barrels a day. Thousands of Midwestern corn farmers, an influential bloc, also reap the rewards.

But the cost of the subsidy has also grown, to $6 billion a year, a tempting target.

“They’ve been incredibly effective over the years,” said Frank Maisano, a lobbyist at Bracewell & Giuliani who represents some oil companies.

It hasn’t hurt that Iowa, host of an early caucus in the presidential primary campaign, is the country’s biggest producer of corn used to make ethanol. Not a single senator from a major corn-growing state, Republican or Democrat, voted for Coburn’s measure. Presidential hopefuls still tiptoe around the issue.

“If we didn’t have an Iowa primary, we wouldn’t have an ethanol mandate,” said Stephen Brown, a government relations executive at Tesoro, an oil refiner.

“But,” said Maisano, “a lot of the shine has fallen off the industry. . . . We’re in a different subsidy environment right now when it comes to . . . whether we can afford them or not. It’s different from where we were five years ago.”

The Renewable Fuels Association and its lobbying ally Growth Energy are aware of that, too. Dinneen said his group supports a different measure that would end automatic subsidies but would maintain the federal mandate and subsidize the installation of 53,000 special gas-station pumps that would mix varying amounts of ethanol in with gasoline.

The measure, co-sponsored by John Thune (R-S.D.) and Amy Klobuchar (D-Minn.) and nine other Midwestern senators, would also extend the tax credits for cellulosic ethanol made with feedstocks other than corn and would tie future tax incentives to the price of oil. When oil prices reach the current high levels, there would be no subsidy, but if they dropped precipitously, the tax credits would go into effect again.

“We certainly understand the budget situation being what it is,” Dinneen said. “Industry has grown. Policy has changed over time. So we are in support of reforming the tax incentive program.”

He said the Thune-Klobuchar measure would cost only $1.2 billion over five years, but estimates vary depending on highly uncertain assumptions about oil prices.

Maisano calls Thune-Klobuchar a “fallback” amendment that is a “sign of a weakened ethanol industry.”

Part of the dynamics of ethanol legislation is the widespread confusion about the effect of tax breaks and who benefits. The tax credits go to refiners, who use them to pay for blending ethanol with petroleum. In theory, the credits are supposed to help lift prices for ethanol without raising what consumers pay at the pump.

But Coburn argued that the tax breaks are going to big oil companies that buy ethanol to meet federal blending requirements.

“Right now, none of it is being passed through to our members. It goes to refiners or gasoline marketers,” Dinneen said. But while Coburn says this is a reason to abolish the tax credit, Dinneen wants to “reform” it.

Oil companies have long opposed the tax credits for ethanol. The regulations are more than a thousand pages long, and compliance is a costly hassle. And ethanol is displacing the oil industry’s own petroleum and additives for higher octane.

“The corn farmer, corn farm landowner and ethanol producers are getting the vast majority of that subsidy,” said Ken Glozer, a former senior staff member at the Office of Management and Budget and now a consultant who recently wrote a book on corn ethanol. “Under certain conditions, the refiner captures some. But . . . it is a silly argument to say refiners are putting it in their pockets.”

Glozer notes that just 21,000 farmers in Iowa and Illinois, who produce 36 percent of all corn grown in the United States, get a large chunk of the annual ethanol subsidies. Moreover, ethanol distilleries use more than a quarter of U.S. corn, and many experts say it’s no coincidence that on June 10, corn for July delivery hit an all-time record price of $7.9975 a bushel. Glozer estimates that a typical large farmer in those states, who gets other federal subsidies, too, could be earning between $750,000 and $1.4 million.

He said taxpayers and consumers not only pay for the tax credit, but also pay higher food prices — an assertion the RFA disputes. Moreover, Glozer said, motorists must buy more gasoline because ethanol has only two-thirds of the energy content of regular gas.

Ethanol supporters see the hand of the oil industry in Congress. The 16 senators who signed the cloture petition to allow Coburn to introduce his amendment, Dinneen said, all voted against eliminating oil tax incentives.

“That’s why they lost today. It’s about hypocrisy, not fiscal responsibility,” he added.

(Valero, which bought ethanol distilleries to help provide it with the ethanol it needs, says it has no position on the tax credit.)

Growth Energy chief executive Tom Buis — a onetime farmer and long-serving congressional staffer — said: “There’s a right way and a wrong way to go about reforming ethanol policy. Senator Coburn chose the wrong way.”

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