Switching To Biofuels Could Cost Lots of Green

By Steven Mufson and Dan Morgan
Washington Post Staff Writers
Friday, June 8, 2007

As President Bush and congressional leaders rally support for their ambitious biofuel proposals, one ingredient is often left unstated: the cost.

Bush and members of Congress stress energy independence and environmental benefits of federal requirements for a massive increase in the use of biofuels in motor vehicles. But so far they have muted discussion of the prosaic details of how to pay for the subsidies and other incentives seen as crucial for meeting the new biofuels targets.

If the current tax credits, grants and loan guarantees are extended, the package would cost taxpayers $140 billion more over the next 15 years. New proposals under consideration in Congress could raise that tab to $205 billion.

Neither the White House nor Congress has spelled out how they plan to square the costs with other budget priorities. Paying for the incentive programs, which are supported by a bipartisan coalition of lawmakers, could clash with keeping the federal budget deficit under control. Democrats have vowed to abide by so-called pay-as-go rules -- offsetting new programs with spending cuts or new tax revenue.

"We aren't paying enough attention to the green lost to the Treasury . . . in stimulating ethanol to make the environment greener," said Robert D. Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. "Before we leap to extend subsidies for alternative fuels or ethanol, we need to take a hard look at their impact on future deficits."

The biggest single expense would be an extension of a 51-cent-a-gallon ethanol tax credit scheduled to expire in 2010. It would cost the federal government an extra $131 billion through 2022 under a fuel mandate that recently cleared the Senate Energy and Natural Resources Committee. (It would cost $18.36 billion in 2022 alone.)

In his State of the Union address in January, Bush proposed mandating the use of 35 billion gallons of renewable and alternative motor fuels by 2017. Some proposals in Congress go even further. The Senate energy committee recently passed a bill that would give industry until 2022 to meet a 36 billion gallon target. Sens. Richard C. Lugar (R-Ind.) and Tom Harkin (D-Iowa) are backing a measure that would push that to 60 billion gallons by 2030.

The Senate energy committee version is set to go to the Senate floor next week, and a similar mandate is being drafted by the House Energy and Commerce Committee. But the budget dilemma will hit when extended and expanded tax breaks are put on the table in the House Ways and Means or Senate Finance committees. That hasn't happened yet.

The agribusiness community has recently split over the issue. The chicken and cattle industries, hurt by rising corn prices as demand for ethanol climbs, have lobbied against the generous tax subsidies for corn farmers and others in the ethanol industry.

But political support for biofuel has spread far beyond the traditional agriculture constituencies. Concern about greenhouse gases, high gasoline prices and U.S. reliance on oil imports has generated support for biofuel makers. The early 2008 presidential caucus in Iowa is making support of biofuel popular among candidates.

Besides the ethanol tax credit, other current incentives include a $1-a-gallon biodiesel tax credit, a subsidy for service stations that install E85 pumps, spending by the Agriculture Department on energy programs, and various other Energy Department grants and loan guarantees.

Various proposals in Congress would add to those costs.

Some lawmakers want to provide aid for ethanol infrastructure because ethanol is too corrosive to be transported through existing gasoline pipelines. Harkin wants to grant right of way along U.S. highways for new ethanol pipelines. Another bill would establish a Strategic Ethanol Reserve for years when corn harvests are reduced by droughts. Late last month, a House Agriculture subcommittee approved a proposed energy provision that would provide $2 billion in loan guarantees for new biomass plants and $1.5 billion for research into cellulosic ethanol technologies.

Loan guarantees for cellulosic ethanol plants could cost $10.8 billion, Energy Department research and development programs could add $6.5 billion, an extension of the $1-a-gallon biodiesel tax credit (which expires in 2008) would cost $10.2 billion and ethanol-related corn subsidies could total $14 billion, according to estimates by a former Office of Management and Budget expert. Grants to help build infrastructure capable of handling such a large volume of ethanol could cost $3.35 billion.

Hardly any of those costs would be offset by less spending on agricultural subsidies. Keith Collins, the Agriculture Department's chief economist, said ethanol-driven increases in crop prices lowered farm-program costs by $10 billion over the past five years. But there isn't much more to save. The Congressional Budget Office baseline estimate for those price-sensitive corn subsidies comes to $2.6 billion over the next decade. Savings in subsidies for other crops would be modest, Collins said. Separate direct payments to corn farmers, projected to be $2.1 billion a year, will continue regardless of prices, he noted.

But higher corn prices will mean higher food prices for consumers. "With any new technology, there are going to be costs and benefits," said Collins. "We will see higher food prices, but not anything that will be unmanageable."

House Ways and Means Committee staff members said discussions about ethanol-related tax items haven't begun. There might not be any need to deal with the issue this year because the existing ethanol tax credit doesn't expire until 2010. In discussing other tax breaks with expiration dates similar to the ethanol tax credit, House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) is fond of saying that the time is not ripe for dealing with such problems.

The Senate Finance Committee hasn't dealt with the potential cost of the fuel mandates, either. Chairman Max Baucus (D-Mont.) said through a spokeswoman that he was looking for fiscally responsible ways to promote use of biofuels, but that he was not ready to discuss how to do that. "Such efforts will not, of course, be without significant costs," she said.

The dilemma over how to pay for ethanol tax breaks and incentives is part of a broader problem for Democrats. They are trying to reduce the deficit while simultaneously extending some of the Bush tax cuts that expire in 2010, easing the bite of the alternate minimum tax and undertaking initiatives such as an expansion of health care for children.

The American Meat Institute, along with dairy, poultry and pork organizations, is raising concern about the rising price of food because of higher corn prices. A University of Iowa study said consumers are already paying an extra $14 billion a year as a result.

The Senate energy bill mandates that ethanol made from materials other than corn, such as prairie grasses, eventually exceed output of corn-based ethanol. But an Iowa State University study was not optimistic about the ability to accomplish that. In corn-producing regions, it noted, subsidies of $270 an acre -- in addition to the existing highway fuel tax break and state tax breaks -- would be needed to induce farmers to switch from corn to prairie grasses.

Moreover, the technology to produce cellulosic ethanol -- made from wood, waste or grasses -- at a commercially competitive price does not yet exist. "It's a pipe dream to think we're going to get a lot of farmers switching to cellulose without a lot of subsidies," said Bruce Babcock, an economics professor at Iowa State.

"These first cellulosic plants will not be built without government guarantees," House Agriculture Committee Chairman Collin C. Peterson (D-Minn.) acknowledged late last month.

Many economists cringe at that thought. "If the aim is to reduce gasoline consumption, the best way is to raise the gasoline tax," said Ian Parry, economist at Resources for the Future. "That exploits all potential options for saving fuel -- driving less, increasing vehicle fuel economy over the longer run, and creating more demand for hybrids and alternative fuels like ethanol. Lowering the price of ethanol only exploits the last of these responses, so it is far less cost-effective than raising gasoline taxes."

Rep. Tim Holden (D-Pa.), who chairs the House Agriculture subcommittee dealing with energy, contended that "we need a Manhattan Project . . . we need to be less dependent on energy."

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