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Editor's Note-The $4.7 Billion Question
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Editor's Note-The $4.7 Billion Question

Can an expiring tax credit be repurposed to make ethanol more viable?

A $4.7 billion-a-year, 45-cent-per-gallon tax credit offered to refineries that blend ethanol with gasoline expires December 31. Some say let it die. We can use the money in better ways. And heck, after 30 years of subsidies with taxpayer dollars, isn’t it time this industry stands on its own?

Others sound alarm bells and say letting the tax credit die could kill one-quarter of the approximately 400,000 ethanol industry jobs nationwide; hundreds in Minnesota.

I say could because such estimates are exaggerated by ethanol industry cheerleaders. The claims are also based on how the tax credit was supposed to work rather than how it actually does work. The reality is that it may be best to let the tax credit die and then repurpose its funding to help counter ethanol’s accidentally adverse impact on our economy.

The federal government set up the tax credit to make it cheaper at the pump to buy ethanol-blended gasoline. The credit goes to blenders, with the intent that it will flow through to retailers and ethanol producers.

In fact, the credit has rarely been passed along, according to industry observers such as Rick Kment, ethanol and dairy analyst for DTN, the business information service used by commodities traders and investors. And guess who most blenders are owned by or affiliated with? The petroleum industry. Doing away with the tax credit would have little adverse impact on the ethanol industry.

Meanwhile, think of what $4.7 billion a year could do elsewhere during a time when we’re saddled with $13.6 trillion in debt, a $1.3 trillion budget deficit, high unemployment, and a stagnant economy. Among other things, it could fund the hiring of 88,000 more school teachers or 94,000 more police officers nationwide. It could be doled out in the sum of $94 million to each state for use as it sees fit, or in checks of $317 to each of the 14.8 million Americans who are still unemployed this holiday season. Or it could simply not be spent.

This is not to pooh-pooh ethanol or the main ingredient used to produce it in the United States, corn. Minnesota’s 21 ethanol plants produce 1.1 billion gallons a year, making us the fourth-largest producer after Iowa, Nebraska, and Illinois. Production here is estimated to generate $3.1 billion in annual economic output and 8,395 jobs. Gallon for gallon, ethanol is far cheaper to produce than gasoline. And it helps wean us, at least a little, from our dependence on foreign oil. Meanwhile, Minnesota farmers produced $4.6 billion worth of corn in 2009, sustaining the state’s rank as the nation’s fourth-largest corn producer.

The problem is that ethanol uses too much corn, driving its price up and negatively affecting other industries, including production of hogs (where Minnesota ranks third in the nation) and poultry and eggs (10th in the nation).

The Energy Policy Act of 2005 mandated increased use of ethanol nationwide: 9 billion gallons by 2008, 19 billion by 2015, 36 billion by 2022. Today, the only commercially viable way to produce ethanol is with corn, and nearly 35 percent of the nation’s corn supply now feeds fuel production rather than livestock or people. That percentage is expected to grow considerably in the next few years.

The federal mandate for ethanol use, combined with a 4 percent drop in corn production this year, is contributing to drastically higher corn prices: nearly $6 a bushel in early November, up 70 percent since May. (The record high of $7.65 a bushel was set in 2008.) This matters to more than the Hormels and Gold’n Plumps in our economy. By next spring, high corn prices will be seen in the form of higher grocery prices—not just meat, poultry, and eggs, but all products made with corn, corn oil, corn syrup, and dozens of other corn-derived ingredients.

“Higher corn prices would be fine if the playing field was even and the government also mandated that Americans eat so much chicken every week,” says an executive of one poultry producer.

“Chicken’s not in the national interest; ethanol is,” counters an agribusiness attorney. He argues that it’s absurd for meat and poultry producers to blame ethanol for their current budget woes, and that they should have recognized earlier that the extremely low prices they were enjoying were unsustainable.

Either way, corn prices have made discussions about ethanol more polarized, and have added fuel to the fire for those who believe ethanol is overly subsidized.

Common ground—and a solution to both the misdirected subsidy and ethanol’s squeeze on our corn supply—might be found in repurposing the dollars behind the tax credit. Instead of enriching blenders, the credit could go to ethanol producers who find new, commercially viable ways to make ethanol from nonfood feedstocks: corn cobs and stalks, other kinds of crops, or other types of biomass, including municipal waste.

Many ethanol producers acknowledge that corn-derived fuel is only a first step in moving away from petroleum. The industry has been experimenting with new feedstocks and new production technologies for years already. And as ethanol plants see corn prices eat into their margins, the need to innovate is only more urgent. Supporting that innovation makes sense.

Thanks to federal mandate, ethanol is here to stay. The challenge is how to make it truly beneficial to our economy, without subsidies and without adverse impact on other industries.

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