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ANALYSIS

Corn's New Sacred Cow?

For ethanol industry, mandate means life after tax breaks.

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Republican presidential candidate Rick Santorum, who has called for ending federal tax subsidies for the ethanol industry, campaigns on August 9 in Dyersville, Iowa. Here, he visits the farm where the 1989 movie Field of Dreams was filmed.((Photo by Scott Olson/Getty Images))

You wouldn’t know it from the political cloud over ethanol, but the federal government will keep propping up the corn-based industry even if Washington eliminates its three-decade-old tax subsidies.

A newer law quietly ensures ethanol’s sustained growth. And that mandate isn’t going anywhere.

 

By year's end, the congressional super committee charged with reducing the federal deficit likely will topple the $6 billion in annual ethanol industry tax credits and a corresponding government tariff on imported ethanol. But another prong of ethanol’s government support – the “renewable fuels standard” – will remain. And it may ultimately be more important to corn farmers and the ethanol industry.

Several Republican presidential candidates competing in Saturday’s Iowa straw poll -- Texas Rep. Ron Paul, former Pennsylvania Sen. Rick Santorum, and former Minnesota Gov. Tim Pawlenty -- have called for ending ethanol subsidies, an unthinkable political stance even four years ago in Iowa, the nation's largest corn producing state. 

But none have stepped into the renewable-fuels standard issue.

 

Passed as part of a 2005 energy bill and updated in 2007, the mandate requires the federal government to boost biofuel production by an amount that grows each year, rising to 36 billion gallons by 2022. That is roughly equivalent to 25 percent of the gasoline U.S. drivers will use this year. (Today, biofuels make up about 10 percent of the transportation fuel market, with almost all of that coming from corn-based ethanol.)

When passing the renewable fuels standard law, President George W. Bush hailed it as a way to wean the country off foreign oil. President Obama says the same thing today.

“Without the[renewable-fuels standard], ethanol really wouldn’t be a viable business,” Valero spokesman Bill Day told National Journal. Valero, one of the nation’s largest ethanol producers, says its investment in ethanol hinges on the mandate. The company has doubled its ethanol production in the past two years, to 3.28 million gallons a day.

Oil refiners and those that market gasoline are working to meet the standard mainly by producing corn-based ethanol, which environmentalists oppose because of pollution in its production process. Grocery and food coalitions oppose it too, out of concern that it could spike food-corn prices as fuel demand increases.

 

“In the very unlikely event that the [mandate] is ended before there is a natural market for ethanol, we and all other producers would have to evaluate our situation to see if it was still viable to produce ethanol,” Day said. “But I believe this scenario is unlikely to the point of not being worth speculation.”

“What is really important to us now and what we really think is the key to providing stability to renewable fuels is that we have to maintain the renewable-fuel standard,” said Pam Johnson, a board member of the National Corn Growers Association, who farms corn in Iowa. “We want a voice at the table that explains why the [mandate] is not only important to Iowans and the people [political candidates] are going to visit with at the straw poll and throughout next year, but why it’s also important to all Americans.”

Repealing the mandate isn’t completely off the table in Washington. Two measures were introduced this year aimed at dismantling the standard, but they have failed to gain much traction.

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Senate Environment and Public Works ranking member James Inhofe, R-Okla., in May introduced a bipartisan, bicameral bill that let states opt out of the portion of the mandate that requires corn-based ethanol. Rep. Jim Moran of Virginia, the top Democrat on the House Interior Appropriations Subcommittee, is among the cosponsors. And Sen. Jim DeMint, R-S.C., floated a plan that would have repealed the mandate outright.

Under the 2007 mandate, the Environmental Protection Agency requires oil refiners like Valero and gasoline makers like ExxonMobil and BP to use a certain amount of renewable fuel each year. Most will continue to come from corn, but the mandate also requires a certain percentage of advanced biofuels like cellulosic ethanol, produced from grasses and wood chips.

Companies failing to meet government renewable-fuel standards could face roughly $30,000 a day in fines. Underperforming companies can buy “credits” from those doing more than the law requires.

 

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