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U.S. Ethanol Incentives Under Scrutiny

Reform of U.S. ethanol incentives could save up to $5.7 billion a year, a congressional watchdog said March 1 as ethanol critics called on Congress to let the tax breaks expire at the end of this year.

In an examination of federal spending, the Government Accountability Office said the ethanol tax credit and a federal law requiring use of biofuels “can be duplicative … and can result in substantial loss of revenue.”

The tax credit will cost $5.7 billion this year and $6.75 billion in 2015 when corn-based ethanol is assured a 15-billion-gallon share of the motor fuel market. The GAO listed options ranging from keeping the credit, ending it or converting it to a variable credit keyed to crude oil prices.

Ethanol margins fall when oil prices are low.

“We urge you to let (the 45-cent-a-gallon credit) expire and resist calls for spending on infrastructure for conventional biofuels,” said a letter to congressional leaders signed by 90 livestock, food maker, budget hawk, environmental and international development groups.

“At a time of spiralling deficits, we do not believe Congress should continue subsidizing gasoline refiners for something that they are already required to do by the Renewable Fuels Standard.”

Trade groups for the ethanol industry said they are willing to accept reforms but attached conditions to it. The Renewable Fuels Association said elimination of petroleum subsidies should move in tandem with ethanol changes.

Growth Energy, another trade group, said the ethanol credit should be converted into financial support for installing “blender” pumps that dispense up to 85 per cent ethanol in gasoline and a requirement for automakers to build flex-fuel vehicles – “then we can compete against oil without any government assistance.”

In its report, GAO said the government, as part of efforts to use less petroleum, buys vehicles that can burn up to 85 per cent ethanol but only one per cent of gas stations have so-called E85 pumps.

Ethanol supports have been under fire since food prices zoomed in 2008. Livestock feeders and food makers say ethanol drives up the cost of feed and, indirectly, the price of meat and grains.

Proponents say ethanol is the only U.S.-grown alternative to imported oil and stimulates rural jobs and income. Nearly 40 per cent of the 2010 corn crop will be used in making ethanol.

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