End is near for controversial subsidy

Source: Jason Plautz • E&E  • Posted: Wednesday, December 21, 2011

It happens every year. As Dec. 31 approaches, energy trade groups work overtime to make sure Congress doesn’t let their tax credits expire.

But the ethanol industry isn’t playing that game this year.

“We are not seeking an extension of the ethanol blenders tax incentive, or VEETC,” the Renewable Fuels Association said in a release last week. “The industry is moving on. VEETC did what subsidies should do: help build an industry, ensure it is stable and successful, and then fade away.”

If the industry had its way, VEETC would have been ditched months ago. Industry sources say they are not fighting for a renewal of the so-called blenders credit and a 54-cent-per-gallon import tariff. They say they are prepared to live without them.

“While [VEETC] was a benefit early on in the industry’s development, it’s become more clear over time that it’s not really a benefit to the ethanol industry,” Growth Energy CEO Tom Buis said. “Our bigger focus is on making sure we have fair, open access to the marketplace so consumers can make the choice.”

The credit’s expiration will mean little to the industry, Buis said. Ethanol producers have not received benefits in years, and even refiners who get the credit for blending ethanol with gasoline say they do not need it.

The biggest impact, industry sources say, is that it might cost consumers a few extra cents at the gasoline pump.

The end of the blenders credit has been in the works since this summer, although the ethanol industry has been eyeing its demise for even longer. Signed into law in 2005 to encourage the use of pure ethanol, the credit provided 45 cents to blenders for every gallon of pure ethanol they mixed with gasoline.

But the credit also infuriated fiscal conservatives and environmentalists who said the money should go to advanced, cleaner-burning biofuels. Senate leaders worked this summer to kill the credit well before its Dec. 31 expiration.

Under a deal struck by Sens. Tom Coburn (R-Okla.) and Dianne Feinstein (D-Calif.), the subsidy and tariff would have ended in July. Its $3 billion in remaining funds would have been used to reduce the deficit and provide other industry incentives. The plan passed the Senate by a wide margin but stalled in the House.

Now, as the witching hour for the credit draws near, there is little hope for a reprieve. A letter this month signed by 73 bipartisan House members urged leaders to “resist calls to expand or create new ethanol subsidies in the eleventh hour.”

Chuck Woodside, KAAPA Ethanol’s CEO, said his company has been preparing for the end of the tax all year and he is “pretty comfortable” going into the new year. He said that while his company was not feeling the direct impact of the credit anymore, it was crucial in building up his business.

“When we needed to encourage production, the plants captured the benefits. But when we expanded production to a certain point, the blend wall [became an issue] and the incentives helped with the blending economics,” said Woodside, who is also chairman of the Renewable Fuels Association. “It encouraged investment at levels of the industry when it was needed.”

But KAAPA — which operates a production plant in Nebraska and owns plants in Minnesota and Ohio — and similar producers have not felt those benefits for years, Buis said, because the credit goes to blenders.

The National Petrochemical & Refiners Association has long opposed the credit, as it does most taxpayer subsidies. In a statement, NPRA President Charles Drevna said it was high time to see VEETC and the tariffs go.

“At a time of high federal deficits, every American taxpayer should welcome the elimination of ethanol subsidies, which wasted $6 billion of taxpayer funds last year,” Drevna said. “The ethanol industry still is being supported by federal mandates requiring the use of ethanol in gasoline and by tariffs keeping out ethanol imports, so there was no justification for continuing the VEETC.”

Will consumers feel pinch

Some distributors say the slight price increase could hurt their sales, and refiners could feel a pinch. Woodside said he has even seen price margins drop in recent weeks, which he chalked up to fears ahead of the VEETC expirations.

But those would only be short-term disruptions lasting a month or two or possibly through the end of the quarter, said RFA president Bob Dinneen. What’s more, he added, some of the pain could be mitigated if EPA finishes its certification of a 15 percent ethanol blend soon and demand goes up.

That confidence in the industry’s base made it easy for the groups to let the subsidy go.

“We don’t want to continue something just for the sake of continuing it,” Buis said. “We know we can compete, but there are barriers to consumers and the market and those are much more important now.”

Buis said the industry has focused on expanding fueling infrastructure, especially a flex pump that would allow consumers to pick from a variety of blends. Supporters also say they would like to see tax credits go to advanced biofuels that offer cleaner emissions.

Money would have been directed to those sources as part of the summer deal in Congress, although the industry says that with the remaining VEETC money already spent, they are not seeking additional help.

With the collapse of that deal, it has left the industry in the unusual position of not promoting its credit, even publicly reiterating its lack of support. Buis said it was a sign of a “matured” industry prepared to work within the tight purse strings of this Congress.

Woodside said their approach to VEETC could be a model to the rest of the nation.

“I think at some point everybody needs to come to grips with the fiscal constraints in Washington,” he said. “What we put forth as an industry should be used as a framework. We don’t need these types of incentive in these economics to make ethanol, just like oil refiners don’t need incentives to produce oil. A lot of the industry should be looking at our approach.”