The Mad Scramble over the Ethanol Tax Credit

July 20, 2010 |

Growth Energy, the Renewable Fuels Association, the Environmental Working Group, the Grocery Manufacturers Association, the Natural Resources Defense Council, the American Meat Institute, and several members of congress are among the main players in a drama unfolding this week on Capitol Hill, in a battle over the ethanol subsidy.

It’s one of several battles over the next fortnight (as we reported on last week in “The Conclave“) relating to the Congress as it approaches its August recess.

The US context

In a US context, the debate over the support of corn ethanol is pivotal to an understanding of how the Renewable Fuel Standard will play out. For example, the Environmental Working Group has called on the EPA to roll back the corn ethanol mandate. Conversely, Senator Klobuchar of Minnesota is reported to be working on a plan to remove or raise the cap on corn ethanol within the RFS.

The global context

In a global context, this strikes at the heart of the first-generation ethanol industry, which enjoys broad public support in Brazil but is controversial in the US, Europe, and China. The issues? A continuing debate over the environmental benefits, the economic payoff of large subsidies, and the “food vs. fuel” debate.

In short, what will be decided this week in DC is an issue that needs attention in other countries as well.

What is the right mix of policies to ensure a speedy transition to renewables in the absence of a true, full price on carbon?

Why the livestock industry and some NGOs dislike ethanol

For livestock producers, grain is their biggest cost item, and anything that brings down the price of corn is good business for them. Denying or limiting the ethanol secondary market achieves this.

For environmentalist groups, the debate is less about the benefits of ethanol vs fossil fuels (even ethanol’s most ardent environmental critics would refer generally to the “minimal emission benefits”, and the EPA has identified a 21 percent gain compared to fossil fuels even including the impact of “indirect land use change”). They dislike the trade-off of ethanol’s environmental benefits, against what they believe is the destructive impact of corn monoculture. They surely aren’t as strongly opposed to, for example, cellulosic ethanol or sugarcane ethanol.

Environmentalists, livestock, GMA join hands

Yesterday, the Environmental Working Group, the Grocery Manufacturers Association, the Natural Resources Defense Council, the American Meat Institute and Taxpayers for Common Sense “amped it up” a notch with a review of the Congressional Budget Office’s review on the credit, here.

The CBO has an older report here relating to the impact of ethanol on food and feed prices.

An analysis by Josh Kagan at Greentech is here. The Digest’s contributing editor Mackinnon Lawrence essayed the same topic for Biomass Intel.

According to Patrick Boyle of the American Meat Institute, “Taxpayers are fed up. The change we’re seeking is to let [the ethanol tax credit] expire. It’s cost? $1.78 per gallon of gasoline. The subsidies are in the billions, and these billions far outweigh the minute gains from ethanol. Congress can make a difference on yawning budget gap by doing nothing.”

According to Craig Cox of the Environmental Working Group: “We would like to point out the complete failure of ethanol…because the production draws so much energy from fossil fuels, the CBO said it  can be thought of as a method for converting coal and natural gas to a fuel. We found that the amount of gasoline that ethanol saves could be achieved by keeping tires inflated and other strategies.”

A proxy battle over corn

But as the Digest has pointed out before, this is not a battle over ethanol, much less a battle over biofuels. For most, it is a proxy battle over corn.

Environmentalists such as the EWG wish we grew less of it, or used less intensive agricultural techniques in so growing so as to mitigate what they regard as unsustainable environmental impact, such as the runoff of nitrogen fertilizers into the Mississippi River and the Gulf of Mexico.

The livestock and dairy industry surely like corn, but they wish they were once again the dominant market for it. They long for the heady days of the 1980s, when cheap meat was on the rise and US farmers had to be bailed out with extensive subsidies, and counter support such as Farm Aid.

Lord knows, we don’t remember the complaints about subsidized corn agriculture back then from the livestock and dairy industry.

The biofuels industry responds

Growth Energy responded: “Ethanol is the only available option that is lessening our country’s addiction to foreign oil – oil that is getting costlier, dirtier and riskier to extract and transport with each passing day,” said Buis. “Whether it’s the spill in the Gulf of Mexico, or the carbon impact of maintaining American military forces in the Middle East, there is no question that addiction to oil comes at a cost. Ethanol is not a ‘someday’ fuel – it is here today, and it is the only commercially-viable alternative we have to oil, two-thirds of which is imported. Domestic ethanol creates U.S. jobs, is cleaner than oil and can strengthen our national security. If Congress were to pass Growth Energy’s Fueling Freedom plan, we would be giving American taxpayers and motorists the power to choose something other than oil at the pump.”

Bob Dinneen, President, Renewable Fuels Association, said: “Fluctuations in unpredictable ethanol export markets highlight the need for America to focus more attention on increasing its consumption of domestically produced ethanol. America must stop dragging its feet and move aggressively to open up more domestic markets to ethanol. This starts with a full and complete waiver for the use of E15 by EPA. Bifurcating the market or limiting E15 use by vehicle model year aren’t real solutions. Exports and the use of mid and higher level ethanol blends, such as E30 or E85, are important markets for ethanol, but they cannot expand fast enough to absorb increasing production and use of ethanol as called for by federal law.”

A point of agreement

One thing all groups are agreed about – advanced biofuels offer options for farmers, for the environment, for meat producers, for consumers.

As NRDC’s Nathanael Greene points out, “The question is “What we should really be incentivizing?” Peel back support for ethanol. Give other investments more of a fighting chance.”

The Biobutanol option

We have written before that biobutanol may offer strong options for first-generation corn ethanol plants.

The good news? Biobutanol can use the same feedstocks and infrastructure, and the same plants (with a retrofit that could take around three weeks). Because biobutanol has more energy density, a 100 Mgy corn ethanol plant would produce 80 Mgy of biobutanol, but is the same in terms of BTUs of energy.

In terms of distribution, you can put Bu16 in the marketplace today, which means that the 13 billion gallon “blend wall” that is reached with E10 ethanol becomes a 19.5 billion gallon blend wall with biobutanol. And, since the biorefineries produce 20 percent less gallonage, current production would be 45 percent short of the blend wall if all plants converted today.

In terms of fuel economy, although biobutanol is not as efficient as gasoline, it is close. In a 16 percent blend, the difference would be almost imperceptible – less than 1 percent.

The bad news? For livestock and dairy interests, it does not bring down the use of corn, per se. In fact, it may create opportunities to expand the number of biorefineries, because the current US set of corn ethanol distilleries, which can produce as much as 14 billion gallons at nameplate capacity, could produce only 11 billion gallons of biobutanol.

Nathanael Greene at NRDC writes: “I think there’s some value to commercializing butanol and showing that it’s a viable alternative to ethanol as a biofuels molecule. Obviously if it’s produced from corn the way we grow it today, that undermines a lot of its potential environmental benefits. So we need to be sure that any commercialization incentives are limited to just the first few plants.”

Sugarbeets – a feedstock option?

Steve Libsack at Betaseed writes, “My company has been growing energy beets for “proof of concept” from Nova Scotia to Georgia, from Texas to Alaska and from California to Pennsylvania for the past several years.  With beets we can produce 800 – 1200 gallon of ethanol per acre (compared with 300 – 450 gallon per acre from corn) and, at a lower cost per gallon.   Plus, beets reduce GHG emissions by over 60% (compared with 30% for corn) which also qualifies beets as a 2nd generation cellulosic feed stock.

There are many more reasons we should be growing and utilizing energy beets for ethanol production.  I would welcome the opportunity to provide you with information about ethanol production from sugarbeet.  We as Americans need to look at alternative energy crops rather than focusing primarily on corn and grain crops.  We have available, today, crops (energy beets), that are more efficient, more economical, can be grown in more climatic conditions and, are environmentally friendly.”

A lurking danger – biomass for power

One of the difficulties for biofuels in the Congressional debate is the role of biomass as a feedstock for electric utilities. In one version of the energy bill, a key focus will be to move the industry away from coal and towards renewables. As we pointed out in “The Conclave,” in the short term this will surely place a huge emphasis on burning biomass to generate steam to drive turbines.

Jack Oswald, CEO of Syngest writes:

Whether we achieve a true comprehensive energy and climate bill, or whether there is only an energy bill with or without carbon limitations on power production, we must make sure that we are very careful  about how we authorize the use of biomass as a means to produce electric power.

“If we don’t, it would virtually kill the nascent advanced biofuels and bioproducts industry which is critical to achieving our energy independence, job growth and environmental goals.

“So far, when we have mandated renewable energy portfolios we have treated fuels (i.e. molecules) the same as power (i.e. electrons).  When we do so we inadvertently establish an unwanted competition between these two types of energy production with distinctly different and incompatible market characteristics.

“The reason is that one market is a highly regulated monopoly where increased costs can legally be passed along to and forced upon customers and the other is a relatively free market where this is not the case.   Power production and delivery is the regulated market.  When we mandate renewable power production by a date certain, utilities contract for renewable power to meet the timeframe mandated.  If that power is more expensive they are allowed to simply pass the costs on to the rate payers.

“Since one of the easiest ways to quickly achieve renewable power is to co-fire biomass (usually wood) with coal, utilities simply bid up the price to, in effect, corner the market for the biomass available to make sure they have a large and reliable supply in order to meet the mandate.  In states that already have an RPS, we can often see biomass prices at $125 or more per ton.  Meeting the mandate is all that matters.  Cost is generally irrelevant.

“On the the hand, advanced renewable fuels is unregulated and must compete with fossil fuels and cannot pass along increases in costs.  Since advanced biofuels/bioproducts production requires inexpensive biomass (e.g. $50 per ton or less) just to compete with $70/barrel oil,  no one in the advanced biofuels/bioproducts industry can compete with a renewable power market where the costs of biomass can be bid up without regard for competing sources of energy.  Supposed “free market” principals can never apply here to solve these cross market incompatibilities.

“The conclusion is that we must simply recognize that we are dealing with a finite energy resource and make conscious decisions about how it should be used for the overall betterment of the nation.   Even when we finally achieve harnessing all of the potential biomass available on a national basis, it will still be a finite resource.  It will never be enough to replace all of the fuel and chemicals that we need.  It will also not provide all of the power.  Not even close.

“Therefore, we must treat biomass as a national constrained resource and make policy decisions that favor the best and highest use.  Given that we can make very high value and carbon negative biofuels and bioproducts from biomass, and achieve an overall higher energy utilization while doing so, one should conclude that a limit should be placed on the use of biomass for the purposes of power production.  This is ever more needed especially as the advanced biofuels and bioproducts industry is just now emerging.

“Some might quip that we shouldn’t pick winners and that we should let the best performing approaches do so.  I would agree, but when we ignore the fact that we have two very different sets of incompatible market dynamics at play we still choose a winner and it is power production.  Why not choose the winner in an intelligent fashion?

“Since biomass conversion to advanced biofuels and bioproducts is in fact the best and highest use in so many regards, it would make sense that to restrict its use in power production would be an intelligent national energy policy.”

Highest and best use. That is indeed the theme that unites all the players in the debate.

What is the highest and best use?

Cheap meat? Ethanol? Biobutanol? Other fuels or chemicals? Power?

Our take: it is too late to develop a nuanced public policy in these last days of debate.

The questions are whether the ethanol tax credit should be kept, or not kept, and whether the offset that lawmakers have developed to fund the proposed credit (around $7 billion per year, at 15 billion gallons), would be better spent in developing biobutanol or other advanced biofuels capacity.

There isn’t a voice in the country opposing a 20 percent Renewable Fuels Mandate (36 billon gallons) in and of itself – it is simply the choices over feedstocks, processing technologies and fuels that are dividing the lobbying forces in DC.

A national low carbon fuel standard, a loan guarantee program for first-of-kind technologies, the mandate itself, and a harmonization of the biomass for power and biomass for fuels legislation. Those are the real priorities.

So the highest and best use of the $7 billion – ethanol tax credits? Blender pumps? A national flex-fuel mandate? No, the loan guarantee program deserves a higher priority, though blender pumps are needed and a flex-fuel mandate is an excellent, low-cost means to ensure choice for consumers.

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