Will Congress Let Ethanol Subsidies Expire At End of Year?

Federal policies currently provide for a tariff of 54 cents a gallon on ethanol imports and a subsidy of 45 cents a gallon for blending ethanol into gasoline. Federal law mandates that oil companies use 12 billion gallons of renewable fuels such as ethanol in this year, rising to 15 billion gallons by 2015. As a result, Treasury will pay out at least $31 billion to refiners over the next five years if the blending subsidy is renewed.The ethanol mandate will rise to 36 billion gallons per year by 2022.  Both the ethanol blending subsidy and the tariff on imported ethanol will expire at the end of the year without Congressional action. If they are allowed to lapse, re-enacting the policies may be difficult, given the more fiscally conservative nature of the incoming Congress.

Some in Congress now believe that subsidies and tariffs to promote domestic ethanol production should be ended because they are “fiscally irresponsible and environmentally unwise.” They believe that eliminating or reducing ethanol subsidies and trade barriers are important steps to reduce the budget deficit, improve the environment, and lessen our reliance on imported oil

Supporters of domestic ethanol call it a cleaner-burning fuel than gasoline that offsets oil imports from autocratic regimes abroad and creates American jobs. But the growing appetite of ethanol refiners for the American corn crop has steadily driven up the price of food worldwide, while increased demand for corn has caused an rise in fertilizer use and pesticide-intensive agriculture in the United States. Supporters of expanded domestic ethanol production believe cutting off the subsidies and ending the tariff would put thousands of Americans out of work and devastate the domestic ethanol industry. The Renewable Fuels Association, a trade association, supports ethanol subsidies and tariffs.

Opposing senators point out that the tariff on imported ethanol, which is 9 cents a gallon higher than the subsidy it was intended to offset, made the country more dependent on foreign oil and was a waste of federal funds. Ethanol from Brazil and other sugar-producing countries is cheaper than domestic corn-based ethanol, but the high tariff discourages low-cost imports.This puts imported ethanol at a competitive disadvantage against imported oil. They believe that eliminating or reducing the ethanol tariff would diversify our fuel supply, replace oil imports from OPEC countries with ethanol from our allies, and expand our trade relationships with democratic states.

High tariffs on imported ethanol, meanwhile, artificially drive up the price of domestic ethanol, angering fiscal conservatives. Environmental, food and livestock industry groups have made their own calls to end ethanol subsidies, arguing that the policies have led to a rise in the price of feed and basic food commodities and ethanol is a required fuel additive anyway [see EPA Finalized 2011 Renewable Fuel Standard]. (NYT, 12/1/2010)