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Whither ethanol subsidies?

The battle over federal subsidies for corn-based ethanol production is a study in classic Washington politics. It pits those that got versus those that don’t; big versus small; growers versus processors, liberal “progressive” versus conservative, and, of course, think tank versus think tank.

The highly successful corporate end of ethanol threw a wrench into the traditional tug-of-war a couple of weeks ago when it “suggested” its members could live with a phase-out of the 45-cent-a-gallon blenders credit and the 54-cent-a-gallon ethanol import tariff if Congress embraced the notion of  “redirecting” those dollars to creating an infrastructure for ethanol, as in building an ethanol pipleline, providing support for ethanol pumping stations across our great land, and a mandate that all new cars be built as dual-fuel vehicles.

Now, this end of the industry has very politically savvy leadership, and I’m guessing they began to see the faintest tracings of the writing on the wall, namely Congress’ love affair with ethanol may be coming to an end, with fiscal conservatives declaring the days of Congress shoveling billions of dollars a year at what objectively can only be defined as a “mature industry” are over.  The House Ways & Means Committee decided to trim the ethanol subsidy by 20% or nine cents, over the next couple of years, and isn’t even thinking about getting into the infrastructure battle. So it was no surprise this week when the ethanol folks said the spending redirection “suggestion”was simply that, never a proposal per se, nothing solid, just kind of an “idea” to kick around.

Enter Iowa State University, the Congressional Budget Office (CBO) and the Department of Energy.  Iowa State says the ethanol industry will continue to grow very nicely without a federal subsidy if only because of the federal Renewable Fuel Standard (RFS), which mandates how much advanced biofuel must be blended with gasoline on an annual basis, and this opinion is pretty much echoed by CBO. Iowa State also says imports of Brazilian sugar-based ethanol would only increase “modestly.” As for that infrastructure spending idea, DOE says the demand for ethanol has’t reached a level to justify the expenditure, estimating it would cost 28 cents a gallon to pump the fuel through a pipeline, compared with about 19 cents a gallon to move it by barge and rail.

Further complicating the whole deal is EPA’s continuing reluctance to actually make a decision on the ethanol industry’s petition to increase the RFS blend rate from 10% ethanol per gallon to 15%; Secretary of Agriculture Tom Vilsack is this petition’s biggest cheerleader within the Obama Administration. Insiders contend EPA, after reviewing tons of literature on what ethanol does to the engines of old versus new automobiles and trucks, will likely render a Solomon-like decision and bump the blend rate some time this autumn to around 12%.

Adding to the entertainment value of ethanol in your gasoline is the ever-expanding and truly strange political bedmates who don’t want to see a blend rate increase. Thirty-six groups, ranging from the American Lung Association to the American Meat Institute to Friends of the Earth, cosigned a letter to Senate Majority Leader Harry Reid (D, NV) and Senate minority leader Mitch McConnell (R, KY) this week, urging both party leaders to oppose any amendment that may be offered to any pending energy legislation that would seek to end-run the EPA and statutorily impose a higher ethanol blend rate in gasoline.

So my prediction is this: For the rest of the political season, which includes Congress’ almost unnatural zeal to enact some form, any form of energy legislation just to say it did, as well as the always-scary lame duck session, the ethanol industry should be very quiet. The likely outcome of all of this sturm und drang is that ethanol subsidies will survive, advanced biofuel subsidies will survive — as well they should — and the battle will be taken up again in 2011.

Why next year? It’s a new Congress — the 112th — with a whole lot of new members, and it’s the beginning of the presidential campaign slog, meaning everyone starts moving toward the middle of the political spectrum. Where, when the dust clears, they ought to be.