Federal Gov't Finally Kills $6B USD Corn Ethanol Subsidy

Fresh debate focuses on eliminating blending/consumption mandates or replacing them with non-corn-based targets

Biofuels have become almost a dirty word, thanks to the government's dealings with respect to corn ethanol. Deep in campaign donations from farm lobbyists, federal politicans have sprinkled billions in subsidies on the corn farmers that helped pay their way into office. Many have argued these subsidies have cost the consumer both in direct taxes and by raising the cost of corn-derived food products at the supermarket. Still other critics accuse the government of greenwashing, pointing out that corn ethanol has actually been shown to increase greenhouse gas emissions, not cut them.

I. RIP "Dirty" Corn Ethanol Subsidy

In the end, it appears the critics prevailed. The federal government is at last axing the $6B USD in annual federal subsidies it had previously been bequeathing on corn farmers and ethanol production facilities.

As the Congressional year ended, corn ethanol's supporters failed to muster the support necessary to push through a new subsidy to replace the previous subsidy that was voted out over the summer.

Tom Buis, CEO of Growth Energy, an ethanol trade group, clearly wasn't thrilled with the decision, but in an interview earlier this month he claimed the ethanol industry would survive without government handouts stating, "The blenders' tax credit initially helped the ethanol industry develop. But today, we don't have a production problem, we have a market access problem. Without the tax credit, the ethanol industry will survive; it will continue to reduce our dependence on foreign oil, create jobs and strengthen our economy."

By some estimates the total gifts to corn ethanol business totalled $45B USD since 1980.

The subsidy cut -- approved by a 73-27 Senate vote in June -- also is accompanied by the end of a tariff on the importation of Brazilian ethanol. Brazil has an excess of sugarcane ethanol, but the U.S. government had previously penalized this fuel stream as a means of allowing U.S. ethanol producers to escape competing on the free market.

The ethanol debate has divided both political parties and even set federal representatives within certain corn-producing states against each other.

For example Sen. Debbie Stabenow (D-Mich.), whose state is the nation's 11th-largest corn producer -- with 11,000 corn growers using 4 percent of the state's land (2.45 million acres) to produce 315 million bushels in 2010 -- was among those who voted against cutting the subsidy, attacking the plan.

By contrast Michigan Reps. Gary Peters (D-Bloomfield Township), Mike Rogers (R-Brighton), John Conyers (D-Detroit), Tim Walberg (R-Tipton), and Bill Huizenga (R-Zeeland) joined California's Darrell Issa (R-San Diego) and Loretta Sanchez (D-Orange County) in attacking higher ethanol blends in a letter "E15 is not ready for prime time".

II. The Next Front: Cutting Mandatory Blending Targets

The letter alludes to the next major front in the debate -- the question of mandatory ethanol consumption targets and fuel blends.

Many states have already forced gas stations to vend a blend of fuel that's 90 percent gas and 10 percent ethanol. But this blend is insufficient to fulfill the federal mandates of 15 billion gallons of biofuel to be consumed by 2015 and 36 billion gallons by 2022. These mandates were pushed through by the administrations of Presidents George W. Bush (R) and Barack Obama (D).

The U.S. Environmental Protection Agency has called for using a higher E15 blend (15 percent ethanol, 85 percent gas), while offering non-E15 options and warning stickers for drivers of older vehicles. Both the EPA and automakers agree that E15 use could do great harm to older engines. However, the automakers and the EPA dispute its effect on more modern engines. Automakers say E15 can still cause significant harm to some modern engine designs, while the EPA claims the automakers don't know what they're talking about and that it's own testing has proven E15 use in modern vehicles to be safe.

But the E15 scheme has been shelved indefinitely thanks to a 285-136 vote in the U.S. House of Representatives.

The house is now debating whether to roll back biofuels targets and/or the existing ethanol blending mandates. Downsides to such actions are that other biofuels such as algae and cellulosic ethanol -- which lack the compelling negatives of corn ethanol -- could be harmed. A repeal could also create uncertainty in the fuel market, causing deleterious financial effects.

III. Moving Towards Better Biofuels

An alternative could be to scale back targets, focusing solely on more promising technologies like cellulosic ethanol and algae, while scrapping any sort of federal mandate for corn ethanol. Interestingly such an idea has support from some environmental lobbies who aren't a fan of corn ethanol.

Environmental advocacy Friends of the Earth's biofuels policy campaigner Michal Rosenoer cheered the decision to kill the subsidy, stating, "The end of this giant subsidy for dirty corn ethanol is a win for taxpayers, the environment and people struggling to put food on their tables."

His group supports focusing federal funding on "better" biofuels.

One particularly promising biofuel is algal oil.

While pure-ethanol vehicles can have a better performance power-wise than pure-gasoline vehicles thanks to higher fuel compression ratios, availability mandates mixed vehicles that can burn both pure gasoline or pure ethanol. These dual-mode engines offer the worst of both worlds, in terms of inferior gasoline performance, while falling short of the promised ethanol performance.

By contrast, algal fuel can be produced in a higher octane blend which mirrors standard gasoline. Thus lesser engine modifications are necessary even for pure supplies. Additionally, for blends the performance losses would be lessened.

The U.S. military has been doing some excellent pioneering work in terms of reducing the cost of algae biofuels. A year ago algae biofuel cost $424 USD/gallon, this year it costs $26.67 USD/gallon.

Algae biofuel production is inherently scalable, although it works best in relatively frost-free climates like Florida and the American southwest. Aside from the cost of the glass tanks, harvesting/processing equipment, and bioengineered algae strains, the only additional costs involved are the certain fertilizers/growth additives used to accelerate the growth of the oily algae.

Algae's biggest weakness is that it doesn't have the millions in special interest money backing it hat corn ethanol has. Thus even as corn ethanol has some firm advocates on The Hill, algal biofuel is just starting to be considered.

Source: The Detroit News