Pushing for Undying Support

With sunset provisions for federal ethanol incentives looming, farm-state lawmakers are making moves to make the federal tax credit permanent. Critics say doing this would benefit big corporations more than American farmers.
By Nicholas Zeman | September 01, 2006
Bob Dinneen, head of the Renewable Fuels Association, went on record in late June saying he doubted a single piece of new biofuels-related legislation would survive the U.S. Senate in 2006. The ethanol industry's top lobbyist did, however, say the plethora of ethanol-linked bills—some 57 of them—introduced in Congress since the Energy Policy Act of 2005 became law are not altogether lost causes. Rather, he said, lawmakers are establishing a montage of "predicate" policy that will ultimately determine biofuels legislation when "real efforts" on the Hill are set in motion.

Present federal law provides for a partial federal excise tax exemption of 51 cents per gallon of ethanol blended into gasoline. For example, fuel blended with 10 percent ethanol receives a tax credit of 5.1 cents per gallon. E85 receives as much as 43 cents per gallon, depending on the seasonal blend. The incentives are governed by the Volumetric Ethanol Excise Tax Credit (VEETC) legislation passed in 2004, and are scheduled to expire in 2010. In addition, the Energy Policy Act of 2005 established the 7.5 billion-gallon renewable fuels standard now largely credited with the ethanol industry's rampant activity over the past 12 months. It also extended the nation's biodiesel excise tax credit through 2008. The expiration dates of each incentive, while celebrated at their inception, are now seen as serious vulnerabilities in the U.S. biofuels industries—vulnerabilities many politicians would like to shore up permanently.

Those in the know tend to agree with Dinneen's take on the fate of biofuels legislation introduced this year, but if there's one proposed bill with the look and feel of the real deal, it may be the Renewable Fuels and Energy Independence Promotion Act. It is a House resolution introduced by Reps. Earl Pomeroy, D-N.D., and Kenny Hulshof, R-Mo., both members of the Ways and Means committee—and both seeking reelection this November.

Making the ethanol and biodiesel tax credits permanent is the main objective of the bill. Pomeroy tells EPM the purpose of the bill—House Resolution 5650—is to create long-term financial security for ethanol and biodiesel production. However, with ethanol spot prices hovering in the $2.50 to $2.70 range at press time—and having been as high as $5 in extreme, misleading circumstances this summer—not everyone is convinced federal ethanol incentives are still necessary.

All taxation bills in Congress must go through the Ways and Means committee—the oldest and most powerful committee in the House—which has jurisdiction over all revenue-raising measures. H.R. 5650, which Pomeroy and Hulshof say is backed in action by longstanding, bipartisan support for the federal ethanol tax incentive, would make the subsidy permanent. The congressmen say the success of the ethanol tax credit is proof that the incentive works, not that it has fulfilled its job and is ready for retirement. "When the incentive went into effect in 1980, the United States was producing about 75 [MMgy], and now we have an industry that is producing 4.8 billion gallons [per year] and everyone is jumping on the ethanol bandwagon," Hulshof says. "We welcome everybody on, [but] we need to provide some certainty to investors. … We need to help grow the industry."
Hulsof said he was optimistic that H.R. 5650 would be approved—once it reached the floor—but time might be too short for the act to move through the channels and become law in the current session. "We at least wanted to build our coalition of support to make this a permanent tax incentive instead of a temporary one," he said, echoing Dinneen's June comments about creating predicate policy.

With the expense of building an ethanol plant now as much as 70 percent higher than it was, say, 18 months ago—along with two-year waiting lists to get on the construction schedules of the industry's top design/build companies—ethanol insiders say there is not less risk in the business, just a new kind of risk. Ethanol plants are, in fact, turning record profits at the moment, but the notoriously volatile market is already showing signs of correcting itself. "[Investors] need assurance that the credits—the economic viability behind these biofuels—are going to continue, not just for the next couple of years but as a permanent part of our energy strategy," Pomeroy says, who represents a state that was once barely in the biofuels business but now has 350 MMgy of ethanol and 120 MMgy of biodiesel production either on line, under construction or in the development stages. "Obviously we've never seen this kind of growth before."

A Critical Approach
Extending the ethanol tax credit, however, without taking into account the remarkable changes that have occurred in the industry since its last extension, could generate a national and very negative backlash against the renewable fuels, says David Morris, vice president of the Institute for Local Self-Reliance (ILSR). The ILSR is a Minneapolis-based organization that advocates sustainable communities and alternatives to the corporate structures that some believe dominate American life. Needless to say, Morris wants to see the ethanol industry benefit farmers and rural American communities as much—or more—than it benefits large corporations, agri-giants and Wall Street-type investors. "The current federal incentive is an incentive that is inefficient," he says. "It doesn't go to the producer, it goes to the middlemen—the oil companies, the marketers, the blenders. [They] get the incentive."

Morris says the system leaves farmers and producers merely hoping the big players will pass the incentive back to them. "No one knows for sure what exactly the amount is that they do pass back," he says, suggesting that his estimates indicate that only about 50 percent of the 51-cent tax credit finds its way back to the owners of the plant. "Well, that means [the other] 50 percent is really wasted," he says.

Make no mistake, Morris isn't anti-ethanol or even necessarily opposed to subsidizing the industry. He merely wants to do it differently. In a recent editorial published in the New York Times, he offered up his plan. First, he said, tie ethanol incentive levels to an index comprised of the price of a bushel of corn and the wholesale price of a gallon of gasoline. Second, transform part of the federal incentive from a gas tax exemption for those who market the ethanol into a direct payment to those who produce it.
Morris believes the federal incentive does not take into account scale or ownership, and it is focused on increasing consumption instead of production. "When you have a national mandate to double the consumption of ethanol, you do not need any more consumption incentives," he argues. "A production incentive should be focused on farmer-owned plants. … We need to redesign the incentive into a producer payment. I would cut the incentive in half and pay it to plants, but only if they are majority farmer-owned."

Morris also says extending the tax incentive indefinitely is inappropriate and could turn the public against ethanol. In other words, he says, consumers could start to think ethanol production companies are getting fat at the taxpayers' expense. "Right now, you can invest in an ethanol plant and make your money back in two years!" Morris exclaims. "So the idea that ethanol needs this 51-cent incentive to survive and prosper in the marketplace is nonsense in 2006."

Morris goes on to say that proof that the current incentive is not needed is further exemplified by the fact that there currently exists what some have called a perfect storm for the renewable fuel: Oil is now over $70 a barrel, the 7.5 billion-gallon mandate is in place, and the country is phasing out MTBE and putting strains on the ethanol marketplace to rise to the challenge of replacing it. "This is a moment for us to reconsider the federal incentive," Morris says.

A Farm Perspective
For the ILSR, it's ironic that an industry founded to add value to the crops American farmers grow—and dismantle the idea that farmers are the grunts of corporate food and feed processing—may now actually be strengthening the archetype. "Farmers have learned over the years that they can't make a living by selling a raw material into a concentrated value-added processing market," Morris says. "They know that … and they learned that when there was large export markets that opened up [and] didn't do all that much for the farmer. One of the marvelous historic opportunities of the biofuels revolution is to restructure agriculture so the farmer can benefit from the value."

Rob Obermoeller, past president of the Minnesota Corn Growers Association and an investor in three of the state's ethanol plants, regretfully agreed with some of Morris' views. "[Morris] might be right, and I hate to see it go that way, but this is still free enterprise," Obermoeller says. "For the corn growers of Minnesota, farmer ownership … is what we're about." Obermoeller was also quick to mention that the ethanol industry would continue to need money from third-party investors. Growers should not scare these opportunity-seekers away, he says, by appearing to want to exert control of the industry.

"I know there are a lot of billion-dollar funds looking to make an offer to every ethanol plant out there, and that's scary … but it's still the American way," Obermoeller says. "I don't want to get in the way of that. It's kind of a fine line we're trying to walk. Five years from now ,we may say this is what we should have done, or that is what we should have done. … We can't see the forest for the trees right now [because] we're too close to it."

Morris believes that because the ownership dynamic has changed so drastically in the past few years, and as farming and ethanol refining have perhaps become slightly less entwined, so has biofuels policy and agricultural policy. "This is a slightly overblown argument," Pomeroy says. "The reality is that we want to get farmers in this business. In North Dakota, we've seen 350 million gallons of ethanol come on line, and that's going to take an awful lot of North Dakota corn."

Groups like the ILSR simply aim to make certain that farmers are able to participate in this new bio-processing economy. "This is a very important objective, but I think eliminating the existing tax credit would be throwing the baby out with the bath water," Pomeroy says. This is a move that would make ethanol investments not nearly as attractive as they are now. "Giving the incentive precisely to the farmer-owned cooperatives that you'd like, you'd set back the cause of biofuels nationally," he added.

Different Strategies
There's no arguing the fact that the federal ethanol tax incentive has been beneficial to the industry and its stakeholders. That was its purpose, after all. The question is, what types of industry stakeholders have benefited most? Morris and others assert that the largest corporate players have cashed in nicely, and farmers have benefited only modestly from the 51-cent tax incentive. Pomeroy and others tend to disagree, but not to the extent that they don't see a need for new measures to bring farmers back into the game. "I've been in discussions with individuals at the U.S. Department of Agriculture in terms of new strategies to make sure the farmer can buy into the processing component of the industry and therefore gain another initial income opportunity and diversify farming itself," Pomeroy tells EPM. In fact, following EPM's interview with Pomeroy in late July, the USDA issued a 31-page paper Aug. 7 that, in essence, outlined the importance of biofuels to agriculture in America. The report identified several ways to encourage the continued development of renewable fuels, including extending tax subsidies for both ethanol and biodiesel.

Morris says the way to do this is to transform part of the federal incentive from a gas tax exemption for those who market the ethanol into a direct payment for those who produce it. This is what Minnesota did in the early 1980s, converting an incentive for consumption into one for production. "The ‘Minnesota Model' is a phrase now heard throughout the country and indeed … around the world," Morris says. "It means a public policy that emphasizes in-state production and farmer ownership."

Pomeroy says that Congress should look into ways in which the USDA could establish a sort of investment fund, not unlike a real estate investment trust, that would create a capital pool from qualified farmer investments on a nationwide scale. He said whatever entity that manages the pool of funds would be responsible for placing investments in ethanol plants. "That would give the farmers a part of that action," he tells EPM.

But there is nothing of the sort addressed in H.R. 5650, Hulsof says, explaining that the bill essentially makes no other modifications to the incentive package other than its duration.

Pomeroy, who happens to be the only congressman who sits on both the Ways and Means committee and the House Agriculture committee, says he is committed to strengthening the role of the farmer in the economy of bio-processing. However, he says, investment capital from private equity investors and corporations does alleviate the pressure on cooperatives and other grower-based entities to finance their own projects. "In the past, we have thought about farmers capitalizing plants," Pomeroy says. "The window of time when that was occurring was when there was basically no other capital available for those plants, and the farmers were taking significant risks to try bring additional economic opportunity to rural America. Now that the industry has fully arrived, it is not a problem getting capital."

If Obermoeller's stance is representative of most farmer-investors, corn growers support extending the incentive as it is and believe it's a good public investment. "As far as the taxpayer is concerned, it's probably a good investment," Obermoeller says. "It's getting the country where it needs to be, and I don't know a faster way of getting there. Of course, my larger concern is that I would like the incentive tied to farmer ownership, and the Pomeroy bill does not do that, I know. … Sometime in the future, though, that might have to be a consideration." EP

Nicholas Zeman is an Ethanol Producer Magazine staff writer, reach him at nzeman@bbibiofuels.com or (701) 746-8385.