The Time to Plan for Ethanol’s Future is Now

By Porter J. Martin and Gregory J. Lynch | January 17, 2011

Ethanol supporters had been trying for months and months to pass extensions of key supports in federal legislation and time and time again they were rebuffed. It looked like it wasn’t going to happen. In the final days of December, the House and the Senate finally passed a one-year extension of the 45-cent-per-gallon blenders credit, the 54-cent tariff on imported ethanol and the 10-cent-per-gallon small producer tax credit.

But, can we do it again? And if we can, then can we get these supports extended again when they expire after that? How many times can ethanol supporters count on these supports being extended? How many times can supporters win this political fight, and can we expect victory in the future in light of the enormous budget deficit our nation is struggling with?

Ethanol’s critics on the right and the left are undaunted and are vowing to fight on. Supporters should consider themselves lucky if the next political fight over extending these supports is no harder than it was this year. Critics’ accusations haven’t changed—that ethanol drives up the price of food to consumers, that ethanol costs too much in federal subsidies, that ethanol has a negative energy balance. Supporters have successfully disproved each of these points time and again but that doesn’t stop critics from repeating these tired claims and muddying the public’s understanding about the value of ethanol.

So what is the solution? Can ethanol survive without these supports? I believe the answer is yes, if we take steps to plan now. Why? Because we have seen ethanol producers start to develop solutions already. In Wisconsin, Nebraska and other states across the Midwest, ethanol producers have installed their own fueling stations where they sell gasoline blended with their ethanol. Blends include 10, 25 and 85 percent ethanol and this fuel is sold directly to the public. People are buying it because they understand that by purchasing this fuel they are helping to grow jobs in the Midwest and they are reducing the amount of foreign oil we are buying from overseas. 

We should take this opportunity to redirect federal ethanol policy away from the current support system, which is politically damaging and based on government payments year after year, to a system that jumpstarts the necessary ethanol infrastructure to help ethanol stand on its own without government support. The key is a two-tier approach to make ethanol available directly to the public and bypass the oil companies. In other words, instead of paying oil companies a blenders credit to use ethanol, that money could be directed to help pay for the installation of technology on vehicles and at fueling stations across the United States. Specifically, we could take the federal money, which is currently being paid to oil companies so they will blend ethanol into gasoline, and redirect it (1) to gas stations for the installation of the infrastructure necessary to deliver ethanol blends directly to the consumer, and (2) to vehicle manufacturers and consumers to install flex-fuel technology in every vehicle being driven in the United States so that consumers would have the ability to use higher blends of ethanol if they so choose. This change in policy would both give consumers a choice of fuel and move ethanol away from government support. If this sounds radical, it isn’t. As mentioned above, entrepreneurial ethanol producers in the Midwest have already proved that consumers will buy ethanol straight from the pump and Brazil’s vehicle owners overwhelmingly drive flex-fuel cars.

The battle over federal ethanol supports at the end of 2010 has made it clear that the political world is changing. Whether it is the political power of ethanol’s critics or the reality of America’s huge budget deficits, the fact is that ethanol needs to be thinking ahead and planning for a day when there are no federal supports. What will be our solution for that day? Can ethanol survive when that day comes? Yes it can, but we need to start planning for it now.

Authors: Porter Martin, Greg Lynch
Michael Best & Friedrich LLP
pjmartin@michaelbest.com, (608) 283-0116
gjlynch@michaelbest.com, (608) 283-2240