U.S. Senate Votes to Cut Billion Dollar Ethanol Subsidies

The U.S. Senate has voted to not only eliminate billions of dollars in subsidies for the country's ethanol industry, but also decided to rescind tariffs against imported ethanol.

In a vote of 73 to 27, the Senate approved legislation which would end the 45-cent-per-gallon subsidy ethanol refiners and mixers currently receive from the government.  Additionally, the Senate eliminated the 54-cent tariff on ethanol imported from across the globe.

The new measure will be added to an economic development bill, which is expected to have a tough time passing through the Senate.  Thursday's measure, sponsored by Senator Dianne Feinstein (D-California) and Tom Coburn (R-Oklahoma), was actually an amendment from an ethanol bill which failed to pass earlier in the week.

Ethanol subsidies have been a hot topic of debate, especially since the onset of the economic recession.  The annual subsidies, now worth $7.7 billion, have been in place for more than thirty years. 

Proponents of the bill argue the American industry, which is the largest in the world, producing 13 billion gallons of ethanol per year, no longer needs subsidies.  Additionally, they say that growing corn and other edible crops for fuel not only raises food prices, but also destroys natural habitats as more land is cleared to grow cash crops.

The White House, nevertheless, opposes the repealing of this subsidy, which it states will hurt the administration's plans to develop domestic fuel sources, including oil, gas, and alternative fuels.  Growth Energy, the U.S. ethanol industry's trade group, says the claims that ethanol drives up food prices are a myth disproved by multiple studies. 

Tom Buis, Growth Energy's CEO, said the Senate is focusing on eliminating the wrong subsidies:  "The Senate missed an enormous opportunity to take real action on deficit reduction and energy policy when it failed to put oil subsidies and giveaways to the same test as ethanol.  Instead, senators turned a blind eye to the hidden costs of oil, and chose to waste time on an amendment that can be tossed out on constitutional test.

POET, the world's largest producer of ethanol, did not condemn the Senate's decision, but did lobby it to consider the Ethanol Reform and Deficit Reduction Act, which, instead of immediately wiping out the ethanol tax credit, would set the credit to a variable incentive tied the price of oil. 

The bill's sponsors say the legislation will eliminate $2.5 billion in ethanol subsidies.  The money would then be allocated to the deficit ($1 billion) and expanding ethanol infrastructure and cellulosic ethanol development ($1.5 billion).

Jeff Broin, POET Chairman and CEO, said, "This bill would end the ethanol tax credit and reduce the deficit, while still supporting the expansion of flex pumps that would give consumers greater fuel choice.  It's not too late for Congress to establish the infrastructure for a competitive market between ethanol and gasoline that would lower prices at the pump."

The Brazilian Sugarcane Industry Association (UNICA), a trade group for sugarcane ethanol, meanwhile, applauded the senate's decision to eliminate the 54-cent tariff on imported oil.  The organization has been lobbying hard for the government to open up its ethanol market.  Leticia Phillips, UNICA's representative in Washington, said, "Consumers win when businesses have to compete in an open market, because competition produces higher quality products at lower costs.  The same principle holds true for renewable fuels."

Brazil is the world's largest producer of sugarcane biofuel and has seen its sugar cane biofuel surpass gasoline as the major fuel source for its transportation sector.  Last week, the Brazilian government released new a new incentive program to boost its sugar cane ethanol production, which has fallen stagnant since the global economic crisis of 2009. 

The program will see the state-run development bank BNDES provide between US$19 billion and US$22 billion to finance the expansion of the industry over the next four years.  Additionally, the government is working to develop a 10-year plan for the industry, which many expect will double domestically.  According to UNICA, Brazil ended its ethanol subsidies over ten years ago, and cut its tariffs last year.