This week the U.S. Senate and the House of Representatives debated and voted on measures addressing ethanol subsidies with contradictory results.

Background in Brief

Currently, a Volume Ethanol Excise Tax Credit (VEETC) provides a $0.45 cent tax credit for each gallon of ethanol blended into gasoline at U.S. refineries.  In addition, U.S. ethanol production benefits from a $0.54 per gallon tariff imposed on imported ethanol.  This year an estimated 40 percent of corn kernels grown in the U.S. may be processed for ethanol, which diverts a significant portion of the energy obtained from the corn crop to biofuel production.

In addition to direct ethanol subsidies, in April USDA amended the regulations for the farm bill’s Rural Energy for America Program (REAP) to allow USDA to pay for 25-percent of the costs for the construction at gas stations of ethanol blender storage tanks and pumps.  USDA has determined that U.S. ethanol production cannot be further stimulated unless more gas stations are equipped with separate gas pumps for ethanol blends.  The goal of this new REAP initiative is to subsidize the costs of up to 2,000 blender pump systems per year for 5 years.

Controversy over ethanol subsidies has increased in recent years.  Many livestock and poultry production trade associations have joined the Grocery Manufacturers Association in opposition to the subsidies based on their conclusion that ethanol subsidies increase prices for animal feed and ultimately for human food.  Many environmental and conservation groups oppose ethanol subsidies because of the environmental impacts of increasing cropland acres for corn cultivation.  And numerous anti-hunger groups contend that U.S. subsidies for ethanol are raising food prices around the world.  These diverse groups joined on a letter to Congress in March calling for repeal of the VEETC.

Senate Action

In the Senate, action on ethanol started on Tuesday, June 14 with Senator Tom Coburn (R-OK) bringing a bill to repeal the VEETC and the tariff on ethanol to the Senate floor for debate.  The highly unusual procedure for moving this bill used by Coburn was not approved by Senate leadership and the Senate voted against moving the bill to a vote.

The Senate action resumed on Wednesday with two amendments to the pending Economic Development Revitalization Act.  The first amendment, identical to the Coburn proposal but now with the procedural obstacle removed, passed by an overwhelming vote  of 73 yes to 27 no.   The amendment would bring the VEETC to an end as early as June 30, 2011 and apply the savings to deficit reduction, as well as ending the ethanol tariff.   Most Senators from Corn Belt states voted against VEETC repeal.   The second amendment, offered by Senator John McCain (R-AZ) would prohibit the use of any federal funds to subsidize ethanol blender pumps and ethanol storage facilities. This amendment was rejected by a vote of 41 yes to 59 no.

It is unlikely that the bill underlying these amendments will be enacted into law but the votes on the amendments give a clear signal that the VEETC has a shaky future.  Subsidies to increase the infrastructure for ethanol delivery, however, could well win final Senate approval.  To achieve that result, on June 13, Senators John Thune (R-SD) and Amy Klobuchar (D-MN) led nine Senators in the introduction of the Ethanol Reform and Deficit Reduction Act, S. 1185.  This Act would modify the VEETC into a variable tax whose level would vary inversely with the price of oil.  The funds saved from transforming the VEETC would be split among deficit reduction, a tax credit available for the establishment of up to 53,000 blender pumps, cellulosic biofuel tax credits, and extension of a Small Ethanol Producer Tax Credit.  The Act would also include algae as qualified feedstock for the cellulosic biofuel tax credit.

House Action

In the House, the ethanol issue emerged in the debate over the House FY2012 Agricultural Appropriations Act.  An amendment offered by Rep. Jeff Flake (R-AZ) to block federal subsidies for ethanol blender pumps and infrastructure, similar to the McCain Amendment defeated in the Senate, was approved by the House with a vote of 283-128.  The Senate will not take up agricultural appropriations to much later this year.

A bill to end the ethanol tax credits, entitled the Repeal Ethanol Subsidies Today Act of 2011 (H.R. 1188), is pending in the House but so far has only 9 co-sponsors.

The VEETC and ethanol tariff are scheduled to expire December 31, 2011, so the key question in the House and Senate may be whether enough support can be generated to extend the ethanol tax credits and tariff beyond the end of the year, and if so, under what conditions.