US ethanol subsidies may soon be eliminated - bank study

20 August 2010 19:53  [Source: ICIS news]

WASHINGTON (ICIS)--US subsidies for bio-ethanol may be sharply reduced or even eliminated this year amid mounting worries among voters and in Congress about budget deficits and the national debt, according to an investment study issued on Friday.

In an advisory note to clients, investment bank FBR Capital Markets (FBR) warned that Congress, facing popular pressure to reduce deficits and the debt, might well abandon the once-powerful US bio-ethanol industry.

“Given an extraordinarily tight budget environment, it is becoming increasingly likely that Congress will reduce the [tax] credit or allow it to expire altogether,” FBR said in its analysis.

The federal government’s 41 cents/gal tax credit for refiners for blending US corn-based ethanol into their gasolines would expire at the end of this year. Also due to lapse on 31 December is the 54 cents/gal tariff on imported bio-ethanol, which has for years shielded US ethanol producers from competition with Brazil’s sugarcane ethanol product.

In appraising the precarious position of bio-ethanol on Capitol Hill, FBR noted that “The previously powerful biofuels industry has thus far been unable to extend the [$1/gal] biodiesel tax credit that expired in 2009”.

And, “as the 2010 expiration of the ethanol tax credit approaches, the ethanol industry has failed to settle on a strategy in the face of criticism from government and private studies,” FBR said.

The US corn-ethanol industry has been criticised by livestock groups for driving up feed costs and by some environmentalists who argue that the biofuel is no more “green” than regular gasolines.  Refiners have long opposed the federal mandate for more biofuels consumption, arguing that the marketplace should be allowed to choose energy fuels based on efficiency and economy.

Two main US bio-ethanol trade groups have split over policies, with one pressing Congress to renew the 41 cents/gal tax credit while the other urges redirection of that money to improving retail-level infrastructure for ethanol fuels distribution.

The Renewable Fuels Association (RFA) had no immediate official response to the study.

In addition to those problems, FBR analysts noted that “ethanol states are less well represented on congressional tax-writing committees as they have been” in previous years when the ethanol credit was up for reconsideration.

At the key US House tax-writing panel, the Ways and Means Committee, Chairman Sander Levin (Democrat-Michigan) in July proposed cutting the ethanol tax credit from 41 cents/gal to 36 cents/gal and extending the credit for only one year.

But even that reduced level for the ethanol subsidy was in trouble, FBR noted.

The reduced ethanol tax credit proposal “was part of a larger energy tax package costing more than $20bn [€15.6bn]”, the bank analysts said, adding: “Thus far, Democrats have been reluctant to take up such a large tax bill in an election year.”

The US holds a national election on 2 November in which every seat in the House is in contention and one-third of Senate members are facing re-election contests amid broad public unease over federal spending, deficits and the ballooning national debt.

After the election, in which Republicans are forecast to make potentially significant gains, the current Congress likely will reconvene in December for what is known as a lame-duck session, so named because many sitting members would have been defeated in the polls and will be out of office on 1 January.

Such a lame-duck session of Congress is even less likely to pass unpopular tax measures, so the existing 41 cents/gal tax credit for corn ethanol and the 54 cents/gal tariff on ethanol imports could well be allowed to lapse at year end, FBR said.

($1 = €0.78)

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By: Joe Kamalick
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