US Ethanol Subsidies, Import Tariffs under Fire

25 July 2011

US Senator Dianne Feinstein joined forces with farm state Senators Amy Klobuchar, a fellow Democrat, and John Thune, a Republican, to announce an agreement on 7 July that would cut the 45 cent a gallon ethanol tax break and the 54 cent a gallon ethanol import tariff, while enacting new subsidies for ethanol infrastructure. The announcement is just one of various signs that ethanol subsidies could find themselves on the chopping block as the US Congress tries to resolve the on-going budget crisis.

The senators' announcement comes just weeks after their chamber voted in favour of a measure to end ethanol subsidies and tariffs on imports. Although the bill that resolution was attached to ultimately failed, pressure is mounting since the US government will be unable to pay its bills after 2 August if an agreement on the budget cannot be reached. Legislators may attempt to include the cuts in a budget package.

According to David Orden of the International Food Policy Research Institute (IFPRI) in Washington DC, this was a "free vote" since law makers knew that the bill it was attached to was going to fail.

The agreement between Feinstein, Klobuchar, and Thune does not change the Renewable Fuels Standard, a government mandate requiring the blending of ethanol into the US fuel supply.

The Renewable Fuel Association, a lobbying group for the US ethanol industry, described the agreement between the Senators as a "bipartisan effort to find common ground."

Geoff Moody of the Grocery Manufacturers Association said that, in the absence of an advanced cellulosic biofuels industry, "any subsidy for infrastructure" would go towards supporting ethanol from corn. Orden noted that the most likely outcome of a reform process would be a "cut" in the tax break and that supporters of ethanol industry would find other programmes to direct funding.

A cut in subsidies, or the Volumetric Ethanol Excise Tax Credit, is expected to save US taxpayers US$6 billion a year and US$2 billion by year's end if enacted today, according to the non-partisan US Government Accountability Office.

Representative Walter Herger a Republican from the US state of California, along with seventeen other members of his legislative chamber, responded to the momentum in the Senate by introducing a bill that would end the tax breaks and tariffs without introducing new infrastructure spending.

Procedurally, tax legislation must originate in the US House of Representatives. A compromise between the Senate and the House will be needed for the legislation to be signed into law by President Barack Obama.

Reactions to ethanol support have been harsh in recent weeks. A Washington Post editorial told readers that there was "no need to compromise" on ethanol subsidies. In Geneva, one trade expert sceptically described the US Congressional efforts towards reform as "shadow boxing."

Action against ethanol subsidies has had a wide base in Washington. Earlier this year 50 organisations, from Oxfam America to FreedomWorks, an early Tea Party sponsor, signed a letter to Republican Senator Tom Coburn and Senator Feinstein calling for an end to subsidies and tariffs. A smaller number of similarly diverse organisations, such as the National Turkey Federation and ActionAid USA, signed another letter to Herger in June.

As the deadline for resolving the budget crisis nears, Senate Minority Leader Mitch McConnell, a Republican, floated the idea yesterday, 12 July, of allowing the President to raise the debt limit in three stages, unless stopped by the US Congress. This would potentially ease pressure on law makers to reach a compromise by the 2 August deadline.

Some lobbying for change in ethanol policy are confident that subsidies will be cut but fear that the blending mandate will continue to drive demand for corn and food prices higher. Shawnee Hoover of Oxfam America told Bridges there "there will be blood in the water to take on the mandate," when subsidies for ethanol come to an end.

Economists have called for flexibility on the blending mandate during times of high and volatile food prices. Ethanol production in the US is projected by the Renewable Fuels Association to exceed the government mandate by 1 billion gallons this year and corn prices have fluctuated wildly in the past month.

According to the Financial Times, the ethanol industry will have used more corn than farmers of livestock and poultry combined by 31 of August, consuming 40 percent of the world's largest producer and exporter's output.

ICTSD reporting; "Farm-State Senators Agree to End Ethanol Tax Breaks in July," BLOOMBERG, 7 July 2011; "US ethanol refiners use more corn than farmers," FINANCIAL TIMES, 12 July 2011; "Nancy Pelosi: Mitch McConnell's debt ceiling plan has ‘merit,'" POLITICO, 13 July 2011.

25 July 2011
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25 July 2011
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