What Happens if Ethanol Subsidy Ends?

The ethanol subsidy is on the way out, petroleum trade groups said, but not necessarily because the U.S. Senate on June 16 approved an amendment to end it.

The amendment to the Economic Development Revitalization Act (S. 782), approved by a 73-27 vote, would put a stop to the 45 cent per gallon credit for blending ethanol into gasoline, valued at approximately $6 billion annually. It would also lift a prohibitive tariff of 54 cents per gallon imposed on ethanol imports. It was offered by Senators Dianne Feinstein (D-Calif.) and Tom Coburn (R-Okla.), and would become effective July 1. But it has little chance of landing on President Barack Obama’s desk, John Eichberger, vice president of government relations for National Association of Convenience Stores, told FON.

‘It is unlikely to reach his desk,” Eichberger said.

The Senate vote may ultimately be symbolic, reported Reuters. The news service pointed out that the White House has vowed not to repeal ethanol subsidies fully, and that the bill the repeal language is attached to is not expected to make it into law.

Eichberger said the tax credit has been ‘a valuable component of the market, ensuring that ethanol remains competitively viable in the marketplace. NACS has long been supportive of the policy. However, if Congress is intent on repealing the credit, NACS believes that by simultaneously repealing the tariff Congress could offset any negative economic consequences for retailers and consumers by increasing the available volumes, increasing competition in the market and putting downward pressure on ethanol prices.

‘The biggest concern we see with the current language is the abrupt termination of the credit and the implications this would have for long-term supply contracts held by our members,” Eichberger said. ‘NACS is advising Congress to not repeal the credit immediately, but to provide for a phase-out elimination of the credit if that is indeed the will of the Congress. Alternatively, Congress should consider some sort of grandfathering provision to protect contracts that were in effect by the date of enactment of the repeal.”

Dan Gilligan, president of the Petroleum Marketers Association of America, which also has supported the tax credit because of its value to members who blend, said of the amendment, ‘There’s no chance that it’ll reach the White House or even that it would get through the House of Representatives in its current form.

‘It’s simply sending a message to the ethanol industry that the tax credit, as it’s currently utilized and structured, is not going to be around after December 31, 2011, when it expires,” Gilligan said.

The Senate’s rationale for ending the tax credit is difficult to dispute, Gilligan said. Under the federal Renewable Fuels Standard, refiners are required to blend a minimum 12.6 billion gallons of ethanol into gasoline this year. With that requirement in effect, Gilligan said, opponents of the tax credit ask, ‘Why do we need a tax incentive?”

‘It’s hard to answer that,” Gilligan said.

Some supporters argue that removing the tax credit will cause gasoline prices to rise by about five cents per gallon, Gilligan said. ‘Maybe it will, maybe it won’t,” he said. ‘I don’t know. The bottom line is a lot ‘ a lot ‘ of programs are going to get the budget axe in the fall. It’s hard to tell which programs are going to survive and which ones aren’t, but I would say the ethanol tax credit as we know it today has no chance of being extended after that Senate vote.”

Members of PMAA who blend ethanol into gasoline are doing it ‘primarily for the RINs,” Gilligan noted. 

Renewable Identification Numbers, known as RINs, are the basic currency for the Renewable Fuel Standard’s program for credits, trading, and use by obligated parties and renewable fuel exporters to demonstrate compliance. They are also used to track renewable fuels.

‘The RINs might be worth three or four cents a gallon next year,” Gilligan said. ‘That’s another incentive to keep blending. But I think everyone’s preparing for the time when the tax credit goes away.”