If Senate repeals ethanol subsidies, what happens at the gas pump?

An amendment to repeal $6 billion in annual tax incentives for corn ethanol producers carries enormous political consequences, with many observers seeing it as a litmus test for whether Republicans will repeal some federal tax breaks to trim deficits.

For ethanol producers themselves, however, the amendment might have little real-world impact.

If Congress were to eliminate those subsidies – as the Senate amendment set to be voted on Tuesday would do – ethanol production is unlikely to suffer significantly, if at all, says James Bushnell, an energy economist at Iowa State University. Ethanol producers will continue enjoy strong pricing as long as gasoline prices remain high, and corn prices are unlikely to take a hit, he says.

"For ethanol producers and corn growers, it's not at all clear that this is a major setback – or any kind of setback," Dr. Bushnell says. "Many people don't remember that we have a federal mandate to use ethanol in gasoline, so that really forces a market demand for ethanol regardless of whether the tax credit is there or not."

The federal mandate requires refiners to blend 36 billion gallons of renewable fuel into gasoline by 2022 – with no more than 15 billion gallons of that total being conventional corn-based ethanol. (The rest must come from advanced biofuel feedstocks like switchgrass that produce far less greenhouse emissions.)

Additionally, two other federal measures also help ethanol producers. First, refiners are paid an excise tax credit of 45 cents for every gallon of ethanol they blend into gasoline. Second, a 54-cents-per-gallon tariff is tacked onto any imported ethanol. These are the tax breaks the Senate could vote to withdraw.

"If you kill [the excise tax break] you are not suddenly pulling the rug out from under the industry's operations," writes Doug Koplow, president of Earth Track, a Boston-based energy subsidy consulting firm in a recent blog. "Far from it. You are merely switching the form of subsidy from taxpayer-financed tax credits to consumer-financed above-market prices at the pump."

But the benefits are real, he notes. As tax credits disappear, the shift saves taxpayers billions per year and reduces the deficit. That's good news for budget hawks.

Chopping the per-gallon tax credit would save $31 billion over five years, according to a study by Taxpayers for Common Sense. The group, however, is upset Congress is targeting only ethanol, having already taken a pass on chopping oil subsidies that could have saved an added $14 billion over five years.

Even so, "eliminating the ethanol tax earmark and tariff would be a big step toward restoring fiscal sanity in Washington," argued Sen. Tom Coburn (R) of Oklahoma in a statement urging senators to vote Tuesday for his amendment to chop both by July 1. "Ethanol is bad economic policy, bad energy policy, and bad environmental policy.”

Ethanol industry advocates, however, charge Senator Coburn with "political gamesmanship," noting oil industry contributions to his campaign coffers – and the pass he took earlier this year on cutting oil tax breaks, which remain in place.

"If this were truly about sound policy and concerns over energy-tax subsidies, then this amendment would include efforts to repeal the billions of taxpayer dollars oil and other mature energy industries receive each year while posting tens of billions of dollars in profits quarterly," said Bob Dinneen, president of the Renewable Fuels Association in a statement.

He goes on to defend ethanol as "the only alternative to imported oil available today" – although that neglects new electrified cars.

But it was Coburn's latter point – that supporting ethanol is "bad environmental policy" – that has environmental groups joining him.

"A lot of environmentalists supported corn ethanol five years ago because the best science at the time showed it could be a stepping stone," says Nathanael Greene, director of renewable energy policy for the Natural Resources Defense Council. "The science changed and policies intended to get that industry off the ground didn't change."

Studies have since shown corn-based ethanol produces far more greenhouse gas emissions than earlier believed, making gains in that area only slightly better than gasoline, he says. Other environmental damage – deforestation and farm fertilizer runoff, for example – meant it was not the silver bullet many had hoped.

"For us, part of this is about not wanting to see more corn ethanol," Mr. Greene says. "But the larger part is just wanting to move on – and move to cleaner fuels. It's hard enough fighting the oil industry. Now we have to fight them and corn ethanol to get anything good done."

The nation is three to five years behind where it was expected to be on producing biofuel from noncorn feedstocks, he estimates. Instead of full-scale production, only a few pilot facilities produce 3 to 4 million gallons a year of advanced low-carbon biofuels.

But he and others are not fighting the RFS, which includes a mandate to produce other biofuels.

"The Renewable Fuel Standard provides the stable, market-based policy mechanism that advanced biofuel producers and investors have been looking for," stated Brent Erickson, a senior official with the Biotechnology Industry Organization, a biofuel industry trade group. "Any effort to undo the existing RFS will have a negative impact on development of advanced biofuels, the nation’s energy security and efforts to revive job growth.”