Ethanol Subsidy nearly 6 billion dollars a Year
    Effort to End Tax Credit for Ethanol Fails in Senate

    WASHINGTON — The Senate beat back a challenge to ethanol fuel subsidies on Tuesday in a demonstration of how the drive to cut the federal deficit can run headlong into a favored interest on Capitol Hill.

    At the same time, Vice President Joseph R. Biden Jr. expressed confidence about bipartisan talks aimed at producing a budget deal that would clear the way this summer for an increase in the federal debt ceiling. He predicted that lawmakers would have a proposal for “beyond $1 trillion” in savings by the Fourth of July recess.

    “We are down to the really hard stuff,” Mr. Biden told reporters after the first of three meetings of the negotiators this week.

    On the ethanol subsidy, critics wanted to eliminate, as of July 1, the 45-cent-per-gallon tax credit offered to refiners for using the corn-based fuel at an estimated cost of nearly $6 billion a year. The 59-to-40 vote on Tuesday to advance the measure was 20 votes short of what was needed.

    The tax benefits are set to expire at the end of the year, but their proponents are already working to renew them.

    Most Democrats banded together with farm-state Republicans to defeat the effort by Senator Tom Coburn, Republican of Oklahoma, who along with his allies charged that federal ethanol supports are wasteful and unnecessary and are increasing the cost of food by inflating the price being paid for corn.

    “Parochialism trumps the best interests of the nation,” Mr. Coburn said after the vote.

    Those who opposed him, while acknowledging that the ethanol subsidies are likely to be eased out eventually, said it would be disruptive to the agricultural and fuel markets to make a sudden change.

    “We have a lot of folks who made investments, you have people across the country whose livelihoods and jobs depend upon this,” said Senator John Thune of South Dakota, one of 13 Republicans who opposed the Coburn plan. “I think it makes sense, when we put policy in place and we say it is going to be in place for a certain period of time, that that be honored.”

    Some Democrats said they based their opposition to Mr. Coburn’s plan on a procedural move he made to force the vote, saying he had usurped the authority of majority Democrats to control the floor. Senator Harry Reid, the Nevada Democrat and majority leader, said Democrats would be back soon with an alternative proposal.

    Still, the resistance to eliminating the subsidies showed the tough choices lawmakers will face as they try to agree on the emerging budget deal that Republicans say should cut $2 trillion or more from programs that will have stronger support than ethanol promotion.

    “It seems to me to be a pretty easy one,” said Senator Jeff Sessions of Alabama, the senior Republican on the Budget Committee, about the ethanol program. It was created to provide an incentive for the development of domestic alternative fuels as a substitute for imported oil.

    Critics of the ethanol program noted that energy legislation enacted in 2007 requires oil companies to produce 36 billion gallons of biofuels like ethanol by 2022, arguing that refiners will have to rely on ethanol whether it is subsidized or not.

    “We simply can’t afford to pay the oil industry for following the law,” said Senator Susan Collins, Republican of Maine.

    Ethanol backers said an end to the subsidy would drive up the price of fuel and make the nation more reliant on imports. “We shouldn’t be fighting each other over domestic energy sources,” said Senator Charles E. Grassley, Republican of Iowa, who called his colleague’s proposal misguided and out of touch.

    Congressional officials said it was possible that the ethanol cuts could be included as part of the savings sought through the Biden budget agreement, though Republicans have generally resisted seeking revenue by eliminating subsidies for the energy industry.

    The Biden group was meeting off the Senate floor even as the Senate upheld the ethanol tax credits.

    “I’m convinced that we can come up with an agreement that gets the debt limit passed and makes some real serious down payment on the commitment to 4 trillion bucks over the next 10 to 12 years,” the vice president said, referring to the spending reduction goal of President Obama.

    The Great Corn Con

    FEELING the need for an example of government policy run amok? Look no further than the box of cornflakes on your kitchen shelf. In its myriad corn-related interventions, Washington has managed simultaneously to help drive up food prices and add tens of billions of dollars to the deficit, while arguably increasing energy use and harming the environment.

    Even in a crowd of rising food and commodity costs, corn stands out, its price having doubled in less than a year to a record $7.87 per bushel in early June. Booming global demand has overtaken stagnant supply.

    But rather than ameliorate the problem, the government has exacerbated it, reducing food supply to a hungry world. Thanks to Washington, 4 of every 10 ears of corn grown in America — the source of 40 percent of the world’s production — are shunted into ethanol, a gasoline substitute that imperceptibly nicks our energy problem. Larded onto that are $11 billion a year of government subsidies to the corn complex.

    Corn is hardly some minor agricultural product for breakfast cereal. It’s America’s largest crop, dwarfing wheat and soybeans. A small portion of production goes for human consumption; about 40 percent feeds cows, pigs, turkeys and chickens. Diverting 40 percent to ethanol has disagreeable consequences for food. In just a year, the price of bacon has soared by 24 percent.

    To some, the contours of the ethanol story may be familiar. Almost since Iowa — our biggest corn-producing state — grabbed the lead position in the presidential sweepstakes four decades ago, support for the biofuel has been nearly a prerequisite for politicians seeking the presidency.

    Those hopefuls have seen no need for a foolish consistency. John McCain and John Kerry were against ethanol subsidies, then as candidates were for them. Having lost the presidency, Mr. McCain is now against them again. Al Gore was for ethanol before he was against it. This time, one hopeful is experimenting with counter-programming: as governor of corn-producing Minnesota, Tim Pawlenty pushed for subsidies before he embraced a “straight talk” strategy.

    Eating up just a tenth of the corn crop as recently as 2004, ethanol was turbocharged by legislation in 2005 and 2007 that set specific requirements for its use in gasoline, mandating steep rises from year to year. Yet another government bureaucracy was born to enforce the quotas.

    To ease the pain, Congress threw in a 45-cents-a-gallon subsidy ($6 billion a year); to add another layer of protection, it imposed a tariff on imported ethanol of 54 cents a gallon. That successfully shut off cheap imports, produced more efficiently from sugar cane, principally from Brazil.

    Here is perhaps the most incredible part: Because of the subsidy, ethanol became cheaper than gasoline, and so we sent 397 million gallons of ethanol overseas last year. America is simultaneously importing costly foreign oil and subsidizing the export of its equivalent.

    That’s not all. Ethanol packs less punch than gasoline and uses considerable energy in its production process. All told, each gallon of gasoline that is displaced costs the Treasury $1.78 in subsidies and lost tax revenue.

    Nor does ethanol live up to its environmental promises. The Congressional Budget Office found that reducing carbon dioxide emissions by using ethanol costs at least $750 per ton of carbon dioxide, wildly more than other methods. What is more, making corn ethanol consumes vast quantities of water and increases smog.

    Then there’s energy efficiency. Studies reach widely varying conclusions on that issue. While some show a small saving in fossil fuels, others calculate that ethanol consumes more energy than it produces.

    Corn growers and other farmers have long exercised outsize influence, thanks in part to the Senate’s structural tilt toward rural states. The ethanol giveaway represents a 21st-century add-on to a dizzying patchwork of programs for farmers. Under one, corn growers receive “direct payments” — $1.75 billion in 2010 — whether they grow corn or not. Washington also subsidizes crop insurance, at a cost of another $1.75 billion last year. That may have made sense when low corn prices made farming a marginal business, but no longer.

    At long last, the enormity of the nation’s budget deficit has added momentum to the forces of reason. While only a symbolic move, the Senate recently voted 73 to 27 to end ethanol subsidies. That alone helped push corn prices down to $7 per bushel. Incredibly, the White House criticized the action — could key farm states have been on the minds of the president’s advisers?

    Even farm advocates like former Agriculture Secretary Dan Glickman agree that the situation must be fixed. Reports filtering out of the budget talks currently under way suggest that agriculture subsidies sit prominently on the chopping block. The time is ripe.

    Steven Rattner was formerly counselor to the secretary of the Treasury and lead auto adviser. He has spent nearly 30 years on Wall Street as an investor and investment banker and is a contributing writer to Op-Ed.


    Jason Reed/Reuters
    Updated: June 17, 2011

    Ethanol has been around for centuries, best known until the last couple of decades as grain alcohol. The fermentation of sugar into ethanol was possibly the first organic reaction known to man — one that in ancient times produced mostly intoxication.

    In recent years, moonshine has given way to hopes for new biofuels and a political football that has had an impact on presidential campaigns, particularly the caucuses in Iowa, the epicenter of ethanol production for fuels.

    Ethanol has appealed to some environmentalists and foreign policy activists hoping to reduce imports of oil because it is a clean-burning fuel. But ethanol production consumes prodigious quantities of natural gas, diesel fuel and other inputs that lead to carbon dioxide emissions.

    Ethanol's political invulnerability appeared to melt in the face of strong cost-cutting pressures in 2011. In June, the Senate voted 73 to 27 to end tax credits and trade protection that benefit the corn-based ethanol industry, with broad bipartisan backing.

    As a practical matter, the measure ending federal ethanol benefits will probably not become law because it is part of a larger measure that is likely to fail. But the lopsided ethanol vote showed that Congressional support for ethanol is eroding.


    Almost all ethanol produced in the United States today is made out of corn, and in recent years its expansion has driven up corn and other food prices. After decades of slow growth, the fuel took off after Congress enacted the 2005 energy law, which set ambitious mandates for ethanol use.

    In 2007, about seven billion gallons of ethanol was produced and consumed in the United States, mostly as a gasoline additive, making the country the world's biggest producer. Brazil, which makes ethanol out of sugar, is the second largest.

    Currently, the industry says it can produce about six billion gallons of corn ethanol a year. Corn ethanol use could reach 15 billion gallons by 2015.

    The fuel itself gets a mixed reception from environmental advocates. Ethanol evaporates more easily than gasoline, which can put an ingredient of smog into the air. It also pits farmers against car owners. Ethanol can eat away at the seals in engines and fuel systems that are not designed for its use.