Senate votes to end US ethanol tax credits on July 1, rejects McCain amendment against blender pumps

End of an Era? Politics as usual? About biofuels, or corn? What do the dizzying array of Senate and House votes mean?

In Washington, the US Senate voted 73-27 to sunset the 45-cent per gallon VEETC ethanol tax credit as of July 1st on ethanol and the 54-cent tariff on Brazilian ethanol, approving an amendment co-sponsored by Senator Coburn of Oklahoma and Senator Feinstein of California. The amendment adds to an economic development bill moving through the Senate.

The bill, which faces an uncertain future in the Senate, has drawn the threat of a veto from President Obama, and Secretary of Agriculture Tom Vilsack has been a vocal critic of the linkage which has been made between ethanol mandates, tax credits and high food prices.

The amendment was opposed by a bipartisan bloc of Senators from “corn patch” states, primarily in the Midwest, including 14 Democrats and 13 Republicans, but did not attract any support from the Atlantic or Pacific states.

Other ethanol-related votes

In other news, the Senate rejected an amendment offered by Sen. John McCain to bar federal agencies from encouraging the installation of Flex Fuel pumps that give consumers a choice of ethanol fuel blends and save motorists money.

At the same time, the US House of Representatives passed a measure to cut Agriculture Department funding for its blender pump program, designed to increase market access for renewable fuels by a margin of 283-128.

What does it mean?

The 45-cent ethanol tax credit is scheduled to expire at the end of the year, and this provision would advance that date to July 1st. The amendment is attached to a bill that is unlikely to become law, and should be seen as an easy vote for Senators. Even champions of advanced biofuels in the US Senate such as Energy and Natural Resources committee chairman Jeff Bingaman voted for the amendment.

The cellulosic biofuels $1.01 per gallon tax credit is also scheduled to expire at year end, and is renewed in the Thune-Klobuchar bill. That bill, supported by corn growers and the ethanol industry, would shift funding from the ethanol tax credit to investments in blender pumps designed to increase market access for ethanol.

Matt Hartwig at the Renewable Fuels Association, said: “As the underlying bill to which this amendment is attached is unlikely to make it to the president’s desk, this vote was a freebie with no real consequences, largely about re-election and intra-Senate politics than true energy policy.  When lawmakers are ready for the kind of comprehensive and dispassionate discourse on energy the American people deserve, the ethanol industry will be ready.”

The Dinneen perspective

Digest columnist and RFA CEO Bob Dinneen offered an incisive analysis:

“On Tuesday, the Senate voted 59-40 against an amendment to eliminate the ethanol tax incentive program. On Thursday, the Senate reversed itself, voting 73-27 in support of the very same amendment. Then, just a half hour later, the Senate defeated another anti-ethanol amendment that would have restricted federal funding for blender pumps.

“The Tuesday vote was about process. Senators were justifiably frustrated by the parliamentary gymnastics Senator Coburn used to bring his amendment to the floor. The amendment was not germane to the underlying bill. It was going to be subject to a constitutional challenge because it was a revenue title not originating in the House of Representatives. And, the Senator took the unusual step of filing for cloture on an amendment, rather than the underlying bill, and he did so himself, despite tradition dictating that is a privilege reserved for the Leadership. Many senators resented the aggressive tactics used to hijack the Senate floor in pursuit of Senator Coburn’s transparently Big Oil agenda.

“In any case, the vote on the Coburn amendment Tuesday was certainly not about fiscal responsibility. That fact was made clear when it was revealed every one of the 16 Senators signing the cloture petition had voted just a month earlier to preserve tax breaks for oil companies.

“Thursday’s vote on the Feinstein amendment was even more confounding. The amendment similarly sought to eliminate a tax incentive that even the industry agrees needs to be reformed. It was a free vote to demonstrate one’s fiscal resolve. Some were even characterizing their vote in support of the amendment as a vote in favor of reform. Indeed, even the amendment’s sponsor, Senator Feinstein, acknowledged during debate she is working with ethanol advocates on a compromise for transitioning the ethanol tax incentive, thus signaling a vote on her amendment would accelerate reform.

“Peel the onion back a bit further, however, and it becomes clear that the undercurrent for the Feinstein amendment was the growing battle over the debt ceiling and budget cuts. For many Democrats, the vote on the Feinstein amendment was an opportunity to get Republicans on record as supporting the repeal of tax incentives (i.e., oil company subsidies) and raising taxes as a means of deficit reduction. In fact, following the vote Senate Leader Harry Reid stated , “With Republicans endorsing our position that we can cut the deficit by cutting spending that occurs through the tax code, I hope they will join Democrats in eliminating taxpayer giveaways to big oil companies that are raking in record profits.”

The Digest’s Take

1. Tariff repeal. The Digest editorial board has opposed the tariff on imported ethanol since 2008, and continues to welcome efforts to repeal the measure.

2. Get off the dope. We have continued, and will continue, to warn the industry to “get off the dope” of federal subsidies, tax credits, and tariffs.

By focusing instead of establishing a long-term, national low-carbon fuel standard that is technology, feedstock and fuel neutral neutral and based on sound, broadly accepted science of direct emissions impact, the industry will move faster, and farther, by providing long-term policy stability.

3. It’s about corn, not biofuels. We are certain that the action by the Senate today has little to do with advanced biofuels – many of which, such as drop-in fuels, do not receive any support from the ethanol tax credit. The Environmental Working Group opined, “Funding blender pumps and ethanol pipelines locks in corn ethanol and locks out advanced biofuels.”

4. Oil industry linkage. We do not believe that the linkage drawn between the oil industry and the ethanol tax credit has beguiled anyone in the Senate. Friends of the Earth noted that ” the tax giveaway…primarily benefits big oil companies,” but we suspect that this is intended to provide “coverage” for urban legislators wary of being seen on the wrong side of the alternative energy debate.  If the oil industry had considered the ethanol tax credit a valuable source of income, instead of a form of support for a rival energy platform, the VEETC would have picked up more than enough votes in the oil-patch states to be continued.

5. Advanced biofuels march on. We expect to continue to see a flurry of announcements over the next 2-3 weeks regarding the progress of advanced biofuels, such as the news that Gevo will retrofit the 50 million gallon Redfield Energy ethanol plant in South Dakota an isobutanol plant with an expected production capacity of approximately 38 MGy. The retrofit is expected to commence by year end 2011, and Gevo expects to begin commercial production of isobutanol at the facility in the fourth quarter of 2012. We also expect to see significant progress announced in aviation biofuels at the Paris Air Show at month-end.

6. The unintended consequences of PAYGO rules. PAYGO is a congressional provision that requires any change or expansion in a discretionary benefit (e.g. a tax credit) to have an equal and opposite offset. Why? So that changes in the budget or tax code do not increase deficits. It’s a provision that arrived with the Omnibus Budget Reconciliation Bill of 1990.

Here’s the problem – old, useless benefits that cost a lot of money become a form of currency. You can trade them in for new, useful benefits. Which makes it tough to simply get rid of benefits – as the current Congress is trying to do for deficit-reducing purposes – because the beneficiaries want to hold them for later horse-trading purposes.

Case in point – if the ethanol tax credit is kept in place, when the ethanol industry comes forward with their proposal on blender pumps, pipelines and other supports, they can use the tax credit elimination as the offset. Consequently, even though the industry really, really doesn’t need or benefit from the tax credit, they hang onto it because they’ll use the offset later on to support other infrastructure programs.

Reaction from industry, government and NGOs

Secretary of Agriculture Tom Vilsack
“President Obama has outlined a plan to reduce our oil imports by one-third by 2025. Biofuels play a central role in this plan, which is why this administration continues to support and invest in the development of these important, domestically produced fuels.

The Administration supports efforts currently underway in the Senate to reform and modernize tax incentives and other programs that support biofuels. However, today’s amendments are not reforms and are ill advised. They could lead to job loss and pull the rug out from under industry, which will lead to less choice for consumers and greater dependence on foreign oil.

“We need reforms and a smarter biofuels program, but simply cutting off support for the industry isn’t the right approach.  Therefore, we oppose a straight repeal of the Volumetric Ethanol Excise Tax Credit (VEETC) and efforts to block biofuels infrastructure programs.”

Jeff Broin, POET Chairman and CEO
“By voting to repeal the ethanol tax credit, while preserving USDA’s funding for flex pumps, the Senate came close to a reform package supported by the ethanol industry. With enough flex pumps to give consumers true choice at the pump, ethanol can compete directly with gasoline. But while the USDA program is a good first step, it doesn’t go far enough.

“That’s why we believe the Senate should now adopt the bipartisan Ethanol Reform and Deficit Reduction Act introduced by Senators Thune and Klobuchar. This bill would end the ethanol tax credit and reduce the deficit, while still supporting the expansion of flex pumps that would give consumers greater fuel choice. It’s not too late for Congress to establish the infrastructure for a competitive market between ethanol and gasoline that would lower prices at the pump.”

Tom Buis, Growth Energy CEO
“Ironically, the United States Senate has spent the better part of a week on an amendment that is unconstitutional and going nowhere, even while the news pours in that OPEC has hit a high-water mark of $1 trillion in revenues. The Senate missed an enormous opportunity to take real action on deficit reduction and energy policy when it failed to put oil subsidies and giveaways to the same test as ethanol. Instead, senators turned a blind eye to the hidden costs of oil, and chose to waste time on an amendment that can be tossed out on constitutional test.”

Brooke Coleman, Executive Director of the Advanced Ethanol Council
“This week’s debate over ethanol is another case of politics over substance that once again distracts from an honest and comprehensive discussion about America’s energy future. With this song and dance now over, advanced and cellulosic ethanol producers will continue to work with Senators to find common ground on a forward-looking and productive new way to promote a fuel that is already an important part of the U.S. energy portfolio and has a very bright future. We look forward to moving a proposal to the President’s desk that expands the market for ethanol and expedites the commercialization of promising new ethanol technologies and fuels.”

Sheila Karpf, a legislative and policy analyst at the Environmental Working Group
“The Senate has put American taxpayers and our soil and water ahead of special interests and the corn ethanol lobby.”

Franz Matzner, Climate and Air legislative director at the Natural Resources Defense Council
“The Senate made clear today that corn ethanol’s days at the public trough are numbered. To continue to subsidize corn ethanol any longer would be a repudiation of the public will.”

Joshua Morby, executive director of the Wisconsin Bio Industry Alliance
“The Senate vote today was not based on the practicalities of producing viable alternatives to petroleum-base fuels. Rather, this was a vote of politics over substantive debate. Wisconsin’s ethanol producers are looking forward to working constructively with lawmakers in finding ways to continue the diversification of American energy producing and decreasing our reliance on foreign oil.”

Kate McMahon, biofuels campaign coordinator at Friends of the Earth
“Senators scored a win for the public and for the environment by voting to end this $6 billion giveaway. Ending this subsidy will help reduce the deficit, have almost no impact on jobs and limit support for this polluting industry. We thank the senators for reaching across the aisle to send a decisive message that the ethanol industry’s days of living high off the taxpayers’ hog have come to an end.”