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ISU Study: Demise of Ethanol Tax Credit Would Have Little Effect on Industry

posted on November 19, 2010


In March of 2009, Growth Energy, an ethanol advocacy group, petitioned the Environmental Protection Agency to authorize increased blends of ethanol in U.S. gasoline.

At that time, the maximum amount permitted was a 10 percent ethanol to 90 percent gasoline blend commonly known as E10. EPA issued an initial decision bumping the ethanol blend rates to E15 for 2007 and newer vehicles, but stopped short of approving its use in older vehicles, postponing a final decision on 2007 or older models until December.

On Friday, however, Reuters reported that sources close to the matter say EPA now is calling for more research and likely will not issue a decision until after the New Year.

And, as if to add insult to injury, researchers at a rural Land Grant University, this week, suggested the demise of a key tax credit for ethanol would have little effect on corn prices.

ISU Study: Demise of Ethanol Tax Credit Would Have Little Effect on Industry

Last week, a coalition of food manufacturers, petroleum interests, and livestock groups filed suit against the Environmental Protection Agency over a proposed 50 percent increase in the amount of ethanol blended with U.S. gasoline. This week, Iowa State University's Center for Agricultural and Rural Development issued yet another white paper on the economic impact of the elimination of two key production incentives.

Currently, a 54 cent per gallon import tariff on foreign ethanol and a 45 cent tax credit, commonly known as the "Blender's Credit", are scheduled to expire December 31st. However the paper's author, Bruce Babcock, claims eliminating the two incentives would have a minimal effect on the ethanol industry.

Officials with the Renewable Fuels Association, or RFA, an ethanol advocacy group whose producer members represent 90% of U.S. ethanol production, took exception to the report. They believe Babcock's conclusions, which build on a paper published earlier this year, are short-sighted and fail to take the big picture into account.

In this week's study, Babcock states there is no better time to let the import tariff expire because Brazil, the major threat to U.S. ethanol production, is using virtually all the ethanol it produces. RFA officials disagree with that conclusion stating elimination of the tariff sends a signal to the South American agricultural superpower to make more ethanol.

Babcock also concluded the price for producing a gallon of ethanol would drop only 13 cents without the "Blender's Credit." But RFA officials believe the price would actually drop by 45 cents and ethanol production would decline by more than half-a-billion gallons annually.

And Babcock states the dramatic increases in corn and soybean prices are a direct result of current ethanol policy. RFA officials say the "drama" Babcock refers to is more a function of a weak dollar, failure of the Russian wheat crop and rampant speculation in the grain markets.


Tags: agriculture biofuels ethanol industry news renewable fuels