Weathering the VEETC Storm

Contradictory reports and new policy proposals are causing turbulence in efforts to extend the ethanol blenders tax credit, set to expire in December.
By Holly Jessen | August 27, 2010
While both are in the business of promoting the ethanol industry, Growth Energy and the Renewable Fuels Association don't always agree on the best way to proceed. That was especially apparent in July, when the two groups diverged on the best course of action in the fight to extend the Volumetric Ethanol Excise Tax Credit.

On July 15, Growth Energy proposed a strategic shift in policy, setting off waves in the ethanol industry. The group unveiled its Fueling Freedom Plan, suggesting some incentives be diverted to support infrastructure such as blender pumps and pipelines and requiring all new vehicles to be flex fuel. The plan would lead to an open market and eventually allow the phasing out of government support for the industry, the group said. Growth Energy had been considering various options for several months before unveiling its Fueling Freedom Plan, CEO Tom Buis says. The lapse of the biodiesel blenders credit figured in the discussion as did the multiple delays in getting an E15 waiver approved. Growth Energy's goal is to look at what is best for the industry, Buis says, not only today, but also in the future.

The RFA, joined by the American Coalition for Ethanol, the National Corn Growers Association and the National Sorghum Producers, reacted swiftly, throwing their support behind the legislation introduced in the U.S. House of Representatives and U.S. Senate to extend ethanol tax incentives. "There's very little time left for this Congress to do much," RFA President and CEO Bob Dinneen tells EPM, "which is why we are trying to stay the course and make sure we keep it simple, because complexity is the enemy right now." Although Dinneen agrees that certain parts of the proposal are very attractive, changing the U.S. renewable fuels strategy isn't something that can or should be done quickly.

Conversely, Growth Energy contends that the time is right to discuss changes. A change this big won't happen overnight, Buis says, and the group wants to get its ideas out there for discussion before the energy debate in Congress, although it is not clear that will happen this year. A Senate energy bill was introduced July 27 that, notably, ignores biofuels completely.

With Growth Energy going one direction and RFA advocating another, will that be a problem for the industry as a whole? It is a valid concern, Dinneen says. "Is it one that will keep us from doing what we want to do?" he asked. "I don't know yet."

At the American Coalition for Ethanol Conference & Trade Show in August in August, representatives from ACE and the National Corn Growers talked about holding a face-to-face industry meeting with RFA and Growth Energy, as soon as possible. Darrin Ihnen, president of NCGA, which has long called for cooperation among ethanol industry groups, said that NCGA has been serving as a "babysitter,", attempting to get the three groups, ACE, RFA and Growth Energy, to at least agree in public.

Raymond Defenbaugh, president, CEO and chairman of Big River Resources LLC in West Burlington, Iowa, commented from the audience that what the industry needs is one voice of support for ethanol from all three groups. ACE, RFA and Growth Energy may have different strategies, but they are united in support of ethanol. "We might be using different tools," he said. "We might even have a different timeline on using those tools." Big River Resources is the only U.S. ethanol plant that is a member of ACE, RFA and Growth Energy. Defenbaugh has exactly the right message, and the organizations need to do what is necessary to make that happen, said Brian Jennings, ACE's executive vice president. "The truth is that we have so much more in common than we are apart," he said.

Ron Fagen, president and CEO of Fagan Inc., said that he doesn't see a problem with having three separate ethanol industry groups. Although those groups do need to deliver the same message, having multiple voices is actually a strength. "We all have our allies," he said. "We all get along better with certain politicians that we do others."

Larry Johnson of LLJ Consulting and Business Development reminded the conference that there was a lot of arguing in the 1980s over the Clean Air Act. The NCGA was in the same middleman position it is in right now, he said. And yet, despite the fighting, the ethanol industry won because it was fighting for a worthy cause. "I'm not really worried about this," he said.

For its part, if the Fueling Freedom Plan isn't adopted, Growth Energy says it will support a straight extension of the VEETC, adding that, without an open market, decreasing the value of the VEETC would not be good for the industry. Several big players back the Fueling Freedom Plan. Jeff Broin, CEO of Poet LLC, the second largest ethanol producer in the U.S., the largest dry-mill ethanol producer and a founder of Growth Energy, is a big supporter. Green Plains Renewable Energy Inc., the fourth largest ethanol producer and also a Growth Energy founding member, has expressed its support.

Valero Energy Corp., the third largest ethanol producer in the U.S. and—ironically—a blender, commented on the issue in late July. A top official said in an investor/media conference call that it would not make a difference to its ethanol business if the blenders credit were not extended. Gene Edwards, executive vice president of corporate development and strategic planning, said with current prices and a blending margin of 30 cents per gallon, the VEETC is "irrelevant" to Valero's ethanol business. "You would not see blending bat down one barrel because of the credit being gone," he said.

While there are multiple bills proposed in the House and the Senate, the one furthest along in late July was released by the House of Representatives Committee on Ways and Means. A pared down version of the bill introduced by Reps. Earl Pomeroy, D-N.D., and John Shimkus, R-Ill., the current bill calls for a one-year extension of the VEETC with a 9-cent reduction of the current 45-cent blenders credit. "The tax credit is a bridge to a future where renewable fuels standards create the market without requiring the tax credit drawing on the federal treasury," Pomeroy tells EPM. "However, we aren't there yet. We're going to continue to press as hard as we can to get it extended."

What's in an Incentive?
Getting biodiesel's blenders credit extended has been fraught with difficulties. Attempts prior to its lapse on Dec. 31 failed, and multiple amendments to bills have since died in Congress. In July, with the Unemployment Extension Act passing without a biodiesel extension, the effort started over with new amendments being attached to bills in both houses. In the meantime, the biodiesel industry has been "knocked on its back," says Renewable Energy Group Inc.'s CEO Jeff Stroburg. Many biodiesel plants, including REG, have cut back on production or are standing idle. Some are teetering on the edge of bankruptcy. REG, the largest U.S. biodiesel producer, has a capacity of 360 MMgy, including fuel both produced and marketed for others. "More than half of our capacity is shut down, although we may not have plants that are totally mothballed like other companies," he tells EPM, adding that getting the tax credit reinstated would mean many restored jobs industry wide.

If the VEETC were not extended, would the same thing happen to the ethanol industry?
The RFA has been very vocal that failing to extend the VEETC would mean closed ethanol plants and lost jobs. This spring, John M. Urbanchuk of Entrix Inc., released a report commissioned by the RFA showing that without the VEETC, the equivalent of two out of every five plants would close, resulting in more than 112,000 lost jobs, both direct and indirect.

The Food and Agricultural Policy Research Institute at the University of Missouri also says the ethanol industry would suffer without the VEETC—although less severely than RFA predicts. In its yearly report, FAPRI says U.S. fuel ethanol and biodiesel production would be cut by 10 percent if biofuels tax credits expire.

Others aren't so sure. A staff report released in July by Bruce A. Babcock, director of Iowa's Center for Agricultural and Rural Development, projects the expiration of the blenders credit and import tariff would not have dramatic, adverse effects on the U.S. ethanol industry. Furthermore, if supports lapse, it would save tax dollars annually and decrease prices at the pump. The renewable fuel standard is the primary driver of ethanol demand and U.S. production will increase to 14.5 billion gallons by 2014 even without the tax credit and tariff. Finally, if the supports were not extended, it would only result in 300 lost jobs in 2014, according to CARD.

Growth Energy points out Babcock's paper assumes the U.S. EPA increases the blend limit to E15, supporting the Growth Energy argument that if the ethanol industry gets access to a bigger share of the market, government supports like the blenders credit aren't as important. However, without that open market, the VEETC is still vital, Growth Energy admits.

A Congressional Budget Office study on biofuel tax credits released in mid-July stirred the debate further, highlighting differences in the tax incentives for ethanol, cellulosic ethanol and biodiesel. Adjusting for energy content and petroleum used for production, the CBO determined that corn ethanol producers receive 73 cents for every unit with the energy equivalent of one gallon of gas. By the same reckoning, incentives for cellulosic ethanol were $1.62 and biodiesel $1.08 per unit. To reduce gas consumption with corn ethanol by one gallon, it costs taxpayers $1, the report said. For cellulosic ethanol the number is $3. To reduce greenhouse gas (GHG) emissions through tax credits, it costs $750 per metric ton of carbon dioxide equivalent (CO2e) for corn ethanol and $275 per metric ton of CO2e for cellulosic ethanol.
The RFA countered that the CBO report failed to give credit for coproducts and relied on worst-case, pessimistic and debatable assumptions. The industry group said the report likely overestimates the cost of displacing petroleum with ethanol by a factor of three to four and overestimates the cost of reducing GHG emissions by a factor of six to eight. In addition, the RFA pointed out that CBO didn't compare biofuel incentives with other energy tax incentives—particularly oil subsidies.

Last year, the Environmental Law Institute did just that and found that energy subsidies are "black, not green." The institute looked at fossil fuel and renewable energy subsidies from 2002 through 2008. Subsidies to fossil fuels totaled about $72 billion over those seven years, while subsidies for renewable energy added up to $29 billion. Of that amount, only $16.8 billion went to corn ethanol, with the remainder going to wind, solar, geothermal and hydro power sources. The results were surprising, says John Pendergrass, a senior attorney for ELI. "It did seem like the provisions to encourage oil and gas and coal, some of which have been around for 80 and 90 years, would not be necessary for a mature industry," he tells EPM. "It raised questions for us. Is it really needed for a mature industry, compared to a relatively new industry of renewables?" In general, subsidies for fossil fuels increased over the study period. Funding for renewables increased as well, but dropped steeply in 2006-'07. An exception was in 2008, when subsidies to fossil fuels decreased and subsidies for renewables increased. For Pendergrass, another eyebrow raiser was how much of the subsidies to big oil come in the form of direct spending. A total of $16.3 billion in direct spending went to fossil fuels, nearly as much as the total of tax breaks and direct spending for corn ethanol combined. In addition, the largest subsidies to fossil fuels are permanently written into the U.S. Tax Code, which is changed only as legislators decide to amend it. "By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry," the report says.

Those words have never rung truer for the ethanol and biodiesel industry than right now. While the ELI paper indicated some hesitation to fully embrace corn ethanol, Pendergrass says he certainly believes it is time to reconsider all incentives. "We think that Congress should revisit and carefully consider the amount of money being spent," he says. "I think there is inertia."

While movement in Congress has been slow, the debate has fueled another round of negative editorials. The week before the ways and means committee released its draft bill for a one-year, 36-cent tax incentive for ethanol, three major newspapers ran editorials bashing the fuel, three days in a row. The Chicago Tribune started off July 23, calling for an elimination of the tax credit, saying that "heavy subsidies and protectionism" are a bad mix. Then, the Washington Post chimed in, also calling for an elimination of the VEETC, vaguely claiming that "there are certainly more effective ways to reduce oil consumption and greenhouse emissions." The last editorial from the Wall Street Journal bitingly argued that the cost of ethanol subsidies is too high compared to the amount of carbon it replaces in fossil fuels. The industry responded swiftly. In a letter published in The Washington Post, Dinneen called the editorial misleading and pointed out that it offered readers no alternative to ethanol. "Calling for an end to tax credits for ethanol while ignoring the billions of dollars of tax subsidies for Big Oil is as inequitable as it is shortsighted," he wrote.

Pomeroy has heard plenty of ethanol backlash too. "The past few years, ethanol has lost a lot of public support, at least in the halls of Congress," he says. "I don't fully understand why." Although ethanol was not the cause for increased food prices, reshaping opinion has been difficult. And, unfortunately, many environmentalists continue to use flawed science to tear down the fuel. "I don't have an understanding of what their end game is," he adds. "I guess they'd put us all on bicycles and call it a day."

Ethanol, as many industry supporters are fond of repeating, is here today. Production is over 10 billion gallons yearly and continues to increase, cutting a chunk out of the amount of fossil fuel the U.S. imports from the Middle East. It's created 119,000 direct and indirect jobs. "Ethanol is a success story," Pomeroy says. "In the early years we had to justify ethanol based on theory, now the evidence is in, and it is working in a big way."

Holly Jessen is associate editor of Ethanol Producer Magazine. Reach her at (701) 738-4946 or [email protected].