Ethanol, Facing Difficult Political Atmosphere, Steps up Lobbying Activity
The following article was written by Andrew Holland for Energy Trends Insider, a free subscriber-only newsletter published by Consumer Energy Report that identifies financial trends in the energy sector. Get you free subscription today.
The ethanol industry has seen its position in Washington severely weakened over the last year. The modern ethanol industry is a creation of Congress; the Renewable Fuels Standard (RFS), the ethanol tax credit, and a tariff on imported ethanol were all responsible for creating the ethanol industry we see today. We should note that this industry has seen some remarkable successes: it has replaced almost 10% of the country’s gasoline fuel supply, with an impact on prices that is marginal at best.
It is important to note that more advanced biofuels still receive tax support: cellulosic ethanol receives $1.01 per gallon in tax credits, but that is set to expire at the end of this year. A Senate bill would extend that credit for a year, as well as retroactively re-instate the $1 per gallon biodiesel tax credit that expired at the end of last year. The fate of these credits is up in the air, as Congress will have to consider a broad range of tax policy questions before the ‘fiscal cliff’ coming this year.
Elimination of Tax Credit and Tariff
Back to traditional ethanol. The ethanol tax credit and the tariff were eliminated at the end of 2011. (See also: Understanding the Ethanol Tariff Issue) The tax credit provided a financial incentive for refiners to blend ethanol into fuel, while the tariff had the effect of allowing a domestic industry to grow without competition from more efficient sugar cane ethanol (most commonly from Brazil).
Now, with both of those gone, the sole remaining support for ethanol is the RFS. The RFS forces refiners to blend a certain amount of ethanol into the fuel supply (15.2 billion gallons in 2012), and includes penalties on refiners if they do not. Politically, this has had the effect of turning the refiners (represented in Washington by API, the American Petroleum Institute) against renewable fuel. They were never strongly in support of ethanol, but until last year they at least received tax credits for blending it.
Opposition is now starting to build against the RFS among ethanol’s usual opponents, ranging from API and the refiners to groups that compete with ethanol for access to corn like the American Meat Association or the Pork Producers. The ethanol industry sees this and realizes that the RFS will be in the crosshairs next year. So, as Congress has returned this week, the ethanol industry is trying to flex its muscles to head off any challenge.
The Advanced Ethanol Council held a ‘fly-in’ this week to have its members meet with the Administration (including the White House) and Members of Congress. Growth Energy is also bringing in its members to support the industry – and the RFS specifically – on the Hill.
Even more interesting is a report that some major players in the industry have hired the Glover Park Group to craft a long-term communications campaign to support ethanol. Ironically, GPG is the lobbying/communications firm responsible for a 2008 campaign, supported by the Grocery Manufacturers Association, which demonized ethanol for pushing food prices up. GPG is a strongly Democratic firm, and this is a clear signal that the ethanol lobby sees Republicans moving away from the RFS (even though the Romney Campaign does not support a repeal), and they are looking to shore-up support among Democrats.
Overall, I think this will boil down to an argument about economics and politics. Ethanol has always won on the politics, but its losses on economics have undercut it. Now – as we see the price of ethanol falling even though the drought has harmed corn crops, there is less of a problem with the economics. This is a mature industry. But, if this becomes a partisan issue, then they are starting to lose the political argument. (See also: How to Fix the Broken Cellulosic Ethanol Incentive System)