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$6 billion-a-year ethanol subsidy dies -- but wait there's more

Seth Perlman / AP

Corn is delivered by the truckload to ethanol plants like this one owned by Archer Daniels Midland in Decatur, Ill.

America's corn farmers have been benefiting from annual federal subsidies of around $6 billion in recent years, all in the name of ethanol used as an additive for the nation's vehicles.

That ends on Jan. 1, when the companies making ethanol will lose a tax credit of 46 cents per gallon, and even the ethanol industry is OK with it -- thanks in part to high oil prices that make ethanol competitive.

Ethanol output and exports reached record highs this year, and a federal law assures ethanol a longer-term share of the motor fuel market.

"Like all incentives it was put in place to help build an industry and when successful, it should sunset," the Renewable Fuels Association said in a statement last week.

What the industry doesn’t want to see, however, is an end to a separate tax credit for ethanol made not from corn but non-foodstuffs like switchgrass, wood chips and even the leaves and stalks of corn.

Known as cellulosic ethanol, no one is selling it just yet due to its higher R&D and production costs. But the industry hopes to soon, and the production tax credit is up to $1.01 per gallon.

The industry earlier this month asked Congress to extend that credit, set to expire on Dec. 31. 2012, for five years but lawmakers did not act before recessing last week.

In the case of corn ethanol, the writing had been on the wall for months. The subsidy's death was confirmed last week when Congress passed, and President Barack Obama signed, tax legislation that did not extend it.

Subsidized since 1979 as a homegrown fuel cleaner than gasoline, corn ethanol had plenty of opponents, environmentalists among them.

Environmentalists question the cleaner energy premise -- adding factors like tractor diesel emissions and fertilizer runoff make it dirtier, they say.

"Corn ethanol is extremely dirty," Michal Rosenoer, biofuels manager for Friends of the Earth, said in heralding the tax credit's demise. "It leads to more climate pollution than conventional gasoline, and it causes deforestation as well as agricultural runoff that pollutes our water."

Opponents also see corn ethanol, which now takes a larger share of the U.S. corn crop than cattle, hogs and poultry, as a factor in driving food prices higher.

"The end of this giant subsidy for dirty corn ethanol is a win for taxpayers, the environment and people struggling to put food on their tables," Rosenoer added.

A CNBC panel last June debates the impact of the ethanol subsidy on gas prices.

 

Environmentalists do support cellulosic ethanol in principle since it doesn't compete with corn as a foodstuff.

But there's a nearer-term battle brewing over corn-based ethanol. A 2005 law requires that 7.5 billion gallons of renewable fuel be produced by 2012 -- 6.25 billion gallons were produced in 2011. A 2007 revision gradually increases that to 36 billion gallons by 2022.

So far most of that renewable fuel has been corn-based ethanol.

"We will now also turn our attention to ending other federal policies that support dirty corn ethanol, including the Renewable Fuel Standard," said Rosenoer.

Some environmentalists say that standard could be a useful tool to incentivize clean ethanol.

The standard needs "to be strengthened and improved over time" to avoid "being taken over by corn-based biofuels," Nathanael Greene, director of renewable energy policy for the Natural Resources Defense Council wrote in his blog last week.

Greene's fear is that the standard might be weakened by those opposed to measuring a fuel's emissions of gases tied to global warming and its impact on land use.

As for tax credits, Greene told msnbc.com that the his group would like to see "a technology-neutral, performance-based tax credit that pays more" the cleaner a fuel is.

Short of that, the NRDC is OK with extending the cellulosic tax credit beyond the end of next year -- and figures lawmakers will take that route since it is an easy one. "Given the current dysfunction in Congress this seems pretty likely," Greene says.

The ethanol industry, for its part, stresses it's only trying to jump start cleaner energy. "Unfortunately," the Renewable Fuels Association stated last week, "the same mentality does not extend to century-old tax subsidies supporting 20th century petroleum technologies."