Economy and Environment and Government and Economic Development

Ethanol's secret: Highly touted alternative fuel needs tax subsidies to survive

February 27, 2006

State and local leaders have been crowing about how ethanol plants will bring more jobs to Indiana and put more dollars in the pockets of corn farmers.

If that prospect isn't enough to make votecoveting politicians and corn farmers giddy, General Motors Corp. started singing ethanol's praises this month in TV ads. Joyous motorists frolic under blue skies-all thanks to ethanol's promise of cleaner air and energy independence from oil.

But there's another economic reality for motorists who use E85, an 85-percent ethanol/15-percent gasoline blend that 5 million U.S. vehicles can burn.

Even with E85 priced at $1.89 a gallon vs. $2.09 for regular gas-the spread the other day at Joe's Junction, at 2210 Kentucky Ave.-the fuel would cost about $400 a year more to run an E85-burning Chevy Tahoe over 15,000 miles, according to fueleconomy.gov.

That's one of the dirty-albeit clean-burning dirty-little secrets about ethanol. Should the government be subsidizing E85 when, under current conditions, it provides virtually no economic benefit to motorists who use it?

"Take these subsidies away and ethanol is dead" as a practical fuel, said David Pimentel, a professor of ecology and agriculture at Cornell University in Ithaca, N.Y.

Pimentel has long been a critic of the fuel he said undermines the nation's efforts to reduce reliance on gasoline and only reflects "politics and big money" by enriching corn processors such as Illinois-based Archer Daniels Midland.

He once declared in a Cornell publication that ethanol production is "abusing our precious croplands to grow corn for an energy-inefficient process that yields low-grade automobile fuel [that] amounts to unsustainable, subsidized food burning."

State dispensing fuel tax breaks

Ethanol's cost is not borne only by those who fill their tanks with it. All motorists are indirectly hit by the impact of state and federal tax breaks being dispensed to reduce the pump price of E85 and to lure new ethanol plants to Indiana.

Just last month, the state offered AS Alliances Biofuels LLC tax credits worth up to $992,500 to build a $100 million ethanol plant in the Montgomery County town of Linden. The plant might employ 58 people.

Last year, the Indiana Economic Development Corp. offered incentives potentially worth $3.8 million to Indiana Bio-Energy toward the cost of a $134 million ethanol plant slated for Wells County.

That doesn't count the $58 million in bond debt the county was asked to guarantee for the project.

Another proposed plant near Logansport could receive tax credits and training and infrastructure grants worth $5 million.

Ethanol producers also might be eligible for a state tax credit of 12.5 cents per gallon of ethanol they produce each year-up to $3 million.

Meanwhile, back at the pump, the federal government provides a 52-cent tax credit for every gallon of pure ethanol.

Gasoline with 10-percent ethanol-an additive used to cut emissions and petroleum use and which can be burned by most every car-gets a 5.2-cent tax break.

Focusing on subsidies misses the bigger economic picture, according to Lt. Gov. Becky Skillman.

"Biofuels are good for our economy. The production facilities certainly create new jobs in Indiana. [Ethanol] is cleaner for the environment and ... good for farmers," said Skillman, from aboard an E85-burning Chevrolet Tahoe GM loaned the state.

Other ethanol backers acknowledge that the economics of ethanol aren't where they should be.

Kellie Walsh, executive director of the Central Indiana Clean Cities Alliance, said ethanol needs to be on the order of 20 or 30 cents a gallon cheaper than gas before one starts seeing an economic benefit in some vehicles.

Hurting ethanol's pricing lately has been a supply shortage, she said, due partly to rising demand for ethanol in place of a common gasoline additive that helps cut pollution but has been blamed for environmental harm of groundwater.

Walsh said ethanol supplies would rise as new plants come on line in Indiana, where, until last May, there were virtually no E85 pumps. Today, there are about 30 and the goal is to have at least 40 operating by year-end.

"This doesn't happen overnight. It's something you have to get in place," said Walsh. "People just need to give it a chance."

But free-market disciples have heard this argument before.

"Just give us a few more years. The problem with that kind of argument ... is, after about 30 years, you begin to wonder if it's true," said Ben Lieberman, a senior policy analyst at the Heritage Foundation in Washington, D.C.

Lieberman said he's not opposed to alternative fuels, but that years of subsi- dizing ethanol dating back to the Jimmy Carter administration may have actually hurt that search. The subsidies have benefited corn farmers, as most ethanol produced today comes from corn grain.

The growing use of corn to produce ethanol has other economic implications, according to a Ball State University economist.

The higher the demand for corn for ethanol, the less corn there is available for animal feed and food products, said Patrick Barkey. When corn supply falls, prices rise.

Potentially, "It makes everything else more expensive," Barkey said.

Corn sold for ethanol production will indeed affect prices, bringing farmers in a 30- to 40-mile area around a plant perhaps a 10-cent increase per bushel, said Chris Novak, executive director of the Indiana Corn Growers Association, "simply because you're adding competition to the local market."

Using corn short-sighted?

But Indiana's investment in corn-grain ethanol production may be a fleeting one.

The U.S. Department of Energy said the economics have dramatically improved for making ethanol from socalled cellulosic materials, such as corn stalks, instead of the kernel.

According to some industry sources, it costs nearly $3.50 a gallon to make ethanol from this kind of feedstock. At that price, it's still not cost-effective, but technological improvements might drive the cost down.

The Energy Department said it recently developed methods to produce ethanol from the material at $2.30 a gallon. Some private firms have told the department they can make it for $1 less than that, said Julie Lynn Ruggiero, a department spokeswoman.

Some prefer cellulosic ethanol because, unlike grain-based ethanol, the materials to make it are available in virtually every state. Ethanol can't be easily transported nationwide from corn-rich states because it's corrosive to pipelines.

President George Bush, in his State of the Union Address last month, called for sharp increases in funding for cellulosic ethanol research. Last summer, the energy bill he signed mandated that the country use 7.5 billion gallons of ethanol by 2012, roughly double today's consumption.

Production of cellulosic ethanol has been under way on a small scale at a demonstration plant in Canada operated by Ottawa-based Iogen Inc. A commercial plant using wheat straw is planned in the United States soon, with construction likely to start next year, said spokeswoman Mandy Chepeka.

If perfected, existing corn-based ethanol plants likely would face costly upgrades to handle cellulosic materials.

"It's important to look at other biomass as well," agreed Lt. Gov. Skillman, who has been leading the charge for alternative fuels such as biodiesel.

Skillman said Indiana's agricultural brain trust, including researchers at Purdue University, have the opportunity to develop even more cost-effective biofuels.

She's also backing legislation still alive in the Statehouse that would give gas retailers who sell E85 a tax break of up to $2 million a year.

Besides six ethanol and two biodiesel plants announced in Indiana in the last couple of years, as many as 10 other biofuel projects are under consideration, Skillman said. "We would like to see Indiana become the global leader in the production and use of biofuels."
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