STATEHOUSE DISPATCH: Daniels administration subtly shifting ethanol strategy

January 29, 2007

Folks in central Indiana who were watching probably took advantage of the section of President Bush's State of the Union address on energy independence Jan. 23 to grab a drink or check in on the Indiana University post-game show.

While the president's energy proposals probably didn't generate a lot of attention in urban areas of the state, the mere mention of ethanol in Indiana outside the collar counties makes lots of Hoosier ears perk up-both ears of corn and human ears.

When Republican Gov. Mitch Daniels took office, he and Lt. Gov. Becky Skillman quickly developed an economic development plan that sought to build upon one of Indiana's strengths: its abundant farmland and strong record of crop production, particularly in corn.

Two key initiatives the Daniels administration sought to implement were an increase in pork production and shaping Indiana into the national leader in ethanol production.

Ethanol production was envisioned as a way for Indiana to contribute to the national desire to reduce our dependence on foreign sources of oil; to help increase the market for Hoosier corn producers; to bring new investment and jobs to rural areas of the state that were not appropriate venues for other types of economic development opportunities; and to contribute to the reduction of greenhouse gases and thus global warming through biofuels.

The Indiana Economic Development Corp. and the Indiana State Department of Agriculture teamed up to offer investment incentives for ethanol producers and for retailers to offer E-85 products at the pumps. The state unveiled plans to increase the number of vehicles in its fleet that could operate on biofuels.

By the midway point of the Daniels administration, some two dozen biofuels plants were on the drawing board or under construction, a big jump from the one plant in operation at the beginning of 2005.

Corn prices-and especially corn futures prices-jumped significantly, with corn suddenly selling for $3 per bushel, up from $2 in 2005, the highest prices for that commodity in a decade.

And, just as suddenly, lots of questions began to be raised across the state, seemingly overnight.

Would the national market be able to support so many ethanol plants? After all, Indiana wasn't the only state to make them a priority. But with the industry so dependent on assorted subsidies, the real cost and efficiencies of ethanol began to come under closer scrutiny.

Would Indiana's farmers be able to produce enough corn? Purdue University agricultural economists calculated that Indiana would have to become a corn-importing state to meet the new demands, and prices would soar. Livestock producers also beefed about the soaring cost of corn feed.

So, it seemed, almost overnight, the Daniels administration subtly shifted away from the corn-to-ethanol concept to the production of cellulosic ethanol, which relies on items such as corn stalks, wood chips, and plant waste products, instead of corn, as inputs.

But even overshadowing this shift is a new energy-efficient technology licensed by the Purdue Research Foundation that could render all existing ethanol-processing techniques obsolete before the end of the decade. The Purdue technology also eliminates pollution issues and produces valuable by-products-at a total investment cost of less than half the average $120 million cost of a new plant now, and it also promises lower operating costs.

Rep. Dan Stevenson, D-Hammond, is working with the Daniels administration to draft energy legislation that would, among other things, establish a $20 million fund that could be tapped to attract cellulosic-ethanol production facilities to the state, providing further incentive to shift from corn as an ethanol base stock.

So, while the president's references to ethanol might not have seemed important to Indianapolis residents, they are part of a bigger picture that includes a major Hoosier commitment that will ultimately affect us in the grocery store and dinner table, at the gas pump, or in our pocketbooks.

Feigenbaum publishes Indiana Legislative Insight. His column appears weekly while the Indiana General Assembly is in session. He can be reached by e-mail at edf@ingrouponline.com.
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