Monday, May 10, 2010

Ethanol Industry: Too Big to De-Subsidize?

Ethanol Factory

The ethanol industry is a growing presence in the Midwest, with production increasing by more than 30 percent in the last year. (Photo via Gordon_Iowa.)

The ethanol lobby has been extremely successful over the course of the last decade in growing the industry into one of Washington's favorite pet projects. A reported 76 percent of each dollar in subsidies to renewable energies is allocated to ethanol, including $5 billion in annual tax credits. Auto companies historically have been supportive of ethanol, but the tide could be turning.

The auto industry is fighting to delay an EPA rule change that would increase the allowable level of ethanol blended into gasoline from 10 to 15 percent. Carmakers say that the increase could damage catalytic converters and cause �Scheck engine⬝ lights to malfunction. The Alliance of Automobile Manufacturers says that early results from a study of the blend's effects on engines is troubling, with half of engines tested showing problems.

A 50 percent increase in the ethanol allowance would help the United States meet a 36 billion gallon ethanol mandate made law by the Energy Independence and Security Act of 2007, and help the ethanol industry�which has lost several companies to bankruptcy recently�continue to grow. The industry currently relies on $0.45 per gallon federal subsidy and a $0.10 per gallon tax credit, but both are scheduled to expire this year. Bills to extend the incentives are currently being considered by Congress, but their prospects are unclear.

Under the government�"s fuel economy regulations, automakers are allowed to assign higher fuel economy ratings to vehicles that have been specially outfitted to use an 85 percent blend of ethanol and 15 percent gasoline. Yet, very few of these vehicles ever use E85 fuel.

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1 comment:

Mohan said...

The United States preaches Third World countries to discontinue subsidies, yet it subsidizes its own ethanol industry. Diverting food grains to ethanol is absurd. Using waste for energy generation or CNG is a better concept. If grains are used to produce ethanol, it leads to price increases of food grains for eating. So, de-subsidizing will not have a major impact in the over-all cost incurred by an individual i.e., either he pays more for food grains or for higher fuel prices. The earlier this is understood the better for the economy.