US Politics: Government Spending, Ethanol, and the Republican Dilemma

EA's US Politics correspondent Lee Haddigan writes:

During the recent controversy within the Republican Party over a ban on "earmark" funding, Senator Jim DeMint, the leading advocate of the moratorium, was able to call upon the support of a host of Tea Party and conservative blogs.

Now the battle gets specific. As DeMint turns his attention to the specific issue of subsidies for corn, media on the Right have been much quieter. At stake in the upcoming debate over the extension of tax credits for the use of ethanol (corn alcohol) in fuel are the same principles that drove the earmark battles, but this time politicians  in corn-producing states may find themselves opposing a cut in Government spending.

The next month will provide an interesting snapshot, on a complex subject, of how far the national priorities of the Tea Party movement have managed to overcome traditional state-centred politics. As Senator Tom Coburn (R-Oklahoma) declared in an e-mail via his spokesman this week, the current ethanol subsidies are a part of the process whereby "every aspect of the federal budget should be reviewed. Nothing should be off the table. Congress has to focus on the national interest, not the parochial politics of the past."

Current tax subsidies enjoyed by fuel refiners who blend their gasoline with ethanol, also known as gasohol, are due to expire on 31 December. Conservatives who oppose the tax credits for financial reason, have been joined by some environmentalists who contend that the benefits of the use of ethanol in fuel are outweighed by their disadvantages. 

On Monday, Al Gore announced at a green energy business conference in Athens, Greece, that his support for subsidies for ethanol production was a mistake as “the energy conversion ratios are at best very small”. And --- in a telling admission that may cause embarrassment to Republicans who attempt to extend the tax credit --- he explained how his initial support for the policy was a result of his presidential ambitions in 2000: "One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for President."

The background: the 2004 American Jobs Creation Act included the introduction of the Volumetric Ethanol Excise Tax Credit (VEETC), which gave blenders of gasohol a 51-cent tax credit for each gallon of ethanol they use in their mixture. Reduced to 45 cents in a 2008 farm bill, this credit is applied to the excise tax of 18.4 cents per gallon of fuel producers. The most common mix of gasoline in America includes 10% ethanol.

This means that for every 10 gallons of fuel a blender sells, they pay an excise tax of $1.84 (10 times the 18.4 cents), but they receive a credit against that liability of 45 cents for every gallon of ethanol used.  

Alongside these tax benefits for ethanol, the 2005 energy bill introduced the Renewable Fuel Standard, which mandated that renewable fuels must be mixed into the gasoline supply. This provision was extended in the 2007 Energy Independence and Security Act, which requires the nation to use 15 billion gallons of ethanol by 2015 and 36 billion gallons by 2022. (These mandates are not the subject of the current debate in Congress, only the tax credits.)

As the name of the 2007 Act suggests, one reason for the protection of domestic ethanol production is that it lowers America’s dependence on oil imports. Common sense would suggest this is a valid proposition, but research indicates this may not be the outcome. A recent report by The Manhattan Institute for Policy Research argues that oil imports have actually increased over the last 10 years and that ethanol subsidies have had no effect. Whatever the agenda behind that report’s findings, which are disputed by ethanol lobbying groups like the Renewable Fuel Association, it allows conservative politicians to attack the subsidies without attracting criticism for ignoring national security interests.

More damaging to the ethanol cause are the twin arguments that it drives up food prices, especially for the poor, while having a negligible positive impact on the environment. An October decision by the Environmental Protection Agency to allow a 15% ethanol mix in cars manufactured after 2007 (to help blenders meet the above mandate) has brought these topics to the fore. A week after the EPA ruling, Oxford University's Ian Goldin told a conference in Naples, Florida, "On the food-versus fuel story, it’s absolutely clear that ethanol in the U. and Europe is driving up food prices.” After the ruling the Grocery Manufacturers Association, among other groups, filed a lawsuit challenging the decision, citing among other reasons that it would cause increases in prices.

Gore's criticisms of ethanol have been joined by other activists. Nathanael Greene of the Natural Resources Defense Council attacked the EPA ruling, "Burning ethanol can cause toxic air pollutants to be emitted from vehicle tailpipes, especially at higher blend levels like E-15. The chemistry is fairly straightforward: ethanol burns hotter than gasoline, causing catalytic converters to break down faster."

The battleground over the issue will be in the Senate. In April, Senators Chuck Grassley (R-Iowa) and Kent Conrad (D-Nebraska) introduced the Growing Renewable Energy through Ethanol Naturally (GREEN) Jobs Act of 2010, which would extend ethanol tax credits at the current level until 2015. After DeMint and Coburn's recent call for letting the credits expire was reported in The Washington Post, Grassley implied in an angry tweet that the two were hypocritical for also not questioning the subsidies received by the oil and gas industries.

There is a chance that ethanol subsidies will not become a major issue over the next month; there are, after all, the immediate problems of tax cuts and budgets to resolve. But DeMint and Coburn seem committed to making it a standard bearer for their crusade to cut the Federal Government and promote free markets unrestrained by regulatory agencies like the Environmental Protection Agency.

This puts Republicans in corn-producing states in a tough situation. Alienate many of their own voters, or invoke the wrath of the Tea Party movement?