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U.S. Biofuel Industry Prepares for Life Without Subsidies

A recent feature story in UK newspaper The Guardian reported that the financial crisis in the U.S. and the country's pressing need to cut its federal budget by $1.3 trillion had combined to spur lawmakers to reevaluate three decades of corn ethanol subsidies.

A significant factor in this equation was the global food crisis, which has illuminated the consequences of biofuel production – rising food prices as farmland is converted to produce biofuels – and created a public backlash against it.

The Senate had already voted overwhelmingly in June to end the tax credits and trade protection that benefit the ethanol industry. In its story, The Guardian reported that Congress was also expected to end $6 billion in subsidies to the ethanol industry as part of its recent debt ceiling negotiations.

Federal pro-ethanol policies, including subsidies, helped to grow U.S. ethanol production to 13.3 billion U.S. gallons in 2010, up from 1.6 billion gallons 10 years before. These subsidies had flowed to oil companies whose products are partly constituted from ethanol. The industry had planned to redirect parts of the funds toward petrol station refits, enabling the stations to use more ethanol under a Senate deal made last July. But the drastic budget cuts required by the debt deal resulted in a Senate vote blocking federal money from paying for special ethanol-blending pumps.

The Omaha, Nebraska-based World-Herald newspaper also reported on the ethanol industry's preparation for "life after federal subsidies." The paper wrote that there seemed to be "no political will" to extend the $6 billion per year in subsidies. Although there had been one proposal to extend existing tax credits that support cellulosic (non-corn based) ethanol, Congress had left Washington for its summer recess without acting on it, "which means it's not going to happen," according to several U.S. senators and ethanol industry representatives.

The ethanol industry, speculated the World-Herald, would now be forced to think of new ways to market their fuel, as it would no longer be cheaper than regular gas (which was its major selling point for U.S. consumers), and to seek other means of acquiring government support that would be more 'politically palatable' – in other words, that would no longer resemble subsidies.

New U.S. projects will involve biofuel production from wood chips and the inedible parts of plants, rather than from corn. (Source: Equity Energy Resources)

Many ethanol plants located close to corn supplies, such as those in the corn-belt states of Iowa and Nebraska, were forecast to remain economically viable and, argues the World-Herald, would be able to continue production in a post-subsidy environment. Iowa is projected to use 58 percent of its corn crop for ethanol in 2011, and some Iowa farmers may sell up to 70 percent of their crops for ethanol production. However, more marginal plants in states without abundant corn supplies could be driven out of business, according to Monte Shaw, executive director of the Iowa Renewable Fuels Association.

In all of these events public opinion cannot be underestimated. Environmental groups and food-focused charities have mounted powerful campaigns to raise awareness of the contributions to the current world food crisis of biofuel production processes and, especially, land use, and these campaigns have made significant headway in terms of turning public opinion against corn-based fuels. The results of this turn may perhaps be seen most clearly in the Senate vote to cut subsidies, which garnered broad bipartisan support. It was noteworthy that 33 Republican senators (with 40 Democrats) voted for the cuts.

However…

In mid-August the U.S. Department of Agriculture announced that the Obama administration will implement a $510 million initiative to boost the production of next-generation biofuels. The plan, jointly sponsored by the Departments of Energy and Agriculture and the Navy, will support a public-private partnership in which companies will be invited to bid on new biofuel projects, and the government will match their investment.

The new projects will involve biofuel production from wood chips and the inedible parts of plants, rather than corn. The Obama administration is presenting the plan as a new route to U.S. energy independence which avoids the food-or-fuel controversy associated with corn-based ethanol, and as the basis for a new industry based in rural areas of the country which will form part of the government's job-creation program. In addition to building new biofuel plants, the initiative will fund the retrofitting of existing corn-based plants.

The new proposals "will support development of a new, rural-focused industry that will replace imported crude oil with secure, renewable fuels made here in the US," said energy secretary Steven Chu.

The participation of the Navy is due to the initiative's focus on the production of advanced drop-in aviation and marine biofuels – chemical copies of their fossil fuel counterparts – which will power military and commercial transportation. Because these biofuels possess the same characteristics as petroleum-based fuels, asserts the Renewable Energy Institute, it is not necessary to modify pipelines, other fuel or transportation infrastructure, or engines in order to use it.

In order to accelerate the production of bio-based jet and diesel fuel for military and commercial purposes, secretary of agriculture Tom Vilsack, Chu and secretary of the Navy Ray Mabus have developed a plan to jointly construct or retrofit several drop-in biofuel plants and refineries. "For the military, over-dependence on imported oil can mean real vulnerabilities," said Vilsack. The Navy's preoccupation with security dovetails with national attitudes about dependence on foreign oil and the pressing need for job creation at home.

It would seem, then, that rumours of the demise of the U.S. biofuels industry have been greatly exaggerated. An end to subsidies may perhaps signal an end – but, depending on how the government's new initiative plays out, the industry may also turn out to be reborn.

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