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New House Bill Would Make Ethanol and Biodiesel Tax Incentives Permanent

US Congressmen Kenny Hulshof (R-MO) and Earl Pomeroy (D-ND) have introduced the Renewable Fuels and Energy Independence Promotion Act (H.R. 5650), which would make the federal excise tax credit for ethanol and biodiesel permanent.

The bill removes sunset provisions for ethanol and biodiesel incentives that accompanied the Volumetric Ethanol Excise Tax Credit (VEETC), which took effect Jan. 1, 2005. (Earlier post.) Currently, the incentives will expire in 2008.

The incentive is a volumetric-based tax credit aimed at helping lower the cost of ethanol and biodiesel to consumers who pay road taxes, such as truckers, and in tax exempt markets, such as school districts.

Since taking effect, the incentive has been the primary stimulant for a dramatic increase in new biodiesel plants—there are currently 65 operational plants, with 50 more under construction.

Renewable fuels are a critical component to our nation becoming more energy independent. By making the tax credits for biodiesel and ethanol permanent, we are providing the stability these emerging industries need to grow.

—Rep. Pomeroy

Several bills have been introduced in the Senate to extend these tax credits, including S. 2401 by Sen. Chuck Grassley (R-IA), Chairman of the Senate Finance Committee.




Does that include Butanol?

Rafael Seidl

Permanent is a relative thing - a future Congress could reverse the decision with a simple majority.

While I'm all for renewable fuels, I think it is unwise to grant open-ended tax breaks to specific markets such as school buses and haulage companies. Instead, all motor vehicle fuels should simply be taxed based on the reciprocal of their EROEI (energy returned on fossil fuels invested). Note: the environmental damage due to any nuclear power used for hydrogen production needs to be monetized as well, to avoid an inadvertent skew in the incentives.

With carefully chosen values, consumers will be in a position to buy alternative fuels at no or little extra cost. It matters little whether they do so for the sake of energy autarky or to reduce their GHG footprint.

Certain European countries do offer one salutary lesson, though: if you consistently maintain one type of fuel (e.g. diesel) over another (e.g. gasoline) because the former is used a lot by farmers and the haulage industry, you can end up overshooting your goal. Not only can you end up with poorer air quality but also suboptimal utilization of your fuel production infrastructure. Austria imports diesel and exports gasoline, for example.

The relative levels of fuel taxes need to be subject to slow, predictable fine-tuning to maintain an optimal balance.

Harvey D.

Has n-butanol been overlooked or is it inclusive? Will the extra expeditures be covered/recouperated with extra carbon taxes on fossil fuels? If so, it will be very effective to accellerate the transition to more efficent vehicles and to alternative fuels.


So, they are going to make ethanol subsidies permanent and solar and wind not? Just goes to show the power of the corn lobby. Right now, the profit in this area for corps like ADM is astronomical. The pigs are at the troth. The real pigs will end us with less food at the troth.

When people wake up to how expensive this all is, they are not going to be pleased. But then, nothing seems capable of waking the sleeping American electorate.


I don't understand why they didn't just propose to extend the subsidies something like 10 years. They've been getting the behavior they wanted even though the provision expires in three years. By extending it for another 10, they'd send the signal that they're serious about this, but also willing to entertain and encourage other ways to reduce fossil fuel dependance...

An Engineer

How stupid is this? The point of subsidies is to allow an industry to mature to the point where it can compete without subsidies! Otherwise, why not subsidies dozens of inefficient companies?

By doing this, Congress would take away any reason for ethanol and biodiesel production to be optimized. It also means that if these fuels get a significant share of the market, it is going to cost the taxpayer a ton of money.

But then what do you expect from those spineless jellyfish?


By doing this, Congress would take away any reason for ethanol and biodiesel production to be optimized.

Nonsense. If I'm producing ethanol/biodiesel for $3/gallon (after $1 subsidies) and the market allows me to sell it for $4/gallon, I'm making $1/gallon. If, however, I gain efficiencies and can manufacture it at $2.50/gallon, I'm making $1.50/gallon. So long as businesses get to pocket any savings they come up with, the fact that there are subsidies has nothing to do with efficiency.

Robert Rapier

It is not at all clear to me why the subsidy needs to be extended. Ethanol was mandated in the energy bill. If they let the subsidies expire, ethanol will still be used in gasoline. The only difference is that consumers will finally pay market price for it. However, as I have argued on my blog, in that case the market for E85 will completely disappear. All ethanol would be blended at 10% or less to hide the higher price and lower fuel efficiency.

I have written a lot of anti-ethanol articles, but I have run across one ethanol process that I can endorse:

E3 Biofuels: Responsible Ethanol



The real question is will these credits go to consumers. Here in Oregon most energy credits bypass consumers.

Sid Hoffman

Ethanol currently costs about $1.60/gal to produce, factoring subsidies. They're selling for $3-$5/gallon on the spot ethanol market. This is why ethanol production is ramping up as fast as possible right now, they're all trying to cash in. They really don't need any subsidies right now.

allen zheng

Maybe this will force the farmers to move to sweet sorghum (~2x ethanol, better energy balance and less water vs corn). After that it is off to cellulose/biomass from waste, and maybe algae.

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