Putting the market in ethanol policy

A few years ago, the nation fully committed to developing a domestic renewable fuels industry.  The creation of the federal Renewable Fuels Standard (RFS) in 2005, and its subsequent expansion in 2007, has put in place the beginnings of a policy framework that can respond to oil market volatility. As economists from the Department of Energy, Iowa State University, and Merrill Lynch have examined the impact of increased ethanol blending on consumer gas prices, they have concluded that ethanol has generally reduced the price of gasoline by 15-50 cents per gallon while displacing more imported oil than we get from Saudi Arabia each year.

With the RFS, market-based tax policies that reduce the price of ethanol-blended fuels for consumers have worked to build the current ethanol industry. Now in the 21st century, these policies can and should be transformed to meet taxpayers’ expectations, as well as the needs of a growing and evolving industry. 

The key to this transition and transformation begins and ends with the market:  market economics, market expansion, and market evolution.

First, we must recognize the importance of market economics to future ethanol production and use. The Volumetric Ethanol Excise Tax Credit (VEETC), also known as the blenders’ credit, has been essential to ethanol’s market penetration. Given current budget concerns and the maturing nature of existing ethanol production, such an incentive is ripe for transformation. 

One idea is a transition to a variable tax credit tied to the price of oil.   Keep in mind the idea behind an incentive, such as the current version, is to drive to demand. At $100 oil, for example, a tax incentive is likely not needed to drive new demand. 

However, we are just two years removed from $39 oil, and at that price, marketers will seek to maximize petroleum use making such an incentive critical. A variable incentive would provide a fiscally responsible backstop to the oil price volatility that would protect taxpayers and the investments in the industry. 

Second, America’s desire to reduce dependence on imported oil cannot be achieved without market expansion for ethanol.  As I testified before the Senate Energy and Natural Resources Committee, “For [the RFS’s] ultimate goal of 36 billion gallons of renewable fuel use to be realized, however, additional federal efforts to open markets, stimulate investments in new technologies and assist in the development of infrastructure for these new fuels will be necessary.”

Expanding the market for ethanol means getting more Americans behind the wheel of flexible fuel vehicles (FFVs).  This can be achieved through a combination of consumer-based incentives as well as requirements that a certain percentage of vehicles sold in the U.S. be FFVs.  Market expansion also means continuing and expanding tax incentives for the installation of ethanol fueling infrastructure like blender pumps capable of offering a range of fuel blends from zero percent ethanol up to 85 percent ethanol known as E85.  It also means working with automakers, retailers, and other stakeholders to permanently remove any ethanol blend wall. 

Finally, policies that continue ethanol’s evolution must be maintained and expanded. Loan guarantees like those offered at the Department of Energy and the Department of Agriculture are critical. As seven renewable energy groups and 34 CEOs wrote to Congressional leaders last week, these programs are vital to the commercialization of these promising technologies.
Such policies must be focused on the long term. Engaging in the yearly tax extenders games, as is the case with current ethanol tax credits, is stalling investment and construction. As Bill Brady, CEO of advanced ethanol producer Mascoma and Chairman of the Advanced Ethanol Council, testified to the Senate Energy Committee, this kind of extenders game “will not provide the kind of consistent market signal that investors are looking for when making decisions in this industry.”

It is unlikely that any other industry is as committed to transforming existing policies that have helped support its development as American ethanol producers. We are ready to talk honestly and openly about how we can give Americans more control over their energy future. Part of that future can and should include domestically-produced renewable fuels like ethanol. 

Bob Dinneen is the president and CEO of the Renewable Fuels Association, the leading trade association for American ethanol producers for more than 30 years.