Yesterday evening I directed some ire at President Obama’s continued reliance on ethanol as a major plank of his do-nothing transportation/energy agenda, noting

That extra money for 10,000 E15-capable pumps? That’s because no gas station owner will pay to install a pump for a kind of fuel that only cars built since 2001 can use… and which the auto industry has tried to ban. And why E15 in the first place? Because blenders can’t sell enough E10 to blend the government-mandated amount of ethanol and collect their $6b this year in “blender’s credits” to do so. A subsidy to support a subsidy which in turn props up yet another subsidy (I may have missed a subsidy in there somewhere). You can’t make this stuff up.

The “cornerstone” subsidy that all other ethanol subsidies support is the Volumetric Ethanol Excise Tax Credit, or VEETC, or “blender’s credit,” a $6b per year subsidy that directs 45 cents to refiners for every gallon of ethanol they blend with gasoline. The VEETC nearly died in December’s lame duck session, only to be revived as a way to buy votes for the President’s tax policy. Now, however, The State Column reports that a bipartisan Senate bill has been introduced that would eliminate both the VEETC and import tariffs on foreign-made ethanol. And with a rash of bad news coming out about ethanol, this could just be the opportunity to kill this wasteful government subsidy with fire.

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President Obama devoted his weekly address to energy and transportation policy this week, speaking to the nation from an Allison hybrid bus transmission plant in Indiana. A White House blog post accompanying video of the President’s speech included a large infographic on “The Obama Energy Agenda And Gas Prices,” the transportation-oriented section I’ve excerpted above. This one section is actually a fairly good representation of Obama’s auto-related energy policy preferences, and illustrates why I often find myself criticizing the president here at TTAC.

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A massive study by the Government Accountability Office into “Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue” has turned up an interesting finding. It seems that the government’s desire to buy more “alternative fuel vehicles” (AFVs) may actually increase the amount of gasoline used by government fleets. Why? Because agencies largely buy E85 ethanol-powered vehicles to fulfill their AFV requirements, and there aren’t enough E85 pumps to actually fuel the fleet, forcing agencies to obtain waivers to buy regular gasoline. Hit the jump for the report’s full findings on this, the latest unintended consequence of America’s ongoing ethanol-subsidy boondoggle.

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How things change in a few years! Just a few short orbits of the sun ago, automakers like GM were some of the biggest boosters of ethanol subsidies. Now, the Detroit News reports

The Alliance of Automobile Manufacturers – the trade association representing General Motors Co., Ford Motor Co., Chrysler Group LLC, Toyota Motor Corp. and eight others – opposes a bill sponsored by Sen. Tom Harkin, D-Iowa, that would require 90 percent of all vehicles to run on E85 – a blend of 85 percent ethanol – by the 2016 model year.

Shane Karr, vice president for government affairs, said the mandate “would cost consumers more than $2 billion per year” for flex fuel vehicles if automakers passed on the full cost “even though consumers will have little or no access to alternative fuels. Therefore, such a mandate is essentially a tax with little consumer benefit.”

In the face of this new opposition, the Renewable Fuels Association has even taken to employing the rhetoric of market economics to justify market-manipulating ethanol subsidies. And it doesn’t seem to be convincing anyone. If anything, Harkin’s bill may just hasten the death of existing subsidies, which are under pressure as both Democrats and Republicans seek to trim the federal budget.

At the end of last year, the Volumetric Ethanol Excise Tax Credit (aka “Blender’s Credit) very nearly expired before congress passed a one-year, $6b extension to the subsidy. The near-collapse of the largest “renewable energy” subsidy on the federal books came as the backlash built against the EPA’s approval of E15 (15% ethanol) blends for certain vehicles, with a huge coalition of industries, environmentalists and budget hawks coalescing around the idea of ending government support for corn-based ethanol. That coalition lost some momentum as the VEETC was extended in order to drum up support for the controversial tax bill that was passed during December’s lame duck session. But now, SolveClimate [via Reuters] reports that the brewing deficit battles have put the Blender’s Credit back on the chopping block, as a new bill seeks to cut the wasteful, inefficient and unpopular (outside of farm states) subsidy.

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Recently the ethanol industry has “suffered” from a problem that epitomizes the problematic nature of government subsidies. Known as the “blend wall” this obstacle was created not by negligence on the part of the industry, but by the fact that its lobbying efforts have been far more effective than its marketing efforts. The problem, in a nutshell, is that the 2007 Renewable Fuel Standard mandates a steady increase in the amount of ethanol blended into the national fuel supply, from 9 billion gallons per year (BGY) in 2008 to 36 BGY in 2022… but with gasoline consumption falling and with standard pump gasoline capped at a maximum of ten percent ethanol (recently raised to 15% for vehicles built after 2007), the industry that’s supposed to get America off gas needs more gas to blend its ethanol into. As a study in the American Journal of Agricultural Economics puts it

Total national consumption of gasoline in the United States has been about 140 billion gallons in 2010 and is expected to fall over time due to increasing fuel economy standards. Thus, at present, if every drop of gasoline were blended as E10, the maximum ethanol that could be absorbed would be 14 billion gallons. In reality, 10% cannot be blended in all regions and seasons. Most experts consider an average blend of 9% to be the effective maximum, which amounts to about 12.6 billion gallons. U.S. ethanol production capacity already exceeds this level. Thus, our ability to consume ethanol has reached a limit called the blend wall.

The solution: well, the EPA’s ruling allowing 15% ethanol blends was supposed to fix the problem, but according to this report, that “fix” would only buy some four years before the industry is back to bumping against the blend wall. The solution?

With ethanol as the primary biofuel and either blend limit (E10 or E15), a substantial increase in E85 would be required to fulfill the mandate.

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EU car owners will get a new kind of gasoline – whether they want it, or not. Most don’t want it. They get it anyway. While US-automakers sue to stop ethanol blends, an edict handed down from Brussels demands that Super has to contain 10 percent of ethanol. An alliance from Germany’s ADAC autoclub to Greenpeace says the new gasoline is a work of the devil, it is liable to ruin cars, and the environment. (Read More…)

Both the Senate and the House have passed a one-year extension of the Volumetric Ethanol Excise Tax Credit (aka “blender’s credit”), the Small Ethanol Producer Credit and the ethanol import tariff and the Alternative Vehicle Refueling Property Tax Credit, as part of a tax bill that now needs only the President’s signature to become law. The full suite of ethanol subsidies were extended at their current levels, despite an attempt to lower the blender’s credit to 36 cents per gallon instead of 45 cents per gallon. These subsidies will cost in the neighborhood of $6b next year, keeps cheaper Brazilian ethanol out of the US market, and may inspire a WTO complaint with Brazil. And, as Senator Diane Feinstein (D-CA) puts it:

The ethanol industry is the only one to ever receive the triple crown of government intervention. Ethanol use is mandated by law, its users receive federal subsidizes and domestic production is protected by tariffs. That policy is not sustainable.

And she’s not kidding: even with these subsidies in place, ethanol plants are still losing money on each gallon they produce… and analysts are predicting record-high grain prices after the extension is signed. What’s not to love?

It is not a good policy to have these massive subsidies for first generation ethanol. First generation ethanol I think was a mistake. The energy conversion ratios are at best very small… 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

Al Gore reveals [via MSNBC] that politics, not science, made an ethanol believer out of him. More than anything else, the admission underlines how badly ethanol can lose the war of ideas and still be heavily subsidized without fear of political attack. After all, what Presidential hopeful (read:every member of Congress) wants to shut down the biggest pork trough in Iowa, a state that just happens to be the first primary of the race for the White House? Heck, Al Gore probably had to lose his favorite weedwhacker to ethanol gum before he came out against the stuff. But just because your representative won’t vote against ethanol, doesn’t mean you can’t… surf over to pure-gas.org for a list of ethanol-free gas pumps near you.

At least one of the institutions financing ads damning Democratic candidates this election season wants to put ethanol in your gas tank. The American Future Fund was founded by one Bruce Rastetter, the CEO of Hawkeye Energy Holdings, one of the larger ethanol companies in the US, according to an article in the New York Times. The fund is financing ads aimed at Democrats in key positions to influence booze fuel… so is the problem their “liberal” policies, or the fact that they’re insufficiently supportive of the farm lobby’s beloved corn juice?

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