Milling & Baking News - July 27, 2010 - 34

Regulatory Affairs 

U.S. biofuels and energy policy
face critical decision points
BY ROBBIN JOHNSON

The Gulf oil spill has been a regular
news item since it occurred April 20,
and its aftermath will likely be with us
for years to come. Against this backdrop, U.S. biofuels policy is facing
some important decision points. Two
are nearby while others are longer
term in timing and effect.
Nearby, the blender's tax credit -
now 45c per gallon for ethanol and a
special $1.01 for advanced biofuels -
and the 54c per gallon special duty on
imported ethanol will expire unless
extended by Congress. Each time such

deadlines have arisen in the past, Congress routinely has extended them,
usually for five years. That seems the
most likely outcome this time around
as well.
One possible change would be to
their levels. The blender's tax credit
was reduced to 45c from 51c per gallon, effective in 2010. With budget deficits looming and with the cost of the
credit now above $5 billion per year,
future reductions may be in the offing
for corn-based ethanol. Whether this
would extend to credits for advanced
biofuels or to the special import duty
seems less likely because neither has
so far had much effect on the deficit.
Long-term Issues
Other decision points are coming
that pose longer-term issues and connect to broader energy policy concerns. One is the so-called "blender's
wall." This would be the second major
34 / July 27, 2010 Milling & Baking News

transition ethanol would make in its
role as a transportation fuel.
The first came when it passed from
a fuel additive to a fuel extender. The
fuel-additive market was about 5 billion to 6 billion gallons annually and
rewarded ethanol with a premium
because of its high octane content. As
ethanol replaced methyl tertiary butyl
ether (M.T.B.E.) as an additive, ethanol
processing margins climbed to their
summer 2006 peak of more than $3
per gallon.
Once that transition was completed,
ethanol began trading at a discount

to gasoline because of its lower energy content. Processing margins for
corn-based ethanol have remained
consistently below $1 per gallon since,
even as ethanol's blending mandate
climbed to this year's 13 billion gallons (12 billion gallons of which is conventional or corn-based ethanol).
Now the ethanol industry faces
another decision point. With the U.S.
gasoline market having peaked at
140 billion gallons and begun a longterm slide toward 130 billion gallons
by 2020, the E-10 blend is reaching
market saturation. The ethanol industry proposes two steps to overcome this constraint. One is to raise
the blending level to 15% (i.e., E-15).
The other is to have the government
require that virtually all cars be flexfuel vehicles, able to use either gasoline or E-85.
The first step would make room for
conventional corn-based ethanol to

grow to its 2015 ceiling target of 15 billion gallons. Something like the latter
change would be needed to accommodate growth of a "second generation"
biofuels industry (anchored in cellulosic feedstocks) from essentially zero
today to a total of 21 billion gallons by
2022, for total "renewable fuels" consumption of 36 billion gallons by then.
When these goals were legislated in
2007, there was substantial optimism
around both the technological and
economic feasibility of cellulosic ethanol. As well, U.S. gasoline consumption was projected to continue rising
rather than beginning to recede under
the impact of greater fuel efficiency
and a growing hybrid market. The
technological obstacles to cellulosic
biofuels still have not been overcome
at commercial scale, and the potential
subsidy costs for such an industry look
much larger today with oil prices per
barrel about half of their 2008 peak.
Another controversy has grown up
around the supply-side of the ethanol
equation. This is whether corn yields
(and yields of cellulosic sources) can
ramp up as fast as the mandates, or
whether this government-led growth
is jeopardizing long-term real food
price trends while causing more natural habitat to be converted to crop
land. It appears that trend corn yields
would support growth to a 15-billiongallon corn-based ethanol industry.
There is less clarity around cellulosic
sources or the ability to increase corn
yields enough to support boosting
corn's share of the ethanol market beyond the 15-billion-gallon threshold.
Decision-making?
The shape of the issues is clearer
at this point than the capacity of the
Obama administration and Congress
to make decisions, at least until after
the 2010 and maybe the 2012 elections. What is clear is that the landscape for these decisions has been altered substantially from the assumptions that underpinned the previous
two pivotal ethanol decisions - the
one in 2005 to go past the 5-billiongallon premium market and the one
in 2007 to head toward a 36-billiongallon renewable fuels market. MBN

Robbin S. Johnson, a fellow
with the Hubert H. Humphrey
Institute of Public Affairs,
is a contributing editor at
Sosland Publishing Co.
bakingbusiness.com / world-grain.com

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