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Did U.S. Senate Cut Deal To End Ethanol Subsidies After All?

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Almost three weeks ago, the U.S. Senate voted to end subsidies for production of ethanol, the alternative fuel that is largely refined from domestically-grown corn.

At the time, conventional wisdom had it that this was a safe move. Because the subsidies were attached to a stalled economic development bill, they weren't likely to go anywhere.

But the vote let Senators go on record as cutting a widely-criticized subsidy program.

The conventional wisdom, it seems, may prove to have been wrong.

The Wall Street Journal reports today that agreement has been reached to let the 45-cents-per-gallon ethanol blending credit expire at the end of this month, along with a tariff on ethanol imports of 54 cents per gallon.

The end of the subsidy is expected to save approximately $2 billion over several years, two-thirds of which will be applied to cutting the national debt. That $1.3 billion represents roughly 0.1 percent of the total national debt of $14.3 trillion.

Corn Ethanol Pump

Corn Ethanol Pump

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Another $668 million would be used to extend tax credits for infrastructure that will be required if producers are to distribute ethanol on a larger scale.

In earlier years, Brazilian ethanol producers would have been ecstatic at the removal of the import tariff, which has made that country's ethanol exports unaffordable in the U.S.

But with global sugar prices high, Brazil isn't likely to have surplus ethanol in the near future anyhow.

Which raises the question: If ethanol isn't subsidized, will there be adequate production to meet the steadily increasing Congressional mandates for ethanol consumption?

In 2007, Congress passed the Energy Independence and Security Act, which mandates usage of 36 billion gallons of ethanol in vehicle fuel by 2022. That's more than three times last year's 11.1 billion gallons used. By 2015, the requirement rises to 15 billion gallons.

Today's compromise, according to the Journal, was negotiated among Senators Dianne Feinstein (D-CA), Amy Klobuchar (D-MN), and John Thune (R-SD).

The group of three is not only bipartisan, but includes two Midwestern supporters of farming subsidies in general.

That a consensus appears to have been reached so soon after real action was written off indicates both how unpopular the ethanol subsidies had become--on fiscal, food policy, and environmental grounds--and how intense the budgetary pressure on Congress is now.

[Wall Street Journal (requires subscription)]

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Comments (3)
  1. The idea that this will "cut the debt" seems misleading. The debt will go up by less if the subsidy is discontinued.

    I think this should really say that it will "cut the deficit" not the "debt". The debt will surely be increasing, that is why they need to increase the debt ceiling.
     
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  2. I think this will neither cut the deficit nor have any positive effect on national debt. Remember that gasoline prices only reflect a fraction of the cost of the use of gasoline. Much of the external cost of the use of gasoline result into extra government expenditure like defence and health care. Also there is the cost to the economy to be considered of structurally high oil prices and sending huge amounts of money abroad for crude imports rather than spending it on home grown fuels.
     
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  3. Oil subsidies are very unpopular, but you don't see them being cut.
     
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