London, 21 June 2011: Reuters

Big Ethanol has enough clout in Congress and in the Obama administration to keep growing with U.S. government support, even though decades of large tax credits may be winding down. Amid pressure to cut yawning U.S. deficit and debt, the Senate voted overwhelmingly late last week to immediately repeal subsidies for the ethanol industry, first won in 1978, that now cost tax payers about $6 billion a year.

With Capitol Hill's focus on austerity and recent high prices for corn, the main feedstock for U.S. ethanol, being blamed by some for helping to boost food prices, the biofuel's subsidies are now under the microscope like never before.

Calls to reduce the subsidies could increase, as lawmakers try to reach a debt-reduction deal by July 1. But, that does not mean the industry will be abandoned by government. "We're not going to go cold turkey," predicted Dan Glickman, U.S. agriculture secretary during the Clinton era.

"The subsidies will be phased down, but not eliminated." Ethanol, which is produced in 28 states and provides 400,000 jobs, is too entrenched in the U.S. economy to be left without government help, he added.

The Senate's vote was mostly symbolic, as it was attached to a bill that does not have companion legislation in the House of Representatives. Senator Diane Feinstein, the sponsor of the bill, is working with Senators Amy Klobuchar and John Thune on a compromise measure, that would phase down subsidies for ethanol, rather than cut them altogether.

"There's sufficient interest and support in the Senate to prevent the complete repeal of ethanol subsidies," said Byron Dorgan, a former senator from North Dakota and a co-chair of the Bipartisan Policy Center's Energy Project. Senate Democrats up for reelection next year in ethanol producing states could feel pressure to work out some kind of legislative deal.

"The room for compromise is very much there," said Kevin Book, an analyst at ClearView Energy Partners in Washington. Glickman pointed to the country's failure to develop anything besides ethanol as oil's prime alternative as another key reason why Congress and the Obama administration will work to ensure biofuels get some sort of subsidies.

They could come in the shape of incentives for infrastructure to help ethanol get to market. Biofuels have long been part of President Barack Obama's plan to start weaning the country off imports of foreign oil. The White House issued a statement after the vote, saying it was against full repeal of the subsidies, indicating it could use veto power if the measure advances in Congress.

COMPROMISE

The industry has signaled it supports moving from an outright 45-cent tax credit that blenders get for mixing every gallon of ethanol into the country's gasoline toward support for infrastructure to get the fuel to consumers. Such support could come in the form of subsidies for advanced pumps at filling stations, loan aid for pipelines, or assistance for farmers to grow, store and transport advanced non-corn feedstocks. The so-called blender pumps could help push more ethanol to market after the government recently approved E15, gasoline with 15 percent ethanol, for newer vehicles.

"Market access is Number 1," Jeff Broin, CEO of privately held POET, the largest ethanol maker in the world, told Reuters. POET is a member of Growth Energy, which has pushed for trading blenders' credits and for breaks on infrastructure. Infrastructure improvements could also benefit large agriculture company Archer Daniels Midland , oil refiner Valero Energy Corp , and ethanol pure plays like Green Plains Renewables.

There are also moves to reduce the blenders' credit and tie it to the price of crude oil. In a bill sponsored by Senator Charles Grassley, the blenders' credit would be linked to the price of oil by 2013. It would be wiped out when crude oil trades above $90 a barrel, but blenders would get as much as 24 cents a gallon if it fell to $50 a barrel.

"These are serious ongoing negotiations," said Klobuchar. "We know that there is support for phasing out the current ethanol tax credits, the question is when and how."

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