Key farm-state lawmakers shifting support to cellulosic fuel

The corn ethanol industry could take a nearly 12 percent hit in their subsidies in the next farm bill, as farm state lawmakers shift their support to new cellulosic ethanol.

The farm bill agreement that key House and Senate negotiators reached Friday would extend and reduce the tax credit for conventional ethanol and the tariff on imported ethanol. It would also give new subsidies for cellulosic ethanol -- derived from crop debris, woody plants and grasses.

The move marks a significant shift for some lawmakers who have been some of the biggest advocates for ethanol supports, and for the booming grain and refinery industries that have come with them.


"This is a huge deal," said House Agriculture Chairman Collin Peterson (D-Minn.). "If a year ago you said we were going to do this, we would have said you were crazy.

"This is a signal to the country," Peterson added, "that we're serious about moving away from corn to cellulose."

Scaling back the ethanol subsidies comes after months of widespread criticism over what was once seen as the future of fuels. Scientific and press reports over the past six months have highlighted the downsides of the rush to ethanol: its strain on water resources, grain stocks, livestock farmers, global land use and food supplies.

"It is a signal we are ready to shift to other, less disruptive forms of ethanol production," Senate Finance Chairman Max Baucus (D-Mont.) said of the package.

Along with the reduction for subsidies for corn-based fuels, the package would give a new production tax credit of up to $1.01 a gallon for cellulosic ethanol through 2012. The infant cellulosic industry is still moving toward commercial-scale plants.

The changes to the ethanol incentives are part of a more than $1.5 billion tax package included in the larger five-year farm bill overseeing energy, conservation, nutrition and crop programs.

Leaders of the House and Senate agriculture and tax committees agreed to the package late last week, after days of closed-door negotiations on the bill. Lawmakers have been wrestling with how to reconcile the two different versions of the farm bill the House and Senate each approved last year and how to pay for spending increases in the bill.

One of the key holdups in the months of negotiations between the House and Senate was the tax package -- included in the Senate bill but opposed by the House. But Peterson, who originally objected to the package, said its shifts in ethanol taxes are now one of the most important parts of the mammoth $300 billion farm bill.

"After all we have been through and all we complained about, one of the things that is most significant is the tax package, ironically enough," Peterson told reporters last week. "This is what the country wants, to start moving away from [corn-based ethanol]."

Tariff changes

The package would drop the current 51-cents-a-gallon tax credit for corn-based ethanol to 45 cents per gallon. Lawmakers said it would also extend and reduce the tariff on imported ethanol -- though they are still negotiating the details of the tariff changes. The reduction would be "modest," Baucus said.

The United States currently charges a 54-cents-per-gallon tariff on ethanol imported from Brazil and other countries. The tariff is financially tied to the tax break for U.S. producers and was originally intended to offset it. Sen. Charles Grassley (R-Iowa), who has been a big advocate in favor of keeping the tariff in place, said Friday the farm bill may reduce it in conjunction with the reduction in the U.S. tax credit.

"The tariff follows," Grassley said.

Some lawmakers on the House and Senate energy panels have called for lowering or repealing the tariff to bring more imported ethanol to the domestic market and help close the supply gap. Brazilian President Luiz Inacio Lula da Silva has lambasted the tariff as "hypocritical" and said its repeal is key to world trade talks.

Domestic ethanol and farm groups have fought against the changes, claiming they would hurt the still-developing domestic ethanol market. But lawmakers say it is time for the U.S. corn-ethanol industry to start standing on its own.

The full conference committee is expected to give its approval this week to the tax package and the rest of the five-year farm bill overseeing energy, conservation, nutrition and crop programs. Before it can become law, the measure will then return to the House and Senate floor for a vote and will need the approval of the White House.

President Bush has held a hard line with the farm bill, threatening to veto it unless it reforms crop subsidies and avoids tax increases. Bush administration officials were not present for the negotiations last week. White House spokesman Scott Stanzel said they are reserving judgment until they can review the entire package.

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