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Big Ethanol's Lobbying Investment of 2010: Tax Credits and Tariffs

Two lifelines for the U.S. ethanol industry -- a tax credit and a tariff on Brazilian sugarcane-based fuel imports -- are set to expire in 10 months and lobbyists are already wringing their hands over whether Congress will get to it in time. And they should be.

The ethanol industry's survival is tied directly to whether Congress gets off its collective duff and extends the tax credit and tariff by Dec. 31. It's this heavy reliance on government-approved tax credits that creates so much dysfunction in developing new technologies and energy resources.

Case in point: the biodiesel industry. Biodiesel producers, struggling with low demand and a European-imposed tariff on its product, saw production fall to about half of the 700 million gallon per year high it reached in 2008. And that was before Congress failed to extend its $1-per-gallon tax credit last year, which sent the industry into a tailspin. Several refineries have closed, including the nation's largest one, in Houston, and most of Iowa's 14 biodiesel facilities have idled or shut down.

Producers hoped the credit would be included in the Senate jobs bill this month -- and it was, for about 30 seconds. Last week Senate Majority Leader Harry Reid scrapped an $85 billion jobs package that included a retroactive extension of the biodiesel tax credit. Now that cautionary tale has ethanol industry lobbyists girding for war. The extensions are expected to happen, but "it will be a very, very tough battle," Jon Doggett, vice president of public policy for the National Corn Growers Association, told Bloomberg.

For every gallon of ethanol blended into gasoline, U.S. refiners receive a 45-cent tax credit. Brazilian imports of its cane-derived ethanol is hit with a 54-cent-per-gallon tariff. Technically, the tariff is on all imported ethanol, but Brazil's product would be the biggest threat to U.S. corn-based ethanol.

One factor leaning in the industry's favor are federal renewable fuel standard rules that require the U.S. to use 12 billion gallons of renewable fuels like ethanol this year. There are few renewable fuels available at that scale right now but for corn-based ethanol.

Without the tax credit corn-based ethanol simply fails to compete with oil. But the tariff is perhaps even more important. With Royal Dutch Shell's recent $21 billion-a-year joint venture with Cosan, Brazil's biggest ethanol maker will suddenly give sugarcane ethanol access to the oil company's global fuel distribution and retail system. Without tariffs, the U.S. suddenly becomes an ideal home for all that Brazilian ethanol.

Photo of ethanol sign by Flickr user Erik Charlton, CC 2.0 See additional BNET Energy coverage of ethanol and biodiesel: