One of the main arguments that pro-ethanol lobby groups like the Renewable Fuels Association (RFA) and Growth Energy make in defense of the generous Congressional subsidies to U.S. corn ethanol producers is that Brazil unfairly competes by slapping a 20% tariff on imported ethanol, effectively locking out U.S. ethanol exports. 

Well, so much for that argument.   

Brazil announced this week that it is eliminating the import tariff until the end of 2011 -- and potentially forever.  Brazilian sugarcane ethanol has several economic advantages compared to U.S.-grown corn ethanol, including the capacity to co-generate electricity by burning the sugarcane bagasse, lower wage workers, and cheaper feedstocks in the form of sucrose (see Brazilian Ethanol Takes a Hit).  The economics are sufficiently advantageous that the Brazilians now feel that their ethanol can compete with any imported ethanol. 

The Brazilians have essentially called the U.S.' bluff and are now demanding the end of U.S. subsidies as a measure of reciprocity.  A quick recap of the three main policy levers for corn ethanol:

Under the "Renewable Fuel Standards" (RFS) provision of the Energy Independence and Security Act of 2007, Congress has mandated that petroleum refiners blend increasing amounts of corn ethanol into the nation's gasoline supply.  In 2010, roughly 12 billion gallons of corn ethanol will be required to be blended in the U.S., displacing 6.5% of the gasoline supply while using about 30% of the corn crop. This number is mandated to increase to 15 billion gallons by 2015.  The RFS essentially has created an artificial demand floor for corn ethanol (see EPA Issues Renewable Fuel Standards).

Corn ethanol is subsidized in the form of the $0.45/gal Volumetric Ethanol Excise Tax Credit  (a.k.a. "blender's credit") that refiners receive for purchasing corn ethanol to meet their requirements under the RFS mandates.  This credit ensures that a refiner will actually purchase the ethanol rather than pay a penalty of non-compliance.  Note that there is also a $0.10/gal ethanol tax credit for small producers.  These credits are set to expire on December 31, 2010 and the U.S. ethanol industry is scrambling to get its friends in Congress to extend them (see The True Cost of Corn Ethanol).

The last major type of subsidy is the $0.54/gal import tax that the U.S. places on imported Brazilian ethanol.  It is debatable how much Brazilian ethanol would actually be imported due to transportation costs, yet it must be significant, because otherwise, why would the corn ethanol lobby continue to insist upon the import tariff?  

Proponents of corn ethanol's mandates and subsidies point out that corn ethanol is a domestic energy source that displaces imported petroleum, generates billions of dollars in tax revenue, and provides tens of thousands of jobs.

Critics counter that U.S. biofuel policy has basically become beholden to an Agricultural Industrial Complex in which corn farmers and multinational agricultural companies like Archer Daniel Midland Corporation are the recipients of billions of dollars in corporate welfare to produce a biofuel that has no hope of ever displacing significant amounts of petroleum.  Such critics point out that ethanol has two-thirds of the amount of energy that a comparable gallon of gasoline contains, cannot be used in our downstream petroleum infrastructure like oil pipelines, competes with scarce cropland, freshwater, and food supplies, and requires engine modification for blends above 10%.

Considering that the first Presidential primary is in Iowa -- and it is almost impossible to become President without winning Iowa -- it would be political suicide for any politician with presidential ambitions to shun corn ethanol. 

Has corn ethanol become too big to fail?

This morning, I received an email from the Renewable Fuels Association stating that if Congress allows the $0.45/gal blender's credit to expire, 112,000 jobs would be lost and there would be a 38% reduction in U.S. production capacity.   The RFA points out that the loss of a domestic ethanol industry would be a disaster because we would replace our dependence upon foreign oil with foreign ethanol.

I have no problem with the idea of subsidizing a technology to achieve the scale required to compete with a market-leading technology that society deems harmful.  That is, investing in biofuels or electrification of vehicles to counter the national security, environmental, economic, and health care costs associated with our dependency on Russia, Saudi Arabia, and Venezuela to supply our petroleum needs makes good policy sense.

Yet, corn ethanol has progressed from 3.5 billion gallons of production capacity in 2005 to 14 billion gallons today -- a 32% CAGR during that period.  At what point do we say that the time has come to pull off the training wheels and see if the industry can compete on its own merits?  And if we find that it cannot, maybe it is time to invest in technologies that can? (See Biofuels 2010: Spotting the Next Wave.)

Given the inherent scarcity of federal money available, every dollar that continues to subsidize corn ethanol is a dollar not being invested in advanced gasification, pyrolysis, hydroprocessing, metabolic engineering, algae, and every other third- and fourth-generation biofuel technology.  For those of you who do not follow this space, these "advanced" technologies produce biofuels that are known as "drop-in" fuels.  Such fuels mimic the chemical characteristics of petroleum, do not compete with food sources, and could actually make us energy independent. 

Unfortunately, it seems like our politicians have confused principle with principal.