While the ethanol industry still contributes billions to the state economy, the report says Minnesota should redirect the subsidies to encourage a new generation of biofuels.
Minnesota should get out of the business of subsidizing ethanol plants, according to a new report from the Minnesota legislative auditor. Payments to producers of the corn-based fuel succeeded in jump-starting the industry in the late 1980s and 1990s, the study said, but the money has continued to flow even when ethanol owners made large profits.
Ethanol owners received $93 million in state subsidies during the past five years when their companies made $619 million in profits, report author John Yunker said.
"Even though there's been a downturn in the economy recently, a strong case can be made for stopping the payment program," Yunker told a legislative panel Friday at the Capitol.
In light of the state budget deficit and other factors, Yunker suggested that lawmakers reconsider the $44 million scheduled to be spent on the payments between 2010 and 2012. Some of the money could be redirected to encourage the next generation of biofuels made from switchgrass and other plants, he said.
Legislative audits are strictly advisory, and legislators are not bound to follow their recommendations.
Minnesota Agriculture Commissioner Gene Hugoson defended the subsidies, which he said are dwarfed by the more than $2.2 billion that the ethanol industry contributes each year to the state's economy. He criticized the study for not emphasizing that 4,300 jobs have been created in the industry, and for not visiting ethanol plants and interviewing owners as part of the research.
The producer payment system began in 1987 and pays ethanol manufacturers 20 cents per gallon of ethanol produced, up to 15 million gallons annually, for what is usually 10 years. Some plants no longer receive the payments, but a handful are still eligible because state payments were deferred or the owners qualify for another year or two.
Minnesota Corn Growers Association spokesman Mark Hamerlinck said his group strongly opposes the recommendation to end payments.
"To us it sends the wrong message to businesses or entities looking to do business in the state," Hamerlinck said. "What you're saying is that a promise from the state is only good as long as the Legislature says it is."
Yunker said that there may have been commitments made by previous legislators to fund schools or nursing homes or other needs as well, but that shouldn't stop current lawmakers from making adjustments, especially when economic conditions change.
Ethanol plants built since 2003 have not received producer payments, but some of them have qualified for JOBZ subsidies, which provide state and local tax breaks to selected businesses. The auditor's report questioned whether ethanol owners needed those subsidies because the plants were built during very favorable economic conditions.
A large section of the audit also examined claims that biofuels save energy, reduce greenhouse gas emissions and improve air quality. It concluded that the environmental costs and benefits are unclear, especially for greenhouse gas emissions. Studies have reached conflicting conclusions, and depend on assumptions such as how much crop yields will increase, and whether other land might need to be converted to grow more corn for ethanol or soybeans for biodiesel.
As to whether biofuels reduce dependence on foreign oil, the report noted that 31 percent of the nation's corn crop last year will be used for ethanol, and it will replace 5 percent of the gasoline used in 2009. If all of the country's corn was used for ethanol instead of food, the report estimated it would replace about 17 percent of the gas.
Cellulosic ethanol, made from switchgrass and other plants, appears to offer greater energy savings and more benefits, but is just beginning to be produced experimentally, the report said. Algae-based biodiesel also may have promise, but it is still in the research and development stage.
The issue of subsidies and environmental consequences will be even more important in the near future. Minnesota law calls for ethanol in gasoline to increase from 10 to 20 percent in 2013, provided the Environmental Protection Agency approves its use. And the state's biodiesel blend rate will bump up from 2 to 5 percent next month.
Tom Meersman • 612-673-7388