GAO report poses tough questions for ethanol

  • Article by: MATT MCKINNEY , Star Tribune
  • Updated: October 2, 2009 - 7:59 PM

Study questions need for tax incentives and urges broader look at environmental impact.

In a report that raises significant questions for the corn ethanol industry, the U.S. Government Accountability Office on Friday questioned the need for tax credits supporting the industry while urging Congress to consider broad effects on air, water and wildlife before expanding biofuel production.

The report, prepared at the request of Sens. Barbara Boxer, D-Calif., and Susan Collins, R-Maine, examined what will happen in coming years as biofuel production expands. Congress has already mandated a steep increase in biofuels, requiring oil companies to blend some 36 billion gallons of renewable fuels into fuel supplies by 2022, up from about 10 billion gallons in 2008. By contrast, consumers in the United States burned some 138 billion gallons of gasoline last year.

"The findings and conclusions in the report really echo and confirm a lot of the concerns the environmental community has been raising," said Craig Cox, Midwest vice president of the Environmental Working Group, a nonprofit based in Washington, D.C.

The report specifically recommends that Congress consider biofuels' impact on soil, air, water and wildlife, something that goes beyond the 2007 Energy Security and Independence Act, which sets targets for biofuels production. The law currently defines a biofuel based only on its greenhouse gas emissions, stipulating that a conventional biofuel like corn-based ethanol must produce 20 percent less greenhouse gasses compared with petroleum.

Such a broader measure should include things like the potential for water shortages in areas where increased agriculture strains the available water supply, leaks from underground ethanol storage tanks and rising levels of air pollution, the report suggested. A spokesman for the ethanol industry dismissed the report Friday, calling it a rehash of earlier statements.

"There isn't anything new in there," said Matt Hartwig, a spokesman for the Renewable Fuels Association, based in Washington, D.C. He added that it would be unfair to the corn ethanol industry to remove the blender's tax credit of 45 cents a gallon while the petroleum industry continues to get government support.

The blender's credit cost $4 billion last year, a cost that will rise to $6.75 billion by 2015 under current projections.

Yet the report said it's unlikely the blender's tax credit will stimulate the industry to produce more ethanol, given current market conditions, thus defeating the purpose of the credit. The existing biofuels mandate already requires that blenders use 10.5 billion gallons of renewable fuels this year, and the blender's credit is unlikely to push that number higher unless petroleum prices rise significantly, the report found.

The industry strongly disagrees, said an analyst.

"It really gets their blood boiling when they see stuff like this," said Todd Neeley, an ethanol analyst at DTN, a subscription agriculture news network. "If you talk to anybody in the industry they'll say the blender's credit is really the thing that's helped the industry to grow."

The tax credit was just one of two fairly critical findings in the report. The report also pointed out that without large investments, the ethanol industry will run up against limits in the transportation system.

Corn-based ethanol, for example, cannot be moved through existing oil pipelines because it would damage them. The limits of existing infrastructure to transport ethanol around the country is known as the "blend wall," and will require massive investment unless new fuels are found, the report warned.

The report suggests that Congress consider biofuels that are more like gasoline, those that could use existing pipelines.

"The report notes that we're going to be spending between $4 billion and $7 billion a year on tax credits that support the corn ethanol industry, and also that there's really serious questions about whether all of this support for corn ethanol is taking us down a dead-end road," Cox said. "We're likely looking at a relative oversupply of ethanol."

Matt McKinney • 612-673-7329

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