Monday, October 18, 2010

Ethanol Tax Credit Renewal

The impressive juggernaut called the ethanol lobby seems to be losing their grip on the political landscape – at least for the moment.  After spending almost the entire year staking out the position that renewal of the VEETC (Volumetric Ethanol Excise Tax Credit) and import tariff were a must-have from the US government, with no compromise, the ethanol lobby received little to no traction on this position.  In response to no movement by lawmakers on renewing ethanol’s tax credit, the key lobbying groups - RFA, Growth Energy and ACE - are now floating a compromise position.  The form of the compromise is outlined as follows:

· Reduce the existing 45 cpg blending tax credit by up to 50% for 2011
· Create a refundable producer tax credit to start in 2012 to last four years – there are no details available on how this would be calculated
· Reward ethanol producers who reduce their carbon footprint with higher producer credit levels – there are no details available on how this would be calculated
· Eliminate the import tariff, starting in 2012
· Accelerate deployment of flex-fuel vehicles by mandate and provide government grants for blender pumps at fueling stations
· Allow cornstarch ethanol to be considered for “Advanced Biofuels” status
· Suppress indirect land use penalties on cornstarch ethanol

Being a keen observer of today’s political environment, it is becoming highly unlikely that a lame duck session of the US Congress is going to deal with the ethanol industry tax credit issues.  A new Republican-controlled Congress in 2011 has the potential to be politically hostile to any attempt for an ethanol tax credit renewal.  We think our subscribers should at least prepare for expiration of the VEETC and the import tariff moving into 2011. 

The key impact will be pressure on discretionary ethanol blending that depends on ethanol/gasoline economics, and not mandated volumes.  We can estimate discretionary ethanol blending by calculating how much ethanol is used to produce ethanol-blended gasoline from the EIA, and compare that to a simple 12 billion gallons mandate divided by 365.  Using last week’s EIA production figures, 34 million gallons of ethanol were blended into gasoline.  This compares to the daily average the RFS2 mandates requires of 32.8 million gallons per day, which means only 1.2 million gallons per day of ethanol are discretionary.  The chart titled “Ethanol Blended vs Mandate” below uses this analysis and calculates the amount of ethanol blended into gasoline that is discretionary, i.e. more than mandated through September of 2010.  The total amount blended exceeding the mandate is 142 million gallons through September.  These numbers would suggest that losing the VEETC will have little impact, if any at all, on ethanol prices for next year.  A negative impact assumes that ethanol prices are higher than gasoline prices as they are today.  In addition, the mandate increases to 12.6 billion gallons, or 34.5 million gallons per day, of ethanol blending next year, and expands the available gasoline pool to include all the gasoline blended by small refiners that lose their exemption from RFS2 mandates starting in 2011. 

The expiration of the import tariff will have little or no effect, particularly due to the high prices in Brazil.  The LCFS in California may create demand for sugarcane-based ethanol, but that remains to be seen, and market participants do not anticipate any action until 2012 if the LCFS is still in place.

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