Grassley bill would taper ethanol incentive, and then gear it to price of oil

Rather than forcing the American ethanol industry to give up blending credits abruptly when current funding sunsets, a bill authored by Sen. Chuck Grassley (R-Iowa) would cut the payments by more than half while extending them another two years, after which time the credit would be indexed to the price of oil on the New York Mercantile Exchange. Because ethanol tends to follow the price of oil upward, increases in the price of oil would drop the future ethanol credit stepwise, until it would disappear altogether at the highest price trigger.

In part, this bill answers a bill offered by Senators Dianne Feinstein (D-California) and Tom Coburn (R-Oklahoma) who want to end ethanol subsidies and trade tariffs altogether.

The Grassley legislation would drop the credit from its current level of $0.45 cents per gallon this year, down to $0.20 cents next year. In 2013, it would further reduce the credit to $0.15 cents per gallon. Starting in 2014, the credit would become linked to the price of oil. When oil costs between $50 and $59.99 per barrel the credit would be $0.24 cents. For every ten dollar increment above that, the credit drops by $0.06 cents per gallon, until oil hits $90 dollars a barrel, at which point the credit disappears.

Growth Energy and Renewable Fuels Association have both endorsed the Grassley approach.

“We think it’s a smart policy that allows the industry to evolve while it addresses the budget concerns of some on Capitol Hill,” said Matt Hartwig, a spokesman for the Renewable Fuels Association, an industry group. He added, “The variable credit provides the ethanol market stability against the volatility of oil markets.”

The bill also provides funding to share the cost of installing blender pumps that allow consumers who drive flexible fuel vehicles to choose what level of ethanol they want in their fuel, from 20 to 85 percent.

Sen. Kent Conrad (D-ND) co-sponsored the bill, and Minnesota’s Senators Amy Klobuchar and Al Franken, also Democrats, have endorsed the legislation.

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