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Embattled ethanol industry could go to war in 2010

As 2009 wound down operating margins at ethanol plants were improving. And the industry could claim at least a partial victory when the EPA in December indicated that it's likely to approve a higher blend of 15% ethanol in gasoline sold to cars made in 2001 or later. That is if further testing confirms early results that showed no damage to cars from a higher blend.

But those signs of hope came after a year of tough losses in politics. California, long the biggest domestic market for ethanol, took steps earlier in 2009 to restrict the use of corn-based ethanol made in the U.S. Last April the California Air Resources Board adopted a low carbon fuel standard that attempts to measure the greenhouse gas emissions of different fuels. The result was that it gave gasoline a smaller carbon footprint than corn-based ethanol.

In May, the Environmental Protection Agency published its first draft of rules for the Renewable Fuel Standard in a 2007 energy law that aims to increase biofuel use in the U.S. But new federal mandates that force oil companies to blend higher amounts of ethanol require biofuels to be greener than fuels from petroleum. Ethanol from new plants has to 20% lower greenhouse gas emissions than gasoline. EPA said ethanol is only 16% greener.

The reason that ethanol seems like such a dirty fuel to California and federal environmental regulators is that they’re using computer models that estimate the indirect effects of planting more corn in the U.S. for ethanol. The models assume that more tropical rainforests and savannahs will be converted to crop production in other countries, a concept dubbed indirect land use change.

As the year ended, the Renewable Fuels Association challenged the California Air Resources Board's low carbon fuel standard. The Washington-based ethanol trade group asked the state’s Office of Administrative Law to reject the low carbon fuel standard. RFA says the Air Resources Board ignored scientists who said the indirect land use concept is flawed. And California ignored the indirect effects of other fuels.

If that fails, ethanol industry sources expect to see a lawsuit that will challenge California’s decision, perhaps in federal court, alleging that California is illegally restraining interstate commerce.

Matt Hartwig, spokesman for the RFA, said the letter to the Office of Administrative Law isn't necessarily a first step to litigation.

The California state entities "could do the right thing, here," he says in an e-mail message.

"We're not precluding any options," Buis tells Agriculture.com."We certainly think they've gone down the wrong path."

"The indirect land use concept is something like admitting something that you didn't do," Buis says. "This theory is something that is designed to stop ethanol."

And it threatens all of agriculture in the U.S., he added, because "we're going to farm based on what's happening in other countries."

The significance of indirect land use isn't lost on the National Corn Growers Association, either.

If there is litigation against California, "I'm sure we'll be part of this discussion because the ethanol industry is very important to us as corn growers," said Darrin Ihnen, president of the National Corn Growers Association.

"I think Tom (Buis) sums it up pretty well. It's something we're looking at and it's on the table," Ihnen says. "The frustrating thing is that California uses a lot of faulty science in their assumptions."

The battle with California will be just one hurdle facing ethanol in 2010.

"It's going to be a year when we sort of prove what we're worth in the ethanol industry as far as policy is concerned," said Brian Jennings, executive vice president of the American Coalition for Ethanol in Sioux Falls, South Dakota.

The 45 cent-a-gallon tax credit for ethanol expires at the end of 2010, Jennings said. And the industry has seen a sobering example of what could happen, with the dollar-a-gallon biodiesel tax credit being allowed to expire at the end of 2009. (Some observers think it will be restored in early 2010, but biodiesel plants were looking at shutting down as the year starts.)

"We saw what unfortunately happened with the biodiesel tax incentive," Jennings said. "We've got some lessons to learn from that."

So the industry is lobbying early to get the tax credit extended. It's also supporting a bill introduced by Senators Tom Harkin (D-IA) and Richard Lugar (R-IN) called The Choice Act. The bill (S 1627) would require automakers to speed up making flexible fuel vehicles that can burn up to 85% ethanol. And it would provide incentives to gasoline retailers to install blender pumps that dispense different levels of ethanol blends.

Jennings and Buis expect other challenges, too.

Opponents of domestic ethanol will try to get the tariff on imported Brazilian ethanol removed, Buis said.

And opponents are also arguing that the tax credit for ethanol isn't needed if there is a mandate to use ethanol in the 2007 energy bill, Jennings said.

Jennings said that ramping up ethanol production will create more jobs, high quality jobs that can't be exported. The industry will try to convince Congress that supporting ethanol is a good way to boost employment, too.

As 2009 wound down operating margins at ethanol plants were improving. And the industry could claim at least a partial victory when the EPA in December indicated that it's likely to approve a higher blend of 15% ethanol in gasoline sold to cars made in 2001 or later. That is if further testing confirms early results that showed no damage to cars from a higher blend.

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