Ethanol subsidy dies, auto industry shrugs
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The Jan. 1 demise of a 30-year federal tax subsidy for corn-based ethanol came and went as a so-what moment in the auto industry.
Automakers and industry observers said it will have little impact on sales of so-called flex-fuel models -- many of which roll through their lives, after winning federal fuel-economy credits for their makers, without burning a drop of ethanol.
Car companies receive a credit toward their corporate average fuel economy for every model they build that is capable of burning E85 -- a blend of gasoline and up to 85 percent ethanol. The credit allows automakers to sell more low-mpg vehicles and still meet CAFE requirements. But the incentive was dropped in the fuel economy rules proposed for the 2017-2025 model years, which will be made final this year.
The Obama administration has made a big push for electric vehicle technology, and included in the proposed new rules are credits aimed at getting more battery-powered cars on the road.
"The more money they can take out of the ethanol market, the more they can put into the EV market," said Mike Omotoso, a senior analyst at forecasting firm LMC Automotive.
Even so, General Motors, Ford Motor Co. and Chrysler Group say they plan to continue building flex-fuel vehicles. Toyota, Nissan, Mercedes-Benz and Bentley also offer engines that burn E85, but in fewer models.
The Detroit 3 produce the industry's largest share of flex-fuel models -- a strategy that goes back to 2006, when GM, Ford and Chrysler pledged to make 50 percent of their production flex-fuel compatible by this year. "This is not a disrupter," said Mary Beth Stanek, GM's director of energy and environmental regulatory affairs.
"This was well anticipated. The industry is mature enough to manage it and everyone will continue to stay the course."
GM offers 20 models equipped with flex-fuel engines, including the new 2012 Buick Verano. About 40 percent of its production for the 2011 model year can run on E85, GM said.
Ford, which offers seven flex-fuel models, also remains committed to build engines capable of running on the gasoline-ethanol blend.
"Biofuels are a key piece of our blueprint for sustainability to reduce CO2," Ford said in a statement.
The Alliance of Automobile Manufacturers, an auto industry trade group that represents 12 automakers, including the Detroit 3, said it had no position on the expiration of the ethanol tax subsidy.
The government's subsidy for corn-based ethanol has been controversial. The Bush administration made a big push for the biofuel source last decade as a way to lessen the nation's dependence on foreign oil, but its luster faded as other alternative fuel technologies emerged.
Legislators let the ethanol subsidy die last month after failing to extend the break, which by some estimates, has cost the government $6 billion a year. The subsidy gave oil refiners 45 cents per gallon for ethanol blended gasoline.
In 2011, flex-fuel vehicles accounted for about 14 percent of the industry's U.S. retail sales, according to LMC Automotive, a research firm that tracks industry sales figures.
If the fuel economy credit is dropped, sales of E85-compatable vehicles could fall even further, to perhaps 10 percent of U.S. retail sales in 2016, LMC Automotive forecasts.
The lack of E85 fueling stations has been a major hurdle. Of the 160,000 gasoline pumps nationwide, 3,500 are for E85 fuel, according to the Renewable Fuels Association, a trade group for ethanol producers.
E85-compatable engines are more expensive to build, although automakers don't typically charge more for them, said Omotoso, of LMC Automotive, who specializes in powertrain forecasting. He estimates car companies spend $100 more per a vehicle to equip a car with the materials necessary to operate on an ethanol-heavy blend of gasoline.
"In the short-term, the expiration of the subsidy won't have an effect," Omotoso said. But combined with the end of the fuel economy credit, he added: "We expect automakers to produce fewer flex-fuel vehicles."