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Auditor's report suggests ending biofuel subsidies

ST. PAUL -- State payments to Minnesota ethanol producers have little impact on the industry anymore, so could be eliminated, an independent audit concluded.

But lawmakers said corn-based ethanol producers, recipients of millions of dollars in taxpayer funds over the past two decades, have been good for Minnesota's economy and were pledged the payments, so should not be cut off.

The suggestion that Minnesota end its annual payments to ethanol producers came in a report on biofuels released Friday by the Minnesota legislative auditor.

The auditor's analysis also concluded that traditional biofuels -- ethanol and soybean-based biodiesel -- serve a purpose by reducing fossil fuel use, but they have limitations and offer only modest environmental benefits, said John Yunker, who conducted the audit.

Cellulosic ethanol -- considered a second-generation biofuel because it is made with wood, grasses and other plant matter -- could offer greater energy benefits, but still is in its infancy, the audit noted.

A key recommendation from the audit is to end the ethanol subsidy program, which provides older ethanol plants a per-gallon payment. Newer ethanol plants receive tax breaks through the state's Job Opportunity Building Zones program. That is another benefit the audit suggested lawmakers end, unless producers can prove they are needed and offer energy and environmental benefits.

State payments to ethanol producers reflect a tiny percentage of the industry's sales. The biggest economic considerations facing producers are the price they pay for corn and the price they can charge for ethanol fuel, Yunker said.

"They're not likely to be a major factor in future business decisions," he said of government payments.

Taxpayer funds have provided $314 million in producer payments to about 20 ethanol plants; 11 plants remain in the program.

Producer payments, which started in 1987, were successful in getting the industry started, but they continued during boom times for the ethanol industry.

In the past five years, ethanol producers recorded $619 million in profits while collecting $93 million in state payments, auditors found. There has been a downturn in the industry in the last couple of years, leaving it at a "break-even position," Yunker said.

An estimated $44 remains to be paid to ethanol producers over the next three years. Legislative budget proposals taking shape would stretch that schedule beyond three years, however, because they propose reducing the payments planned for the next two-year budget period.

Agriculture Commissioner Gene Hugoson defended the industry and the state payments. He said 18 ethanol plants have provided some 4,300 jobs in Minnesota, and biofuels is a $3 billion-per-year industry.

"That's a huge economic factor," Hugoson said.

Legislative Auditor Jim Nobles said there is a "compelling case" for ethanol, but its environmental and economic impacts are complex and will need to be explored further as lawmakers look to build upon the first generation of biofuels.

"We need to be cautious," Nobles said. "We need to get good information and we need to consider this from many different points of view."

Yunker said he did not visit any Minnesota ethanol plants while preparing the report because of a reduction in staff assigned to the project. Biofuels producers will get an opportunity to weigh in on the report, said a top lawmaker on agriculture.

Rep. Al Juhnke said his House agriculture finance committee will review audit findings and listen to biofuels producers before recommending any major policy changes.

"As rural members," Juhnke, DFL-Willmar said, "we're very concerned and to knee-jerk this now at this point would concern me, without some extensive testimony from the plants."

"I don't think they should end," he added of producer payments.

House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said she supports keeping existing ethanol commitments in place. Otherwise, she said, the state could be legally liable for breaking its word.

However, she added, lawmakers no doubt will debate ethanol-type payments in the future.

Juhnke, among ethanol's biggest proponents in the Legislature, said discussion of producer payments was just a piece of the audit. The report also concluded that use of biofuels -- such as in the state-mandated fuel blend of 90 percent gasoline and 10 percent ethanol -- reduces petroleum use. That mandate will increase to a 20-percent ethanol blend.

"There's a lot of things in here that we've been saying for years have been affirmed," Juhnke said.