The Minnesota Legislature should consider ending its producer payment program for corn-based ethanol and redirect funds toward biofuels such as cellulosic ethanol, according to a recent Minnesota legislative auditor’s report.

It suggests that legislators “look carefully at this (producer payment) program in light of the current budget deficit and the state’s goals of reducing energy consumption and greenhouse gas emissions.” About $44 million has been allotted for the program from fiscal year 2010 through 2012. It has paid $93 million over the last five years to companies that have earned profits of $619 million over this period.

“While financial conditions for ethanol producers have deteriorated in the past year, it is unlikely that maintaining these payments will influence production decisions. The subsidies are only a little more than 1% of sales,” the report states.

The report also recommends not using tax exemptions for biofuel plants unless needed or if plants offer significant energy and environmental benefits. In addition, the Environmental Quality Board should look at what land could be used to grow biomass for cellulosic ethanol production and how it could be grown and harvested with minimal environmental impact, according to the report.

Minnesota Agriculture Commissioner Gene Hugoson, in response to the report, disagreed with the recommendation to end the producer payment program. He wrote of the “profoundly positive impact” that Minnesota’s ethanol program has had on the state’s economy.

“Corn-based ethanol and soy biodiesel reduce fossil fuel energy consumption,” the report agrees. “But the fossil fuel energy savings are limited due to land constraints and other considerations. About 31% of the corn crop and 7% of the soybean crop harvested in the United States in 2008 are expected to be used for biofuels. These usage levels have raised concerns about the impact of biofuels on world food supplies and prices. Yet, we estimate that only 5.2% of gasoline use and 0.6% of diesel use would be replaced by these biofuels in 2009.”

Environmental impacts of corn-based ethanol and soy biodiesel are unclear, particularly their impact on greenhouse gas emissions, the report suggests. Although studies are showing that cellulosic ethanol will provide greater energy savings and better environmental results than corn-based ethanol, some uncertainties remain.

“Preliminary estimates indicate that, compared with corn-based ethanol, cellulosic ethanol would reduce overall fossil fuel consumption, provide greater reductions in greenhouse gas emissions, and require significantly less fertilizers and pesticides. Biomass for cellulosic ethanol would come from forest residues, corn cobs or other portions of the corn plant, and dedicated energy crops like switchgrass, prairie grasses or willow and poplar trees. Furthermore, grasses and trees may be grown on marginal land that is not suitable for traditional crop production,” the report says.

“However, cellulosic ethanol is in the pilot project stage and is not yet being produced commercially. There is considerable uncertainty about how cellulosic ethanol will be produced and whether it can be economically competitive even with the federal tax credit that began in 2009. Cellulosic ethanol can also have adverse impacts on greenhouse gas emissions if the biomass is produced on land previously used for traditional crop production. There are also concerns about whether growing biomass on marginal lands means that lands will be removed from the Conservation Reserve Program with adverse impacts on the environment and wildlife.”

The report recommends more study on the potential land use and environmental impacts of cellulosic ethanol. “Additional energy and environmental savings are possible in the future either by developing a cellulosic ethanol industry or through additional improvements to existing corn ethanol plants. However, the largest subsidy programs are not designed for these purposes.”

A number of studies and demonstration projects regarding cellulosic ethanol have been funded. But more are needed, the auditor says.

Go online for a copy of the report, entitled Biofuel Policies and Programs.

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