"Indirect Land Use charges:•bCrLf The next ethanol battleground

These are troubled times for the corn-based ethanol industry. Now a new proposed regulation is adding more uncertainty.

This week the EPA proposed draft rules for the expanded Renewable Fuel Standard (RFS-2) that could undercut $3 billion a year in federal tax breaks for producers of ethanol, a move that sets the stage for a battle between Midwestern grain producers and environmentalists, reported today's Chicago Tribune.

EPA's proposed regulations would allegedly battle greenhouse gas emissions blamed for climate change and would make sure that alternative fuels, such as ethanol or biodiesel, do not have indirect effects, such as deforestation in other countries.

On the upside, industry officials were cheered by a simultaneous announcement that nearly $1 billion in stimulus funds would go toward advanced biofuel research and that the government would take new steps to promote ethanol-powered cars and fueling stations. President Obama announced the creation of a Biofuels Interagency Working Group and EPA Administrator Lisa P. Jackson said that existing corn ethanol distilleries or ones under construction would probably be "grandfathered," or exempt from the new regulations.

Land use debate At the center of the controversy is something called "indirect land use charges (ILUC).•bCrLf Environmentalists point to the indirect land use effects of pulling corn out of the world food supply, which theoretically could provoke farmers in developing nations to clear rain forests -- and release massive amounts of carbon dioxide in the process -- in order to plant corn.

The debate over ILUC is focused on whether or not the carbon intensity of fuels like ethanol can or should include a penalty for theoretical indirect economic effects. According to Growth Energy, a trade association formed by ethanol manufacturers, ILUC theory uses speculative models and incorrect assumptions in an attempt to blame American farmers for deforestation in Brazil

According to the theory, corn used for ethanol displaces other crops, like soybeans. This in turn causes farmers in other countries, such as Brazil, to cut down rainforests to grow soybeans and fill the demand. 

ILUC is built on two main assumptions. The first is corn used for ethanol production will lead to large decreases in American grain exports and second, ethanol production will increase deforestation in the Amazon. Both have been proven to be empirically false, argues Growth Energy. 

Since 1998 corn exports have remained at 1.5-2.5 billion bushels each year and soybean exports reached record levels last year. And according to the National Institute for Space Research, deforestation in the Amazon has declined sharply just as American biofuels production doubled. In 2004, 10,588 square miles of the Amazon was deforested and in 2008 that number dropped to 4,621 square miles

Farm groups react The American Soybean Association (ASA) said EPA's approach is "significantly flawed,•bCrLf could make the RFS-2 goals unattainable and harms the competitive position of the U.S. soy biodiesel industry.

"ASA is particularly disappointed that EPA does not recognize the evidence that soy biodiesel use in the United States does not drive international land use change," said ASA President Johnny Dodson, a soybean producer from Halls, Tenn. Wesley Clark, co-chairman of Growth Energy, added: "We don't think the theory of indirect land use change will hold up. It's unfairly applied only to ethanol."

U.S. Senator John Thune, R-SD, has already introduced legislation that would, in essence, prevent the EPA from using indirect land use charges as a part of its regulatory equation.

The EPA will now open a 60-day comment period to allow feedback from scientific sources and businesses in how to measure carbon emissions from the full lifecycle of biofuels. Bob Dinneen, President of the Renewable Fuels Association, said his group would "participate aggressively•bCrLf to help shape the final regulations.

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