Stalking Each Other : Auto Makers, Corn Growers Team Up for Their Mutual Benefit

By DONALD W. NAUSS

June 11, 1997 12 AM PT

TIMES STAFF WRITER

DETROIT —

The nation’s auto makers and corn growers have formed an unusual mutual-admiration society.

The auto industry suddenly is pledging to produce hundreds of thousands of vehicles that will run on ethanol, just as Congress is seriously debating whether to slash or eliminate a long-standing taxpayer subsidy that makes the corn-based fuel competitive.

The latest step came Tuesday when Chrysler Corp. announced plans to build about 180,000 minivans in 1998 that will run on either ethanol or gasoline. It comes a week after Ford Motor Co. said it would put 250,000 ethanol-burning cars, pickup trucks and minivans on the nation’s highways in the next four years.

The developments provide a boost to Midwest farmers and such politically well-connected agribusiness concerns as Archer-Daniels-Midland, the nation’s dominant ethanol producer, and come as the very survival of the ethanol industry is in question.

Building ethanol-friendly cars allows the auto makers to project a green image. But more important, thanks to a loophole in federal law, it permits them to earn fuel-economy credits that allow them to sell more gas-guzzling pickups, sport-utility vehicles and minivans.

The auto makers say they will build the dual-fuel vehicles even though there are only about 30 ethanol fueling stations in the nation, most in the Midwest. By putting cars on the road now, they hope to spur the building of more ethanol service stations by producers and government.

Environmentalists, however, say the auto makers are attempting to circumvent federal environmental standards that require the companies to meet average fuel-economy levels for all the vehicles they sell.

By offering flexible-fuel vehicles, the auto makers qualify for fuel economy credits even if the motorists who buy the cars and trucks put nothing but gasoline in them. The credits can then be used to allow them to sell more low-mileage gas hogs.

“They are trying to say it’s a boon for the environment when it’s literally a loophole that you can drive a truck through,” Daniel Becker, energy program director for the Sierra Club, said.

Ethanol, mostly distilled from corn, is more costly to produce than other fuels and cannot be profitably produced without a subsidy.

Purchasers of ethanol receive a 5.4-cent-a-gallon discount off the federal gas tax of 18.4 cents per gallon. The subsidy benefits producers and farmers by creating demand. Nearly 1.5 million gallons of ethanol will be produced this year, accounting for only 1% of U.S. transportation-fuel consumption.

The ethanol vehicles were announced as Congress is considering a $135-billion, five-year tax-cut package. As one way to pay for the bill’s cost, House Ways and Means Committee Chairman Bill Archer (R-Texas) has proposed reducing the ethanol tax credit by 3 cents and eliminating it by 2000.

Auto makers insist that their announcement is not an attempt to rebuff the attack in Congress on the ethanol subsidy. But ethanol advocates suggested that Detroit’s plans give greater credibility to their product.

The ethanol subsidy was created 18 years ago as part of the federal government’s efforts to spur alternative-fuels development in the wake of the 1973 and ’79 oil shortages. There have been several attempts to eliminate the tax incentives, but those failed in the face of intense lobbying by Midwestern grain-belt interests.

But the current balanced-budget priority, the departure of former Sen. Bob Dole (R-Kan.)--a powerful ethanol advocate--and a price-fixing scandal at Archer-Daniels-Midland may be signaling that this is the year the ethanol subsidy can be eliminated.

Stephen Moore, a corporate welfare expert at the Cato Institute, a libertarian think tank, says there is no justification for ethanol tax incentives.

“Every argument for it is salacious,” he said. “It’s not energy-efficient, it’s not good for the environment and it’s not cost-effective.”

The General Accounting Office, the watchdog agency for Congress, earlier this year found that the ethanol subsidy had cost the nation’s highway trust fund $7.1 billion since 1979. At the same time, it concluded that ethanol did little to reduce air pollution or the nation’s dependence on foreign oil.

Ethanol proponents counter that eliminating the tax subsidy could kill the fledgling ethanol industry. “It would be devastating,” said Eric Vaughn, president of the Renewable Fuels Assn., a trade group for ethanol producers. “It would shut the industry down.”

The industry says eliminating the tax subsidy would cost up to 120,000 U.S. jobs, reduce farm income by up to $10 billion in the next seven years and increase the trade deficit by as much as $8 billion by 2005.

Chrysler said about a third of its 1998 minivans will be outfitted with fuel systems that can burn pure gasoline or a blend of 85% ethanol and 15% gas. Though the vehicles cost slightly more to build, they will be priced the same as other minivans.

In making its announcement, Chrysler played down the environmental benefits. Indeed, the company said there will be little emission savings and that the vehicles will cost more to operate since the fuel carries less energy per gallon than gasoline.

The company also acknowledged that a prime benefit of producing dual-fuel vehicles was to bring it into compliance with average fuel-economy standards.

“We will get fuel-economy credits,” spokesman Mike Aberlich said.

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Corn in Detroit

The average fuel economy of the total new-car fleet has leveled off since 1988 but still exceeds the 27.5 mpg required of each auto maker. However, the industry is expected to fall below the 20.7-mpg standard for trucks this model year. Because of growing sales of big-engine vehicles, each of the Big Three is expected to fall below one or both standards and be subject to stiff fines. That’s one reason Ford and Chrysler have announced plans to boost output of vehicles that can run on gasoline or corn-based ethanol, for which they receive credits toward raising their official fuel economy, even though vehicle owners might never use ethanol.

HOW THE INDUSTRY FARES

Average fuel economy for the auto industry, in miles per gallon*:

Cars:

28.6 mpg, 1.1 over the standard

Light trucks:

20.4 mpg, 0.3 under the standard

* 1996 and 1997 figures are preliminary estimates.

HOW THE BIG THREE FARE

Estimated avg. fuel economy in mpg for 1997 (standard indicated by triangle):

Standard

Cars: 27.5

Light trucks: 20.7