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  Ethanol Bandwagon Picks Up Speed
California, Other States
Push for Expanded Use;
Higher Gas, Food Costs?
By JOHN J. FIALKA
January 10, 2007

In separate actions aimed at reducing "greenhouse gases," California Gov. Arnold Schwarzenegger ordered a cut of "at least 10%" in the carbon content of motor-vehicle fuels used in his state by 2020, while governors of 37 states prepared to push for a new federal rule to require greater use of ethanol fuel.

Both efforts are designed to reduce global warming and the U.S.'s reliance on imported oil, but they also could raise consumer prices for food and fuel. The initiatives also signal the increasing urgency of climate change as an issue both in state capitals and in Washington.

President Bush is expected to express more support for domestically produced ethanol when he gives his State of the Union address later this month. Meanwhile, Democratic leaders in Congress are talking up the need for alternative fuels and national emissions controls.

Announcing his carbon-reduction order in remarks prepared for delivery in his State of the State address last night, Gov. Schwarzenegger said, "California has the muscle to bring about such change."

While the details of the proposal have yet to be worked out, California officials explained that the program would leave it up to oil suppliers in the state to figure out how to reduce carbon content, but that using more ethanol, which contains less carbon, would be the most likely way. The move, they estimated, would triple the size of the state's market for ethanol and other renewable fuels.

Gov. Schwarzenegger said his order would be the first standard in the world that would diminish the use of fossil fuels, which come from deposits that have been buried in the ground for millions of years, and which release carbon into the air when burned. The regulation, which the governor ordered completed by 2008, would also include incentives for more electric and hydrogen-powered vehicles. The governor acted under his state's recently passed law to regulate carbon-dioxide emissions.

Meanwhile, the 37 governors today will propose a new federal standard that would mandate substantially higher use of ethanol fuel and offer new tax incentives for the production of cellulosic ethanol, which can be made from farm wastes and wood chips, and doesn't rely on corn, the feedstock typically used by current ethanol producers.

The proposal would require fuel sellers to increase the use of ethanol to 12 billion gallons a year by 2010, eclipsing an earlier federal mandate, contained in the 2005 Energy Policy Act, of 7.5 billion gallons by 2012. The new standard calls for the use of 15 billion gallons by 2015 and around 37 billion gallons by 2025, which means ethanol could displace about 25% of the nation's expected gasoline use.

A January 2005 proposal by the governors' coalition to mandate greater use of ethanol as fuel was quickly endorsed by President Bush and became the centerpiece of the energy bill passed by Congress.

The governors unveiled their new proposal to the president in a letter, saying, "Oil is the unquestionable epicenter of national-security crises that distort the foreign policies of many nations and that suggest potential scenarios for economic disaster."

While the new moves enjoy considerable political support and the endorsement of environmental groups, experts who watch the nation's food consumption worry that more ethanol use will drive up food prices. Michael Swanson, an economist with Wells Fargo & Co., said the demand for corn has already raised corn prices. Meanwhile, producers are already lowering the number of young chicks they raise and are fattening cattle less because of soaring corn costs, trends that Mr. Swanson predicted will soon raise retail meat prices.

"We're looking at corn futures trading in the range of $4 a bushel. That's as high a price as we've seen in this decade," Mr. Swanson said. Earlier spikes in the price of corn were caused by small crops, but this year's crop "was one of the largest we've ever had," he added.

Currently, ethanol is turned into motor fuel by mixing it with gasoline in blends of 10% or less ethanol. Both the pending California rule and the governors' proposal would require major owners of gas stations to provide pumps that distribute 85% blends of ethanol and give auto makers incentives to make more "flexible fuel" vehicles that can use this blend.

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