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The money from a tax on car owners goes to a fund for clean-energy technologies. But backers say it was not to be used for corn ethanol, which they say harms the environment as much as oil.
By Jack Dolan, Los Angeles Times
Reporting from Sacramento
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California's energy commission has promised millions of dollars to a struggling corn ethanol business founded by a political ally — and generous campaign contributor — to Gov. Arnold Schwarzenegger despite public assurances that the commission's environmental funds would not be used to subsidize that technology.
The money comes from a tax on car owners passed three years ago that goes to a fund for clean-energy technologies. When the fund was set up, its backers said it would not be used for corn ethanol, a decades-old gas additive that many environmental scientists argue is at least as bad for the planet as oil.
The decision to use the fund for an ethanol subsidy has the program's creator crying foul.
"It's appalling. We gave them a very clear direction where these funds should be going," said former Assembly Speaker Fabian Nuñez, who wrote the bill that created the Alternative Fuel and Vehicle Technology Program. "Ethanol is yesterday's news. It seems like there's some inside deal going on."
Pacific Ethanol, the largest of four companies eligible for up to $15 million in new subsidies offered under the program, was founded by former California Secretary of State Bill Jones, a fixture in the state Republican Party who has given nearly $70,000 to Schwarzenegger's campaigns, state records show.
The firm filed for bankruptcy protection last year. Its plants in Stockton and Madera are now idle but would restart in a matter of months if the promised subsidies come through, which is contingent on passage of the long-overdue state budget.
"What I smell here is a bailout," said Nuñez, who left the Legislature when his term limits expired in 2008.
Jones did not respond to requests for comment. Tom Koehler, Pacific Ethanol's director of public policy, said nobody from his company ever spoke to the governor about the subsidy.
"This whole kind of undue influence thing just is not there," Koehler said.
Schwarzenegger's chief environmental advisor, Dan Pellissier, said Koehler's brother Neil, Pacific Ethanol's chief executive, came to his office last summer with representatives from other California ethanol producers to press their case for the subsidy. Pellissier said he then asked Energy Commission Chairwoman Karen Douglas to "have your people look at it."
Pellissier said he has never met Bill Jones and had no idea that Jones had given money to the governor's campaigns.
"That would have had no bearing on this at all; that is just not the way we make decisions," Pellissier said, adding that his support for the subsidy is based solely on its merits: Ethanol produced with the methods used in California is a bit cleaner than oil and much cleaner than that shipped in from the Midwest, and the money will help restart idle plants and put people back to work.
Each of Pacific Ethanol's plants would employ about 40 people if they reopen, Koehler said.
News of the state's planned investment surprised many environmentalists because a growing body of scientific opinion holds that clearing fields to grow corn, harvest it, distill it into ethanol and ship it to oil refineries consumes as much energy and causes as much environmental damage as burning oil.
"I don't think anybody in the environmental community believes that corn ethanol has sufficient value itself to warrant spending this money on it," said Roland Hwang of the Natural Resources Defense Council.
Hwang, who sits on the advisory committee that helps decide how to spend California's alternative fuels fund, said that converting one farmer's corn into fuel means that another farmer would have to fire up a tractor to grow more food.
Other environmental experts say that even if ethanol manufacturing is cleaner in California than in other states — much of the electricity used in the state comes from wind and solar power, as opposed to burning coal — it is not a long-term solution to the state's greenhouse gas problems.
"What we want to see is investment in the next generation of bio fuels," like those made from garbage or non-edible farm waste, said advisory committee member Patricia Monahan, of the Union of Concerned Scientists. "I don't think corn ethanol is going to solve our climate and environmental problems."
The biggest investments from the fund are going to electric and natural gas-powered vehicles. Ethanol is listed as an eligible alternative fuel in the law creating the fund, but Nuñez said he was referring to ethanol made from more sustainable crops, like switch grass.
The aversion to corn ethanol is nothing new. In July 2008, when state officials met with their advisory committee of environmentalists and entrepreneurs to decide where to invest the new fund, Peter Ward, the lead author of the energy commission's investment plan, repeatedly stressed his expectation that the money would go elsewhere, according to a transcript of the meeting.
"I don't know how I can more clearly state it," Ward finally said, responding to fears that the politically powerful corn lobby would get its hands on the money. "I doubt, personally, that we will see corn-to-ethanol projects funded."
Since then, the corn ethanol industry has been on a losing streak. The California Air Resources Board released its nationally watched ranking of fuels based on their relative environmental friendliness last year, and corn ethanol fared poorly. The industry is suing the state to get the ranking formula changed.
On top of that, the price of corn rose and the price of ethanol fell, squeezing profit margins for producers. Pacific Ethanol sought bankruptcy protection in May 2009.
In February of this year, with encouragement from the governor's office, the Energy Commission started to discuss offering price supports to ethanol producers. By June, the plan was in place. Four companies qualified; Pacific Ethanol is the largest.
The subsidy would take the form of price supports, compensating the ethanol producers when profit margins are low. Should profits climb, the producers would pay the state back. The money also comes with a requirement that the firms produce a plan, within a year, to start lowering their carbon footprint. They have five years to put those plans into action.
"It's 100% performance-based," Koehler said. "It's not a handout."
Environmentalists say those benchmarks are generous, and there's little penalty if the companies don't live up to them.
"I wouldn't say we have zero confidence that we'll get what we want out of this program," Hwang said, "but it's much less than 50%."
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