Thursday, February 08, 2007

Ethanol Tariffs and Trade

Today's Washington Post reports that US and Brazilian officials are meeting this week in talks on a new biofuels energy partnership, with the aim of increasing biofuels use and trade between the US and Latin America. This seems a laudable goal, in light of our commitment to increase our ethanol use and given the greater efficiency of producing ethanol from cane in the tropics. Although you might guess that one of the key topics of conversation at this trade session would be the $0.54/gallon US tariff on imported ethanol, the article indicates this is not on the table. There's a good reason for that. The tariff is an integral part of the US ethanol incentive system, which is here to stay. Repealing the tariff would create a loophole that would effectively subsidize Brazilians to compete with American farmers. Imagine the headlines and sound-bites that would generate.

Our ethanol subsidy structure has evolved over the nearly 30 years since it was created. The current $0.51/gallon federal Volumetric Ethanol Excise Tax Credit (VEETC) was established by the American Jobs Creation Act of 2004 and reinforced by the Energy Policy Act of 2005. Under this system, the tax credit is issued to those who blend ethanol into gasoline at any fraction, including but not limited to the popular 10% (E-10) and 85% (E-85) blends. US ethanol producers benefit indirectly by charging a higher price for their product than they otherwise could, effectively receiving the 51 cents without having to file to get it. The current tariff prevents a blender from importing cheaper foreign ethanol, selling it at the domestic market price, and pocketing a subsidy that was intended to help US agriculture. The other way to look at this is that the net tariff on imported ethanol is really a modest 3 cents per gallon, after the blender collects the VEETC.

Our ethanol imports from Brazil have reached 1.7 billion gallons per year (110,000 barrels/day) in spite of the tariff, and that probably has as much to do with the cost of transporting domestic ethanol from the Midwest to coastal markets as with any inherent US ethanol shortage, which will rapidly disappear as new capacity comes online in the next year or two. It also reflects the lower cost of producing ethanol from sugar cane, which contrary to some assertions about its environmental impact, can apparently be grown in a sustainable fashion, with a higher energy return on energy invested (EROEI) than for corn ethanol, or even for fossil fuels.

I hope the Brazil/US ethanol discussions are fruitful. This is the kind of trade we should be promoting, and it adds at least in a small way to the diversification of our energy supply, which has been the most successful energy strategy we have pursued since the 1970s. More importantly, market pressure from expanding ethanol trade with Brazil, along with the prospect of having to compete with cellulosic ethanol later, should give US farmers and corn-ethanol producers ample incentives to become much more efficient, reducing their energy inputs and consuming a smaller fraction of a larger corn crop. That should help minimize ethanol's looming impact on food prices, while improving its contribution to reducing greenhouse gas emissions.

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