Politicos Seek to Harmonize Tariff, Tax Credit

If the noise coming out of the Capitol in Washington, D.C., in late 2008 is any indication, the tariff on imported ethanol appears to be in danger, or at least subject to significant modification.
By Frank Zaworski | November 03, 2008
At a time when the U.S. ethanol industry can least afford it, some political leaders want to either harmonize the tariff with the 45-cent blender tax credit, or eliminate the tariff entirely.

Sen. John McCain, R-Ariz., stated in his proposed "Lexington" energy plan that he believes alcohol-based fuels hold great promise, as both an alternative to gasoline and as a means of expanding consumers' choices. McCain said during his recent presidential election campaign that he would like to abolish the tariff on imported ethanol to make the renewable fuel more accessible and affordable to blenders.

Sen. Jeff Bingaman, D-N.M., chairman of the Senate Energy and Natural Resources Committee, "favors lifting the tariff and would likely vote that way if such a measure is ever introduced in Congress and brought up for a vote," says Bingaman spokesperson Bill Wicker of Bingaman's Senate Energy Committee office.

"We need to level the playing field and eliminate mandates, subsidies, tariffs and price supports that focus exclusively on corn-based ethanol, and prevent the development of market-based solutions which would provide us with better options for our fuel needs," McCain said.

While Sen. Barack Obama, D-Ill., has not specifically addressed the tariff on ethanol, he has repeatedly voiced his support for renewable fuels. He told the National Corn Growers Association in September that he supports efforts to reduce the nation's dependence on foreign oil by developing renewable energy, including biofuels, solar and wind energy. "Farmers are on the cutting edge of America's path to energy independence," he said. "We are already replacing millions of barrels of imported oil thanks to our successful biofuels program, and I recently established a goal to have 60 billion gallons of our fuel come from biofuels by 2022.

He continued, "I am a proud supporter of the renewable fuels standard and tax incentives for biofuels. I'll invest $150 billion over the next 10 years in our green energy sector, enhancing farmer profitability, injecting capital into rural economies, and creating up to 5 million new jobs in the process—jobs that pay well and can't be outsourced."

Meanwhile, Bingaman has signed on as a co-sponsor of a bill submitted in June by Sens. Diane Feinstein, D-Calif., and Judd Gregg, R-N.H., that would reduce the tariff on imported ethanol to 45 cents. "The need for inexpensive and cleaner-burning fuels continues to grow," Feinstein said in introducing her bill. "And yet, U.S. refiners are forced to pay a 54-cent tariff on ethanol imported from Brazil and other foreign sources. This bill would essentially level the playing field and ensure that U.S. refiners are able to purchase cheaper and more climate-friendly ethanol, no matter where it comes from."

Feinstein said the harmonization of the tariff with the ethanol subsidy would ensure that foreign ethanol neither benefits from the ethanol subsidy nor is penalized by a 9-cent barrier to trade.

U.S. Ethanol Industry Responds
As expected, ethanol proponents oppose Feinstein's bill. "She proclaims we need more biofuels from Brazil but she turns her back on biofuels from the United States time and time again," says Brian Jennings, executive vice president of the American Coalition for Ethanol. "ACE believes the tariff works exactly how it was intended. It is not a barrier. When the situation allows, we can import ethanol when it makes the most economic sense.

"For ACE to support harmonization of the tax credit, we need an ironclad commitment from Congress that they will extend the tax credit (volumetric ethanol excise tax credit) beyond 2010," Jennings says. "We won't entertain harmonizing the credit and the tariff to 45 cents without such a commitment.

"If the value of the tariff is dropped, it would send an absolutely chilling signal to companies, lenders, scientists and everyone else that our nation is not as committed to energy security as we say we are."

Nathan Schock, director of public relations for Poet LLC in Sioux Falls, S.D., tells EPM that, "Eliminating the tariff would not result in one more gallon of ethanol being used in the United States because ethanol is currently in an oversupply situation. With an E10 base blend, ethanol is effectively capped at 10 percent of our fuel supply and with the plants we have in operation and under construction, we are already there.

U.S. Oxygenates, Fuel Ethanol Imports (thousand barrels per day)

Source: U.S. Energy Information Administration

"The American ethanol industry is in a constant state of technological advancement," Schock says. "By allowing foreign ethanol to flood the market, it would slow technology investment and likely delay the development of cellulosic ethanol production because there would be no market for the product."

In Washington, the Renewable Fuels Association voiced a similar sentiment. "Calling for a repeal of the tariff is a solution in search of a problem, to paraphrase Senator Chuck Grassley," says Matt Hartwig, RFA communications director. "The tariff exists to prevent taxpayers from subsidizing foreign ethanol production. It is not a protectionist measure, nor
is it a barrier to our markets for foreign ethanol. Last year, some 400 million gallons of ethanol was imported directly from Brazil. Hartwig says the RFA has supported parity between the tax credit and the secondary tariff. "Removing the tariff would send a chilling signal to an already cold investment market that we are not serious about developing a robust domestic ethanol industry complete with the emergence of cellulosic and other next-generation technologies," Hartwig says. "It would mean American taxpayers would be subsidizing ethanol and job creation in foreign countries. Removing the tariff would be a mistake."

Schock adds, "The U.S. would be far better off following the Brazilian model of encouraging domestic, renewable fuel production. Brazil protected their industry and increased the base blend so that ethanol could grow to be a significant part of their energy supply. Today, they are energy exporters and the U.S. continues to spend hundreds of billions of dollars on foreign oil."

A study early in 2008 at Iowa State University in Ames indicated that eliminating the tariff on foreign ethanol would likely result in a decrease of U.S. ethanol production of about 7 percent as cheaper imports move in and grab market share.

According to the USDA, costs for ethanol produced from sugar in Brazil are about 81 cents per gallon. Domestic U.S. ethanol production costs were well over $2 per gallon in 2008.
Any reduction in demand for domestically produced ethanol would likely have a significantly negative impact on corn-based ethanol producers who struggled in 2008 with out-of-whack input costs.

Importer Advantage
One company that could stand to gain from an adjustment to the ethanol tariff is Minneapolis-based Cargill Inc. According to its Web site, Cargill is one of the main exporters of Brazilian sugar. Cargill ships this commodity worldwide through its joint ventures Terminal de Exportação de Açúcar do Guarujá (TEAG) and the Terminal de Açucar Ensacado (T-33), both in the state of São Paulo. Cargill also exports alcohol through the Terminal Exportador de Álcool de Santos (TEAS), which is also in the state of São Paulo, in which the company has an equity stake.

In 2006, Cargill announced the acquisition of a 63 percent stake in Central Energética Vale do Sapucaí Ltda. (Cevasa), an ethanol mill located in Patrocínio Paulista, in the state of São Paulo. In that same year, Cargill also acquired a 43.8 percent stake in Usina Itapagipe Açúcar e Álcool Ltda., a sugar and ethanol mill in the state of Minas Gerais.

Cargill has taken the position that free markets are the best way to meet global renewable energy challenges. "Biofuels should be freely traded worldwide," Gregory Page, Cargill president and chief executive officer, told the USDA's 2007 Outlook Conference. "Open trading arrangements for biofuels will provide flexibility to our domestic biofuels markets and greater cooperation and integration with our biofuels trade partners around the globe. Global trade in biofuels should comply with international trade rules and agreements by ensuring equity for all countries as well as industry and trade participants.

"Brazil is an increasingly important global player in ethanol production and ethanol exports, producing nearly half of all traded ethanol today. We currently charge a 54-cent duty on Brazilian imports. But then, we allow the purchaser of that imported ethanol to be eligible for a 51-cent credit when the imported ethanol is blended into our U.S. fuel supply.

"Rather than view global biofuels trade as a threat, we should view overseas sources as an opportunity to develop a diverse and global biofuels market that can take advantage of multiple points of origin. U.S. production of biofuels can help increase our energy security—but other kinds of renewable energy will increase our flexibility and improve our ability to help feed the world's hungry, while improving the global and U.S. energy picture."

The status of the ethanol tariff will likely be determined after a new administration takes office in January. Until then, the U.S. ethanol industry will be keeping its fingers crossed.

Frank Zaworski is an Ethanol Producer Magazine freelance writer. Reach him at fzaworski@gmail.com.