Bridges • Volume 14 • Number 2 • May 2010

Ethanol: to Tariff or Not to Tariff?

Brazil and the US are locked in hot competition over ethanol trade, with the former seeking more market access and the latter determined to protect its domestic producers.

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On 5 April, Brazil surprised the world by announcing a temporary elimination of its 20 percent import tariff on ethanol until 31 December 2011. The main motive behind the move was to encourage the United States to follow suit, but that outcome looks unlikely.

Bipartisan bills have already been introduced in both chambers of Congress, providing for a five-year extension of the 54-cent-per-gallon tariff levied on imported ethanol and the 45-cent-per-gallon ‘blender’s tax credit’, currently available to refiners who add ethanol into their gasoline. Both measures were set to expire on 31 December 2010.

Senators Chuck Grassley and Kent Conrad said their legislation would “strengthen America’s energy independence and create jobs through the production of domestically produced biofuels [which] offer an alternative to foreign oil and generate economic activity in the United States.” They further claimed that a failure to extend the measures would “result in the loss of 112,000 jobs nationwide and reduce ethanol production by nearly 40 percent.”

US industry warmly welcomed the legislative initiatives. Renewable Fuels Association president Bob Dinneen called the tax incentives “sound public policies by any economic, environmental or energy measure. Domestic ethanol use is lowering the price of gasoline, reducing imports of foreign oil, and helping stabilise and reinvigorate rural economies all across the country.”

John Eichberger of the NACS industry group said his association supported extending the blenders’ credit because “without it, these fuels are not economically viable.” However, he said it was “time to eliminate the import tariff in order to expand available, cost-competitive supplies… Protectionist measures like this do not benefit consumers - they only lead to increased costs.”

In contrast, Joel Velasco of the Brazilian Sugarcane Industry Association (UNICA) said that “generous government initiatives and consumption mandates” had allowed the US to build the world’s largest ethanol industry over the past three decades, leading to an “elaborate system of subsides and trade barriers” that had made Brazilian ethanol more expensive and nearly unavailable in the US. Mr Velasco threw down the gauntlet: “After 30 years of subsidies and import taxes, American consumers deserve clean fuels at a market-based price. Brazilian sugarcane ethanol producers are ready to compete. What about American corn ethanol producers?”

Competing Ad Campaigns

Brazilian ethanol, which uses sugarcane as a feedstock, is both cheaper and more energy efficient than the home-grown corn-based ethanol that dominates the US market. Ahead of the upcoming congressional debate, industry associations in both countries have embarked on advertising campaigns on the virtues of ethanol, with UNICA emphasising the superiority of the cane-based variety, while the US ethanol trade coalition Growth Energy does not mention the word ‘corn’ in its TV spots.

WTO Offers Another Avenue

Covering all its bases, Brazil is also seeking to include ethanol in the list of environmental goods targeted for steep and quick liberalisation in the Doha Round negotiations (see related story on page 7). UNICA CEO Marcus Jank expressed strong support for this position when WTO Director-General Pascal Lamy visited Brazil in April. WTO Members should reconcile their trade and climate change policies, Mr Jank said, as it made “no sense for countries to adopt ambitious policies to reduce greenhouse gas emissions, while continuing to apply high tariffs on clean technologies that can be instrumental to achieve reduction goals and allowing fossil fuels to be traded freely.”