Brazil Scraps Ethanol Tariff as US Considers Extending Its Own

21 April 2010

Brazil has eliminated its 20 percent tariff on ethanol imports until 2012, the country's Chamber of Foreign Trade announced earlier this month. The temporary measure is widely seen as an attempt to pressure the United States into lowering or even removing its own trade barriers on ethanol imports.

Under existing US policy, ethanol imports are subject to a 2.5 percent ad valorem tax plus a tariff of 54 cents per gallon. Additionally, a tax credit for ethanol blenders of 45 cents per gallon - the Volumetric Ethanol Excise Tax Credit or VEETC - supports US ethanol consumption. As these policies are set to expire at the end of 2010, a new bill has been introduced in Congress to extend them for five more years.

The US is the world's largest producer of ethanol, but Brazil, the second-largest producer, is the largest exporter of the biofuel, with 1.365 billion gallons sold abroad in 2008. The countries produce two different types of ethanol - corn-based in the US and sugarcane-based in Brazil - but both kinds may be used interchangeably. Because cane-ethanol is cheaper to produce than corn-ethanol, the Brazilian ethanol industry is highly competitive.

The VEETC is not restricted to domestically produced US ethanol but can be paid to ethanol blenders using imported fuel. But because the tariff on imports is higher than the tax credit, Brazilian ethanol producers operate at a disadvantage to US producers, according to analysis by Robert Rapier, Chief Technology Officer for Merica International, a bioenergy holding company.

"If our energy policy goals are promotion of renewable energy, then the tariff is a partial obstacle," Rapier wrote in his blog for Forbes.com. "If our energy policy goals are only to promote domestic renewable energy, then the tariff serves that purpose at the potential expense of taxpayers, consumers and ethanol exporters."

Lowering the cost of ethanol consumption would encourage use of the alternative fuel. "Consumers win when industries compete," said Joel Velasco, the chief North American representative of the Brazilian Sugarcane Industry Association (UNICA). "Brazilian ethanol producers are willing to compete for consumers. What about American producers?"

The American Farm Bureau supports the continuation of the tax credit and tariff as a way to secure energy security for the United States, move away from fossil fuels and develop a domestic industry.

The US corn-ethanol lobby group Growth Energy has launched a major push for the tax benefits to be extended. The group's campaign includes a US$2.5 million series of ads broadcasting the benefits of ethanol. UNICA came out with an ad campaign to end the subsidies, calling cane-ethanol a "sweeter alternative." UNICA has often allied with the US lobby in the past to promote consumption of ethanol, but it is now acting in the interests of Brazilian ethanol.

WTO members who enact large-scale policies to reduce greenhouse gas emissions without also lowering tariffs on clean technologies that would help reach reduction goals are acting nonsensically, said Marcos Jank, President and CEO of UNICA, in a presentation to WTO Director-General Pascal Lamy, who visited Brazil's largest sugarcane-growing region on 17 April. Ethanol ought to be included in the "list of environmental goods for which import tariffs must be abolished," added Jank.

Jank emphasised the importance of keeping legally binding sustainability criteria in line with WTO trade rules. "Sustainability must be a given and we all want to ensure that it is always a vital consideration, but any binding criteria must be science based and measurable in practice," said Jank. "Otherwise, we will be opening doors to a serious risk of creating new trade barriers."

ICTSD reporting; "Brazil Announces Temporary Elimination of Ethanol Tariff," NACS ONLINE, 7 April 2010; "Implications of the US Ethanol Tariff," FORBES BLOG, 15 April 2010; "Brazil Records Record Ethanol Exports in 2008: Report," BIOFUELS DIGEST, 27 January 2009; "Cane ethanol fires back at the corn-based variety," THE HILL E2 WIRE, 12 April 2010; "Renewable Energy Tax Incentives," AMERICAN FARM BUREAU FEDERATION, April 2010.

010; bh:E#& to trade protections in Senate climate bill, adviser says," THE NEW YORK TIMES, 20 April 2010.

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