US Ethanol Tariffs, Subsidies End; Brazil Likely to Continue Ethanol Imports

11 January 2012

The beginning of the new year saw the end of tax credits and tariffs that have long protected corn-based ethanol production in the US, after Congress' failure to renew these measures. The end of the legislation signals a shift in nearly three decades of policy.

Political support for ethanol in the US declined precipitously in 2011. Though the 54 cent per gallon tariffs on imports and 45 cent per gallon tax credits for blending ethanol with petroleum were renewed at the end of 2010, similar action at the end of 2011 was viewed by many as politically unpalatable. The US Senate signalled as much in a resolution from last summer, calling for an end to the blending credit and tariff (see Bridges Weekly, 13 July 2011).

Commentators have attributed the change in attitude both to high oil prices, making ethanol relatively competitive, and a heated debate on farm subsidies in the context of the US fiscal deficit and budget cuts.

Although many experts have questioned the sustainability of corn-based ethanol, government support over the years has arguably left it the only economically viable alternative to petroleum as a plant based fuel source.

A more efficient conversion of biomass to fuel, using organic waste products such as wood chips or remnants of farm output, or advanced cellulosic ethanol, has not yet reached economic maturity. "A fly speck on the wall" is how Bruce Babcock, an agricultural economist at Iowa State University, described the effort in a conversation with Bridges. To promote the newer technology, the US government is fining companies supplying motor fuel US$6.8 million for failing to reach targets in 2011.

Experts: Blending mandate likely to prop up industry

Even without government subsidies, some experts note, the US mandate to blend greater amounts of ethanol into the national fuel supply will continue to drive revenue for the ethanol industry.

The Renewable Fuel Standard mandates that an increasing proportion of the US fuel supply come from ethanol or other renewable sources. The US expects 15.2 billion gallons of renewable fuels, largely ethanol, to make up nine percent of the national fuel supply in 2012. The Energy Independence and Security Act of 2007 requires that that total be boosted to 36 billion gallons by 2022.

An elimination of the tax credit and tariff may ease some pressure on corn prices, but the blending mandate will continue to push demand for corn and corn-based ethanol, according to Babcock. Notably, similar blending policies are also in place in Brazil and the EU, ensuring robust and growing demand for ethanol.

Leading exporter, Brazil, likely to continue imports

Meanwhile, Brazil is likely to continue buying ethanol from the US in the short term, according to UNICA, a São Paolo-based industry association. However, with a relief from US tariffs, the group expects to be exporting ethanol in the "medium- to long-term."

The South American country is the largest producer of ethanol in the world, but began importing the fuel from the US last year when growth in its domestic supply failed to keep up with demand from a booming fleet of cars running on ethanol.

Sugar cane-based Brazilian ethanol uses less land, fossil fuels, and has traditionally been cheaper than its corn-based equivalent in the US. The credit crisis in 2008 and a period of consolidation in the industry lead investors to favour new acquisitions over improvements in old sugar cane fields or planting new ones, said UNICA. Sugar cane fields require replanting and substantial inputs every seven years to remain productive. The recent lack of investment led yields to slip, turning a leading exporter into an importer.

ICTSD reporting; "Brazilian brew: America opens up to Brazilian ethanol," THE ECONOMIST, 7 January 2012; "Ethanol Subsidies: Not Gone, Just Hidden a Little Better." 5 January 2012. MOTHER JONES; "A Fine for Not Using a Biofuel That Doesn't Exist," NEW YORK TIMES, 9 January 2012.

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