The End of the U.S. Ethanol Tariff

The U.S. Congress surprisingly refused to extend the 54-cents-per-gallon tariff levied against imported ethanol, which has opened the U.S. market to imports. At the same time, Congress refused to extend the complementary production tax credit of 46 cents per gallon, which had been provided to U.S. producers for three decades. These changes complement the tariff elimination enacted by Brazil in 2010. Suddenly, there is a hemispheric free market in ethanol.

The commentary on this momentous decision has so far focused on the impact on Iowa corn farmers and the big commodity traders like Archer Daniels Midland (ADM). It is undeniable that there will be some rethinking in the U.S. Midwest of planting strategies, now that corn no longer attracts the subsidies that were running at around $6 billion for the past year. The diversion of corn from foodstuffs markets to ethanol production, which had been so widely condemned, may now be moderated — to the relief of food consumers everywhere.

But the biggest impact of this decision will be felt away from the United States — in Brazil. There, a huge national effort has gone into building a biofuels industry, based on fast-growing sugarcane, which is now the pride of the country. The energy produced by ethanol compared with the energy invested in its production (the energy return on energy invested) is about nine to one in Brazil, compared with only 1.3 to one for corn-based ethanol in the United States and two to one for sugarbeet ethanol in Europe.

Brazilian sugarcane-based ethanol has thus always had a huge energy advantage. It has a very large cost advantage too, through the relentless improvement efforts engaged in by sugarcane producers and ethanol distillers, in conjunction with the Brazilian government.

Proud as it was of this national industry, Brazil was frustrated in its export efforts by the heavy U.S. subsidization of its own ethanol producers. Now that a hemispheric free market in ethanol has been created — just like the free market that exists for oil — Brazil’s powerful national competitive advantages will kick in. The first to feel the benefits will be U.S. motorists, who will be able to buy E10 gasoline at a lower price — as soon as oil companies start blending Brazilian ethanol. (Don’t hold your breath!)

The geopolitical impacts of this decision promise to be profound. First, it should create a strong mutual alliance between the United States and Brazil to co-develop their ethanol exports and argue for free markets for ethanol around the world. Europe now stands isolated as the region that imposes a still-heavy tariff on ethanol imports, as well as subsidies to its sugarbeet producers.

This tariff is now levied at ten U.S. cents per liter (compared with the U.S. tariff, just discontinued, of 14 cents per liter). The EU also has a market mandate of 10% of transport fuels to be met from biofuels by 2020. So the stakes for ethanol exporters — Brazil and the United States are the world’s largest — are high in having the European tariff dismantled.

Second, it will add credibility to U.S. calls for freer markets for “clean fuels