Understanding the Ethanol Tariff Issue
Posted by Robert Rapier on May 14, 2010 - 10:17am
You probably saw the recent announcement that Brazil has lifted its tariff on imported ethanol until 2012. It's hoping to put pressure on the U.S. to remove or reduce its own import tariffs on the alternative fuel.
In order to better understand the intricacies of the issues involved, I have been engaged in dialogue with a number of industry groups and economists. Here I will try to shed some light on the tariff issue.
I believe there are three key issues to explore regarding the tariffs:
1. The argument that the tariff offsets the VEETC.
2. The argument that the tariff is warranted because Brazil subsidizes their domestic ethanol.
3. The argument that the tariff is ineffective in any case due to a “Caribbean loophole.”
Each of these issues will be examined in an attempt to separate out facts from hype and misinformation. In this essay, I will break down the first argument. In the next essay, I will address the 2nd and 3rd arguments.
The VEETC Offset Argument
U.S. taxpayers directly support ethanol usage through the Volumetric Ethanol Excise Tax Credit (VEETC). But that tax credit does not require that the ethanol be domestically produced. A gasoline blender that purchases ethanol imported from Brazil can receive the same VEETC as ethanol purchased from a producer in Iowa.
Therefore, one justification that has been cited for the tariff is to offset the VEETC. A tariff of equal value to the VEETC would mean that any taxpayer money that is directed at imported ethanol is refunded via the tariff.
One may wonder, since each gallon of domestically produced ethanol is assigned a unique serial number called the Renewable Identification Number (RIN), why it isn’t straightforward to make sure the VEETC is only paid on domestic ethanol. I have inquired and learned that this would likely be ruled a violation of Article 3 of the WTO Agreement on Subsidies and Countervailing Measures which states that subsidies that are contingent on the use of domestic over imported goods are prohibited. The tariff is essentially a loophole that accomplishes the same thing, although I have learned that the tariff may itself violate Article III of GATT 1994.
However, there are two points to consider regarding the VEETC offset argument. First, the amount of the tariff is higher than the amount of the VEETC. At present, the VEETC is $0.45/gallon, but the tariff is a 2.5 percent tax plus $0.54/gallon. The total tariff is approximately $0.60/gallon, which is 33% beyond merely offsetting the VEETC. Of course I still maintain that with the ethanol mandate, the VEETC is redundant because it merely pays oil companies to obey the law. If we did away with the VEETC, we could kill two birds because that would no longer be a justification for the tariff.
Second, even if the offset argument is valid with the VEETC in place, the tariff still represents a substantial barrier to trade. For instance, imagine that the wholesale price of ethanol at a U.S. port is $2.00 per gallon. An ethanol exporter’s full costs to put ethanol into a U.S. port must then be below $2.00 per gallon if they are to make money. In fact, under the present system their costs would need to be under $1.85/gal because they would pay the $0.60/gal tariff, but a blender could get back $0.45/gal via the VEETC. In this case, with the exporter’s costs at $1.85/gal, the cost to the ethanol buyer is $2.00/gal.
But because of the VEETC/tariff combination, the domestic producer is in a far better position than those exporting ethanol to the U.S. For a domestic producer with an ethanol price of $2.00/gallon, the purchaser receives the $0.45/gal VEETC, with no offsetting tariff. Thus, the bottom-line costs to the ethanol buyer are $1.55 per gallon, providing a very large incentive for them to purchase the $2 domestic ethanol over imports priced at $1.70 (for example).
In other words, under the present system Brazil would have to put ethanol into a U.S. port at $1.40 per gallon (to offset the $0.60 tariff) to compete with U.S. ethanol priced at $2.00 per gallon. This essentially eliminates the competition for domestic ethanol producers, which for consumers also reduces the opportunity to save money on their fuel costs.
The overriding question here is “What are the goals?” Of course different interest groups have different goals. Consumers will tend to want product at the cheapest price. Domestic ethanol producers will want to protect their markets and avoid competition that could cut into their margins (as their new lobbying effort amply demonstrates). Foreign producers will want more open access to markets. Some see the reduction of fossil fuel usage (this is my personal position) or carbon emissions as the most important goal. Others would argue that energy independence is the goal, and that trading oil imports for ethanol imports does little to achieve that.
My intention here is not to answer that question, but rather to cut through the lobbying and explain the implications of the policy. If our energy policy goals are promotion of renewable energy, then the tariff is a partial obstacle. If our energy policy goals are only to promote domestically produced ethanol, then the tariff serves that purpose at the potential expense of taxpayers, consumers, and ethanol exporters.
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Thanks Robert!
It seems like right now, the US is producing corn ethanol fairly cheaply, in quantities greater than the US needs if ethanol blending is limited to 10% of gasoline supply. This would seem to limit the US need for ethanol imports, with or without a tariff, at this time.
At the same time, Brazil hasn't recently been in a good position for exporting. Not long ago, prices of ethanol in Brazil were higher than those of gasoline.
It seems like some of these issues may be entering into decisions as to what to do regarding tariffs. Brazil might choose to take tariffs off, because temporarily, it needs imported ethanol. The US might choose and "belt and suspenders" approach, figuring keeping farmers happy is paramount, regardless of energy policy.
I would support the import tariff based
on the land use issue alone.
The danger is that Brazil and other countries will convert forests and worse, crop land to biofuel production as Indonesia/Malaysia did for oil palm to serve a world biofuels market.
So you have land use change that increases Global Warming PLUS food-vs-fuels competition for countries some of which have problems feeding their poor.
The tariff reduces US involvement in that world biofuels market, and of course the US is able to supply its own ethanol needs easily(we actually need to raise the US blend limit to 15% to grow ethanol use further).
US buying ethanol abroad will raise world prices enriching only a few rich people in those countries while increasing CO2 and raising food prices for the poor.
Actually, we don't. What is needed is for the ethanol industry to stop spending time and money lobbying and start developing their market, like any other producer.
There are over 8 million flex fuel vehicles on the road, but only a handful of E85 filling stations. There is nothing stopping the ethanol industry, or anyone else, with their backing, setting up E85 pumps, they don't have to be at gas stations.
If they are going to lobby for anything, it should be for all new vehicle to be flex fuel. GM has said it now costs just $75 to make it flex fuel, so it's time to mandate it.
This has the advantage that such vehicles are also suitable for running on methanol, which opens up an even better gasoline alternative.
There is nothing stopping the ethanol industry, or anyone else, with their backing, setting up E85 pumps, they don't have to be at gas stations.
I agree with that 100%. I have made the point many times that instead of trying to push the nationwide blend higher, the industry should focus on E85 penetration in the Midwest, close to the source. Demand in just the Midwest could consume more than all of the current ethanol production today. And using it close to the source is much better than shipping it across the country.
The reason they would rather push the blends higher is that it masks the costs. E85 probably can't be consistently competitive, although at the moment it is. But if ethanol has a future as a competitive fuel in the U.S., the Midwest is where the focus should be.
If I understan d the fuel economy issue correctly, a car burning e10 should suffer a moderate loss of economy per gallon in the nieghborhood of 4 or 5%;my personal experience is that this is correct, if the car is an older one.
I have seen some claims that new cars will get equal or better mileage even though there is less available energy, running e10 or e15, because the ethanol raises the octane and the engine computer can advance the spark considerably beyond what is possible with ordinary regular grade gasoline.
I would like to hear what some people with more experience in this area have to say, and what thier experience has been with e85.
In respect to the larger issue of ethanol in general:
We need to concentrate our efforts on conservation and more efficient cars in the short term,, and moving away from the car culture in the longer term.
I am utterly convinced that if Joe Sixpack is ever sold on the idea he can drive on ethanol,we are totally screwed as far as conserving what remains of our soil and water is concerned.
A modest little biofuels industry that can serve as a cushion in the event of WWIII or some other disaster and help provide the essential services such as police, medical , water , sewer , food production, etc is one thing.
A car culture dependent on biofuels is something very different, and as dangerous to the environment as any worst case oil spill, or even more so, since the damages will be spread out and gradual.This means that there will be no concentrated spotlight of public attention available to help regulate the bau car crowd-the manufacturers, the unions, the dealers, the developers of far flung subdivisions, ad infinitum..
My Aveo gets the same mileage on 100% gas or the 10% ethanol. It doesn't care, at least not over my drive cycle. Although a GM, it is not a flex fuel engine.
Can flex fuel really run methanol as well? Since methanol is the only way a hydrogen economy might actually work, that would be a good reason to keep building flex fuel cars.
Apparently so but you'd have to check with the maker.
http://www.flexiblefuelvehicleclub.org/aboutus.asp
http://www.scientificamerican.com/article.cfm?id=detroit-automakers-etha...
The big problem is getting industry to sign on.
Yes however there is no large well funded lobby for methanol like there is for ethanol. Ever heard of ADM, or the Iowa Farm Producers.
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That makes little sense. You mean you don't want to cause deflorestation and desertification at Brazil, but it will support deflorestation and desertification at the USA (well, thanks for caring this much about my country). Also, "raising prices for the poor" could be easily replaced by "raising salaries of the poor", and buying ethanol from a place that has a highter EROEI won't increase CO2, it will decrease.
Now, I get a hard time trying to understant international commerce. Every country wants to give their goods to the other ones (export), but don't want to actualy receive the payment from those (import). Everybody seems to be happy to keep the money, for the eternity. Last time I checked, paper was not that valuable, and reserves didn't make a country rich.
The US doesn't need to increase its acreage of corn to increase its ethanol production to 15%, especially with cellulosic ethanol from corn cobs starting up.
Brazil and tropical countries are a different game.
However if the US started massively buying Brazilian ethanol the price would rise very fast. Farmers would switch from growing food to growing sugar cane in sugar cane growing areas and others would cut down rainforests to plant more food or start ranches.
The rainforests are important for the whole world.
Needless to say other countries would also compete with Brazil like Angola for valuable ethanol production and more cropland would go to biofuels.
Do you think Hugo Chavez or the Saudis are grateful because the USA buys about their oil?
If the USA bought half of Brazil's ethanol no doubt we would be even more unpopular than we are now.
Well, ok. Again, that was a bit sarcastic, but was intended as is, tanks for caring that much about Brazil. As I understand, the Amazon florest has much a bigger local value than global one, but our government doesn't seem to care about it. But if the US does increase the production of ethanol, it must decrease the production of something else or use more land, just like Brazil. You also have severe local problems that may come due to desertification.
Now, about Hugo Chavez, I'm quite sure he likes to sell oil to the US. He has the power to stop that commerce any time he wants, and didn't do that yet. I don't really know about the Saudis. Anyway, I understand why a country would like to export things, what I don't understand is why no country seems willing to import stuff.
Indeed, good question. How about a goal of supporting the development of systems that have a future, systems that are sustainable?
For biofuels that would mean, for me, a significantly positive EROEI produced by a permaculture agriculture. By permaculture I mean a system that can be expected to be continued "indefinitely" without significantly damaging its surroundings or failing due to depletion of required inputs.
"because it merely pays oil companies to obey the law."
Stating the law in the first paragraph of the essay would make this statement more unnderstandable for the uninformed reader.
That's simple. I'd have thought it was too obvious to state. eg/ "Every gallon of motor fuel sold in US (and Canada) must be comprised of at least 10% ethanol." With that as the law, what exactly is the excuse for subsidizing ethanol production? It can only be to increase overall fuel usage by keeping end-use prices lower.
It also contributes something towards the balance of payments and helps a little in respect to keeping oil prices down.
Biofuels in general when used as oil substitutes may also be suppressing oil prices by anywhere from a fraction of one percent to as much as five percent or more;I don't have any real idea personally, as I am not an economist and have not seen any figures put out by people I consider trustworthy.
Hopefully somebody will wiegh in on this point who has better grasp of the facts.
Please note that suppressing the price of oil is not necessarily correlated with a good energy return on investment;a lot of coal, ng, and diesel, not to mention some small amounts hydro and nuke juice go into producing a gallon of ethanol, directly or indirectly.
But as X is prone to point out occasionally, you can conveniently burn ethanol in your car;he is correct in this one respect at least.
I realize that myself, it is a simple suggestion for Robert's essay. The prior administration also mandated yearly increasing production targets. Robert made these points in his earlier essays on ethanol, and as an argument against the tariffs for general readers, it would help.
I suggest there could be both local goals and global goals in biofuels. The local goal is greater self sufficiency in liquid fuels, not indirect farm subsidies. To do that an import tariff may need to be phased out after a few years once the industry 'stands on its own feet'.
A global goal is overall less CO2. To do that needs international carbon taxes or cap and trade. Ethanol output should escape carbon tax but fossil inputs like petro-diesel and NG urea will be taxed. A country that runs sugarcane harvesters on ethanol not petro-diesel should do better than other countries.
Either way fermentation ethanol doesn't cut it on a net energy basis. If the switch was made to methanol using thermochemical methods any kind of biomass could be used such as garbage or roadside weeds. However I think methanol will have to wait until automotive ceramic fuel cells are ready, some way off.
Boof,
Ethanol distillation *can* be energy efficient, IF a waste heat source is used for the distillation process. Any steam power plant that has large condensers/cooling towers comes to mind, and there lots of those. Unfortunately, this is not done very often!
You are spot on in stating that methanol can be made from any biomass, though the current feedstock is NG.
BUt for running car engines on it, the development work was done decades ago. . Ford did extensive tests on methanol vehicles in the 80's and 90'sIndy cars ran on methanol for decades, until being forced to switch to ethanol a few years ago. Dragsters using methanol outperform the same vehicles on gasoline.
Methanol has a very high octane rating, and can be used with diesel type compression of over 20:1. An engine set up for methanol can actually get better thermal efficiency than a diesel, and over a wider operating range.
Some intersting reading here, it is amazing how much has been forgotten;
http://www.methanol.org/pdfFrame.cfm?pdf=MethanolStoryRobertaNichols.pdf
http://www.methanol.org/pdfFrame.cfm?pdf=2002-01-2743.pdf
http://www.methanol.org/pdfFrame.cfm?pdf=ISAF-XV-EPA.pdf
The 2002 paper has excellent thermal efficiency maps from a VW Jetta diesel that was converted to M100 operation. It got better efficiency over a much larger rev and power range on methanol than diesel - specifically, very good low rpm torque - a very desirable characteristic.
The 2005 paper has some different efficiency curves that show how the efficiency drops off as you go fro m100 down to M50.
The problem with blends, and flex fuel vehicles, is that they have to maintain an ability to run on ordinary gasoline. it's like maintaining backwards compatibility in computers and software - eventually, it limits improvement. Make the engine a dedicated alcohol engine (for M or E) and you get great performance and efficiency gains.
Also, when you are running straight alcohol (M or E) you do not need to distill to 0% water, you can leave the last 5-10% in there, which is the most expensive water to remove. And, there is no decrease in performance, and an improvement under high load conditions. and it actually improves engine performance under high load conditions. And, the exhaust is much cleaner too, no need for expensive catalytic converters!
Alcohol fuels are much safer to handle, do not poison groundwater, and can be made from many feedstocks, gas, liquid and solid. China has several coal to methanol plants, and more under construction, and is blending methanol into gasoline.
The original Model T was designed for ethanol (it actually meets todays flex fuel requirements!), and the only reason it went to gasoline is that it was cheaper, not because it is a better fuel.
If all gasoline engines were replaced with purpose built methanol engines, we would see a decrease of at least 25% in energy per mile, and possibly much more.
Without checking I seem to recall that diesel has an energy density (higher heating value) of over 40 megajoules per litre and methanol little more than half that. I know dirt track racers like to use methanol in big block supercharged V8s because it burns smoother and doesn't explode on impact. However it has an invisible flame and is toxic both inhaled and on skin contact. All the drivers seem to have had a methanol inhalation drama at some point. Filling pumps need to be well ventilated or have slightly negative external pressure. That's why I don't think it is an automotive fuel of the future unless the higher thermal efficiency of fuel cells compared to ICE can overcome the lower energy density.
I agree that a chemical carrier would solve
the problems of elemental hydrogen but I don't think methanol is it. Alternatives include dimethyl ether and methane at different levels of compression. I like methane as it would blend with other fuel gases containing methane like natural gas, coal seam gas and biogas. A couple of times I've had the impression the Brazilians are thinking that way ie forget all alcohols and go for gaseous fuel.
Boof, methanol is actually much safer to handle than gasoline. When there is a fire, you can use water to put it out. Any filling station just needs a water based sprinkler station. The reason Indy cars went to it was for safety, after a crash and gasoline fire lead to multiple deaths as no one could see what was happening from the thick smoke. The last season they used it, there was a pit lane fire and they put it out with - a hose. Last season, running on ethanol, they had a pit lane fire, and you can use water, but not as easily, and several guys were burnt badly.
Yes, it is toxic, but so is gasoline. The volatiles, like benzene, toluene, xylene, are know carcinogens and just as bad for you if ingested, inhaled or absorbed. But the low volatility of methanol makes this less likely. The racer guys would have those same incidents regardless of what type of fuel they use, and are not, in that regard, a good analogy to normal motorists, who rarely come near their fuel or work on their engines.
Methanol was actually sold in California in the 90's, from gasoline style pumps, with no problems.
Yes, the fuel value is half, so you need twice as many litres, but that's no big deal.
DME and the like do make for good fuels too, and you need the same equipment as for LPG. CNG is a different level, however, as much higher pressure equipment is needed, but NG is available almost everywhere, burns clean, etc.
My ideal "flex fuel"vehicle would be a high compression engine that can run on CNG/LNG or ethanol/methanol. The all fuel sources come into play, and must compete with each other, and the motorist is not forced to try to pick a winner. They can refuel on CNG from home, with a CNG tank good for say, 150km, and then a liquid fuel tank good for 400km or so. The liquid tank can be shaped around the gas cylinder to make optimum use of space.
The more multi-fuel the engines are, the better - get gasoline out of the picture, and you can have one engine that can use any of these fuels, in any combination! That is the real change that needs to be made.