The federal government has done much to boost the U.S. ethanol industry and is largely responsible for the growing use of this costly fuel additive. Now, Congress should do something for America's drivers by ending tariffs that limit imports of cheaper ethanol that could help lower pump prices. Even by the standards of special-interest-driven Washington, the ethanol industry gets an unusually sweet deal. Each gallon of U.S. ethanol that is blended with gasoline receives a 51 cents tax credit, along with other tax code inducements. Even with these tax breaks, domestic ethanol, mostly made from Midwestern corn, remains more expensive than gasoline.
The ethanol industry also enjoys protectionist tariffs that keep it from having to compete with foreign providers. Foreign ethanol is subject to a 54 cents-per-gallon tariff and a 2.5% duty. This discourages imports, such as potentially cheaper sugar-cane-based ethanol from Brazil and other countries that could undercut domestic producers.
Tilting the playing field even further, the energy bill passed last year actually requires 4 billion gallons of this fuel additive to be blended into the U.S. gasoline supply this year, and that will increase to 7.5 billion gallons by 2012. The mandate has contributed to rising gasoline prices this year. Both the costs of ethanol itself (even with the tax credits) and the logistical difficulties of incorporating it into the fuel supply have proved greater than expected. And the mandate is sure to continue to pose challenges during the high-demand summer months ahead.
Therefore, Congress should help drivers by either temporarily or permanently repealing the tariff and allowing free trade in ethanol. Temporary repeal, as proposed in separate Senate and House bills, would help alleviate the current impact of the ethanol mandate on prices. Permanent repeal would diversify sources of supply and reduce the mandate's cost for years.
In true Washington style, there is a small and convoluted exception to the tariffs. Ethanol produced or processed in certain Caribbean and Central American nations enters the U.S. duty- and tariff-free. But the exempted amount cannot exceed 7% of total domestic use. In theory, Brazilian ethanol could qualify up to that limit, but only if it is first sent to a preferred nation for processing before coming to America. So far, the 7% import cap hasn't been reached. One reason: The extra cost of diverting Brazilian or other supplies to these favored nations discourages full use of the tariff exemption.
Instead of creating legal hoops for other countries to jump through, U.S. lawmakers should allow foreign ethanol into the country without penalties or special requirements. Over time, this would spur increased global production. Both exporting and importing nations would benefit through increased trade and lower prices. While permanent repeal is better, even a temporary suspension would bring some relief.
Needless to say, agribusiness giant Archer Daniels Midland and the rest of the ethanol lobby, which is strongly supported by Midwestern legislators, oppose these measures. So proposals to repeal the tariffs face an uphill battle. Still, the best solution for consumers would be to end ethanol's special treatment entirely.
Proponents of domestic ethanol have claimed that increased use could reduce pump prices, displace oil imports, and help clean the air. But there are plenty or reasons to doubt the merits of this alternative fuel. Beyond its cost (now more than $1 per gallon above gasoline), the substantial amounts of fossil energy used both to grow the corn and to distill the ethanol weaken the energy security and environmental rationales for the mandate. And when all the energy that goes into producing ethanol is taken into account, the amount of oil imports displaced by it turns out to be less than proponents claimed.
That's why lawmakers should abolish both the favorable tax treatment and the mandate. Fuel ethanol ought to succeed or fail on its merits. Until this happens, Congress should at least end the tariffs and let global competition drive down prices.
Indeed, if ethanol is truly to succeed as a motor fuel, it will have to be the cheapest ethanol globally available. And consumers would benefit most if the market, not special-interest politics, decided how much ethanol to use and where it should come from. If lawmakers really want drivers to use ethanol, they must allow free trade in this alternative fuel.
Ben Lieberman is a senior policy analyst at The Heritage Foundation (heritage.org), a Washington-based public policy research institute.
First appeared in BusinessWeek Online