government has done much to boost the domestic ethanol industry and
is largely responsible for the use of this costly fuel additive.
Now Congress should do something for America's drivers by removing
the tariffs that limit imports of cheaper ethanol and drive up
prices at the pump. Several bills now before Congress would repeal
these tariffs, either temporarily or permanently.
Good for Special
Interests, Bad for Drivers
Even by the
standards of special interest-driven Washington, the ethanol
industry gets an unusually sweet deal. Domestic ethanol, produced
mostly from Midwestern corn, is the recipient of special tax
breaks, a mandate, and trade protection.
Each gallon of
ethanol that is blended with gasoline receives a 51-cent tax
credit, along with other tax code inducements. Even with these tax
breaks, corn ethanol remains more expensive than gasoline.
The energy bill
passed last year actually requires ethanol use. In 2006, 4
billion gallons of this fuel additive must be blended into the
gasoline supply, and that amount will increase to 7.5 billion
gallons by 2012. This ethanol mandate has contributed significantly
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 proven greater than
expected. The mandate will continue to pose challenges as the
high-demand summer months near.
As if preferential
tax treatment and a product mandate were not enough, the domestic
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 percent duty.
This discourages imports, such as potentially cheaper sugar
cane-based ethanol from Brazil and other countries, that could
undercut domestic producers.
There is an
exception to the tariffs. Under the Caribbean Basin Initiative
(CBI) and other laws, ethanol produced or processed in certain
Caribbean and Central American nations comes into the country duty-
and tariff-free. But the total exempted amount cannot exceed 7
percent of total domestic use. Brazilian ethanol could qualify up
to that limit, but only if it is first sent to a CBI nation for
processing before coming to America.
In past years, the
7-percent import cap has not been reached. For one thing, current
ethanol production in some nations just meets their domestic
consumption, leaving only small quantities for export. Also, the
costs of diverting Brazilian or other supplies to CBI nations has
discouraged full use of the tariff exemption, especially given the
relatively low ethanol prices that prevailed in the U.S. until this
year. If the tariff were dropped, foreign producers would now face
a strong incentive to export to the U.S. Allowing this ethanol into
the country without penalties or special requirements would, over
time, act as a catalyst for increased global production.
introduced bills would either temporarily or permanently repeal the
tariff and allow free trade in ethanol. Temporary repeal, as
proposed in S. 2763 and H.R. 5170, is designed to help alleviate
the current impact of the ethanol mandate on prices. Additional
foreign competition in the U.S. fuel ethanol market would diversify
sources of supply and reduce the cost of the mandate for many years
to come. Both the exporting and importing nations would benefit.
While permanent repeal is better, because it would signal that the
American market is open to the world's ethanol production over the
long term, even temporary repeal would bring these other
Needless to say,
agribusiness giant Archer Daniels Midland and the rest of the
ethanol lobby, which is strongly supported by Midwestern
legislators, oppose to these measures. Proposals to repeal the
tariff definitely face an uphill battle.
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 others seriously doubt the merits of this alternative to
gasoline. Beyond the fuel's high cost, the substantial amounts of
fossil energy used to produce both the corn and the ethanol itself
weaken the energy security rationale for the mandate because the
amount of oil imports displaced by ethanol use turns out to be less
than proponents claimed. In addition, studies have shown that that
ethanol's putative environmental benefits have been
For these reasons,
the preferential tax treatment and mandate should be abolished
along with the protectionist tariffs. Fuel ethanol ought to succeed
or fail on its own merits. Until this happens, Congress should at
least end the tariffs and let global competition to serve this
market and drive down prices.
If ethanol is to
succeed as a motor fuel, it will have to be the cheapest ethanol
globally available. Consumers would benefit if the market-not
special-interest politics-decided how much ethanol to use and where
it should come from. For these reasons, Congress should repeal the
laws that keep foreign ethanol out of the U.S. and allow free trade
in this alternative fuel.
Lieberman is Senior Policy Analyst in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage