December 04, 2007

Should the Import Tariff on Ethanol Be Dropped?

There have been many calls for the import tariff on ethanol to be dropped. Many people think that it is meant to protect domestic ethanol production from cheaper Brazilian ethanol.

The government subsidizes ethanol at a rate of 51 cents per gallon. The subsidy is paid to the company that blends the ethanol with gasoline and makes no distinction as to where the ethanol comes from.

The ethanol subsidy was meant to promote the domestic production of ethanol by giving blenders, normally the oil companies, incentive to use it. And as I mentioned the subsidy makes no distinction as to where the ethanol came from, so foreign ethanol gets subsidized at the same rate.

The ethanol tariff is 54 cents per gallon and is simply meant to offset the subsidy. There is a bit of difference between the two numbers because a few years back the subsidy was lowered from a rate of 54 cents per gallon to the current 51 cents per gallon.

So what would happen if the import tariff were dropped?

For an idea of what would happen if the tariff were dropped just look at biodiesel which has a subsidy but no matching import tariff. In the case of biodiesel the subsidy is $1.00 per gallon for every gallon of biodiesel that is blended with petroleum diesel. This subsidy is also paid to the blender and companies have been sending tankers here filled with foreign produced biodiesel, blending in 1% petroleum diesel, collecting the subsidy, then shipping the biodiesel off to other countries to be sold. It a tactic that is commonly known as "splash and dash".

Worse still for U.S. taxpayers, the law also inadvertently allows foreign companies to claim the tax credit after simply blending a drop of U.S. mineral diesel into their mixture. Such 'blended' foreign biodiesel is in most cases re-exported to the EU ("splash and dash"), further harming European producers. Congressional moves to repeal the export subsidy and "splash and dash" loopholes failed in 2007.

"What we are witnessing here is U.S. taxpayers effectively subsidizing European motorists to the tune of around $300 million last year. And that figure is set to be even higher this year - all while Americans themselves are suffering at the pump. We appreciate Congressional efforts to address the problem last year but regret that, in the end, the proposed remedies didn't stay in the Energy Bill eventually signed by President Bush. As I work with Members of Congress in the coming months, I will continue raising this issue and push for a resolution; hopefully in time to stave off an expected complaint from European industry."

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