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Congressional Policy Effectively Blocks Sugarcane Ethanol

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Congress has erected an elaborate system of subsides and trade barriers that make sugarcane ethanol more expensive and practically unavailable in the U.S. As a result, Americans are not currently enjoying the environmental, economic and energy diversity benefits of this clean and affordable renewable fuel.

A Primer on U.S. Ethanol Policy

Corn ethanol has been manufactured in the U.S. for more than 30 years and has blossomed into a thriving industry. American farms and refineries generate nearly half of all ethanol produced around the globe. Despite being a mature industry, corn ethanol producers in the U.S. still are protected by an interlocking series of government mandates, subsidies and trade barriers.

  • Mandates – The U.S. Environmental Protection Agency (EPA) oversees a program that requires adding continually increasing volumes of renewable energy into America’s fuel supply – growing from 12 billion gallons today up to 36 billion by 2022. The Renewable Fuel Standard forces fuel providers to use ethanol and sets aside a quota of up to 15 billion gallons annually for corn ethanol.
  • Subsidies – Even though EPA’s renewable fuels standard mandates its use, ethanol receives a 45-cents-per-gallon tax credit that costs American taxpayers approximately $6 billion annually.
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  • Trade Barriers – To prevent foreign manufacturers from collecting the ethanol tax credit, Congress imposes a 54-cents-per-gallon tariff (or import tax) on ethanol coming into the U.S. from most foreign countries. The amount of the tax credit and tariff historically were aligned to achieve a direct offset. In 2008, while Congress lowered the subsidy for corn ethanol to 45 cents, it left the import tax at 54 cents. In addition, imported ethanol must pay a 2.5% ad valorem tax. Taken together, those import taxes add up to about $0.60 per gallon.

Both the ethanol tax credit and tariff are scheduled to expire at the end of 2011, and Congress currently is considering whether to extend or change its ethanol policies.

The Impact on American Drivers

The bottom line for American drivers is the tariff on imported ethanol amounts to a hidden tax that increases the cost of their fuel purchases, since most gasoline sold in the U.S. contains up to 10% ethanol. Without the import taxes, the average American could save about a nickel per gallon using gasoline blended with sugarcane ethanol. The following example – using the historic average cost of gasoline ($3.00 per gallon), corn ethanol ($2.15) and sugarcane ethanol ($1.84) – illustrates how.

IN AN OPEN MARKET, SUGARCANE ETHANOL WOULD CUT FUEL PRICES
Gasoline with Sugarcane Ethanol Gasoline with Corn Ethanol
Gasoline cost ($3.00 x 90%) of $2.70
+
Ethanol cost ($1.84 x 10%) of $0.18
=
$2.88 per Gallon
Gasoline cost ($3.00 x 90%) of $2.70
+
Ethanol cost ($2.15 x 10%) of $0.22
=
$2.92 per Gallon

However, the potential nickel per gallon savings evaporates when the tariffs are assessed. At approximately $0.60 per gallon on pure imported ethanol, the tariffs add four cents to the cost of a gallon of gasoline that has been blended with 10% sugarcane ethanol. As a result, the system of subsidies and trade barriers that Congress instituted to protect corn ethanol distorts the market and effectively blocks sugarcane ethanol from entering the U.S. in all but a few instances.

Competition Means Lower Prices

Consumers win when businesses compete in an open market, because competition produces higher quality products at lower costs. The same principle holds true for the renewable fuels market. Competition will create a race to the future and generate better options for consumers.

Sugarcane ethanol from Brazil is a sweeter alternative for diversifying America’s energy supplies and increasing healthy competition among biofuel manufacturers. Both Brazil and the U.S. have invested significantly in ethanol for more than three decades. During that time, Brazil has eliminated its dependence on imported gasoline and cut government subsidies for ethanol. In contrast, American taxpayers are still subsidizing ethanol production even though the U.S. is the world’s largest ethanol producer.

If you think it’s time to phase down the subsidies, promote competition and diversify America’s energy sources, add your voice to the growing chorus who want greater access to the benefits of sugarcane ethanol.

Gasoline cost ($3.00 x 90%) of $2.70
+
Ethanol cost ($1.84 x 10%) of $0.18
=
$2.88 per Gallon
Gasoline cost ($3.00 x 90%) of $2.70
+
Ethanol cost ($2.15 x 10%) of $0.22
=
$2.92 per Gallon

copyright 2010 Brazilian Sugarcane Industry Association