Understanding the Ethanol Tariff Issue
Submitted by R-Squared Energy Blog
You may have seen the announcement earlier in the week that Brazil has eliminated tariffs on imported ethanol:
Brazil Announces Temporary Elimination of Ethanol Tariff
WASHINGTON – On Monday, the Brazilian Chamber of Foreign Trade said it would remove the country’s 20 percent ethanol tariff until Dec. 31, 2011, Congress Daily reports. With the temporary elimination of the tariff, Brazil was hoping to pressure the United States into lowering or removing its own tariff and taxes on imported ethanol. Currently, imported ethanol is subjected to a 2.5 percent ad valorem tax and an additional 54 cents a gallon surcharge, which terminates Dec. 31, 2010.
The Brazilian Sugarcane Industry Association is urging both countries to eliminate the ethanol tariffs. “Consumers win when industries compete,” said Joel Velasco, chief North American representative for the association. “Brazilian ethanol producers are willing to compete for consumers. What about American producers?”
I have been engaged for the past few days in a dialogue with the Brazilian Sugarcane Industry Association (UNICA), and I want to share some of that in order to shed some transparency on this tariff issue, as there are some complexities involved.
In my mind, there are three key issues that one should understand regarding the tariffs. The first is that U.S. taxpayers directly support ethanol usage through the VEETC. But that tax credit does not require that the ethanol be domestically produced. Any ethanol imported from Brazil can qualify the gasoline blender with the same VEETC as ethanol purchased from a producer in Iowa.
Therefore, to the extent that the tariff is there to offset the VEETC, then I agree with keeping the tariff in place. A tariff of equal value to the VEETC merely means that any taxpayer money that is directed at Brazilian ethanol is refunded via the tariff. (It isn’t clear to me, though, since domestically produced ethanol is assigned a unique serial number called the Renewable Identification Number or RIN, why it isn’t straightforward to make sure the VEETC is only directed at domestic ethanol).
However, the amount of the tariff is higher than the amount of the VEETC. At …
