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Congress Keeps 54 Cent Tax on Brazilian Ethanol to Keep Oil Prices High

While listening to the PBS Newshour last night, I heard an amazing statistic from an energy analyst. He mentioned that the US government imposes a 54 cent tariff per gallon of imported ethanol. I couldn’t believe it so I double-checked it on google. Gosh, it’s true. Adam Dean comments:

At the heart of the issue is U.S. ethanol policy. Despite the Bush Administration’s explicit support for increased U.S. ethanol consumption, the United States maintains a tariff of 54 cents per gallon for imported ethanol. This tariff limits U.S. ethanol imports and creates a higher domestic price than would otherwise result from a more open market.

By limiting market access for Brazilian ethanol producers, who would benefit from increased exports, the U.S. tariff also limits the subsequent benefits that would accrue to Brazilian sugar producers. Furthermore, since ethanol production in the United States is based on corn, the tariff also leads to a higher price of corn in the United States. This artificially inflated price is then passed on to Mexican consumers in the form of higher food prices.

James Surowiecki adds:

A recent study by Amani Elobeid and Simla Tokgoz, scientists at Iowa State University, projected that if the tariffs were removed prices would fall by fourteen per cent and Americans would use almost three hundred million gallons more of ethanol.

But that isn’t likely to happen anytime soon: the Bush Administration proposed eliminating the ethanol tariff this past spring, but Congress quickly quashed the idea—Barack Obama was among several Midwestern senators who campaigned in support of the tariff—and the sugar quotas appear to be as sacrosanct as ever. Tariffs and quotas are extremely hard to get rid of, once established, because they create a vicious circle of back-scratching—government largesse means that sugar producers get wealthy, giving them lots of cash to toss at members of Congress, who then have an incentive to insure that the largesse continues to flow. More important, protectionist rules flourish because the benefits are concentrated among a small number of easy-to-identify winners, while the costs are spread out across the entire population. It may be annoying to pay a few more cents for sugar or ethanol, but most of us are unlikely to lobby Congress about it.

Sasha Lilley makes the connection with Archer-Daniels Midland, the sponsor of PBS Newshour:

ADM’s political heft was behind the 54 cent per gallon tariff that the US government has imposed on imports of sugar-cane based ethanol from Brazil, which is cheaper than ADM’s corn-based fuel. The tariff dates back to 1980 when the CEO of ADM convinced President Carter to adopt it, according to former ADM lobbyist Joseph Karth. Iowa’s Senator Grassley recently stated his intention to block any attempt to remove the tariff on lower-cost Brazilian fuel in the face of rising gas prices, stating that “lifting this tariff would be counter-productive to the widely supported goal of promoting home-grown renewable sources of energy.”

Over many decades, the company has been the recipient of government largesse in the form of federal and state corn and ethanol subsidies that have totaled billions of dollars, prompting the libertarian Cato Institute to declare ADM the biggest recipient of corporate welfare in the U.S. in 1995. ADM has been a prime beneficiary of the federal tax credit on ethanol, which the refiner can apply to the tax it pays on corporate income. First implemented in 1978, the tax credit currently stands at 51 cents per gallon of ethanol sold. The Government Accounting Office estimates the subsidies to the ethanol industry from 1980-2000 at $11 billion. As the biggest ethanol producer in the US, ADM has received the largest portion of the government’s generosity.

Recent legislation has further greased the tracks of the ethanol gravy train. The Energy Policy Act of 2005’s Renewable Fuel Standard stipulates that gasoline sold in the US must include a certain percentage of ethanol or biodiesel, starting at 4 billion gallons this year and rising to 7.5 billion gallons by 2012. ADM got another boost when the federal government mandated that oil companies replace MTBE, a cancer-causing gasoline additive, with ethanol. 45 states have adopted policies to encourage the production and use of the fuel. ADM has responded with plans to increase its output of ethanol by 42 percent over the next three years.

This piece is a damning indictment of Archer Daniels Midland:

Subsidies and tax incentives might make public policy sense – even when they flow into the coffers of a Fortune 500 company with mega-profits – but only if corn ethanol delivers on the promise that its boosters claim: to significantly cut greenhouse emissions, protect the environment, and slow global warming.
Debate has raged for years over whether ethanol made from corn generates more energy than the amount of fossil fuel that is used to produce it. UC Berkeley’s Alexander Farrell recently co-authored a comprehensive study, published in Science, on the energy and greenhouse gas output of various sources of ethanol. His group found that corn ethanol reduces greenhouse gases by only 13 percent, which compares unfavorably with ethanol made from vegetable cellulose such as switchgrass. “Our best guess,” says Farrell, “is that using corn ethanol today results in a modest decline of greenhouse gas emissions.”

Yet the enormous amounts of corn that ADM and other ethanol processors buy from Midwestern farmers wreak damage on the environment in a multiplicity of ways. Modern corn hybrids require more nitrogen fertilizer, herbicides, and insecticides than any other crop, while causing the most extensive erosion of top soil. Pesticide and fertilizer runoff from the vast expanses of corn in the U.S. prairies bleed into groundwater and rivers as far as the Gulf of Mexico. The nitrogen runoff flowing into the Mississippi River has fostered a vast bloom of dead algae in the Gulf that starves fish and other aquatic life of oxygen.

To understand the hidden costs of corn-based ethanol requires factoring in “the huge, monstrous costs of cleaning up polluted water in the Mississippi River drainage basin and also trying to remedy the negative effects of poisoning the Gulf of Mexico,” says Tad Patzek of the University of California’s Civil and Environmental Engineering department.

“These are not abstract environmental effects,” Patzek asserts, “these are effects that impact the drinking water all over the Corn Belt, that impact also the poison that people ingest when they eat their food, from the various pesticides and herbicides.” Corn farming substantially tops all crops in total application of pesticides, according to the US Department of Agriculture, and is the crop most likely to leach pesticides into drinking water.

While banned by the European Union, atrazine is the most heavily used herbicide in the United States – primarily applied to cornfields – and the EPA rates it as the second most common pesticide in drinking wells. The EPA has set maximum safe levels of atrazine in drinking water at 3 parts per billion, but scientists with the U.S. Geological Survey have found up to 224 parts per billion in Midwestern streams and 2,300 parts per billion in Corn Belt irrigation reservoirs.

Then there is the question of how practical it is to replace petroleum with corn-based ethanol. “There are conflicting figures on how much land would be needed to meet all of our petroleum demand from ethanol,” says Energy Justice Network’s Ewall, “and those range from some portion of what we currently have as available crop land to as much as five times as the amount of crop land in the US.” The Department of Agriculture estimates that the Corn Belt has lost 90 percent of its original wetlands, two thirds of which has taken place since draining for agriculture began mid-century.

Finally, the more observant may have observed my use of the word “tax” in the headline for this post instead of “tariff.” Americans don’t understand the harms caused by tariffs, but they understand the harms caused by taxes. A tariff bears many similarities with taxes, except in this case the beneficiary is not the government but the few thousand people employed with the affected industry.

If I had one question to ask each presidential candidate, it would be this: “do you think the 54 cents per gallon tax on cheaper imported ethanol should be eliminated? If not, can you explain to American taxpayers why the resulting higher prices for oil would be beneficial for them?

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