Report: U.S. ethanol subsidies not needed

Apr 9, 2010

The U.S. ethanol industry is running out of reasons to defend its reliance on federal subsidies and import tariffs, an Iowa State University (ISU) economist said in a new report.

The report, “Mandates, Tax Credits, and Tariffs: Does the U.S. Biofuels Industry Need Them All?” by Bruce A. Babcock, professor of economics at ISU and director of the Center for Agricultural and Rural Development, makes the case that the ethanol industry would be successful with only production mandates set in the Renewable Fuel Standard (RFS), along with the market for renewable identification numbers, or RINs.

“It is puzzling why the biofuels industry continues to defend these subsidies when it has its mandates in place,” Babcock states in the report. “Tax credits cost taxpayers more than $5 billion per year, and import tariffs convey the message that the ethanol industry is so uncompetitive that it needs protection against foreign competition.

“It would seem that there would be major political benefits from simply giving up all subsidies and import tariffs and for the industry to rely solely on the mandates.”

The good news for farmers, he said, is that the RFS mandates are unlikely to go away anytime soon and will lead to increased demand for corn, soybeans and oilseed crops.

The ethanol industry ar gues that U.S. taxpayers shouldn’t be paying for incentives to foreign producers through the 45-cent blenders credit, and that’s why the 54-cent ethanol tariff is needed, as well.

“The market for RINs works because the demand for RINs increases when the quantity of biofuels purchased is insufficient to meet the mandate,” Babcock said in the report. “An increased demand for RINs increases the RIN price, which improves the relative attractiveness of buying biofuels instead of RINs.”

Gasoline producers and importers are assigned a number of RINs they are required to give to the U.S. Environmental Protection Agency (EPA) each year.

Because each gallon of biofuel has a RIN assigned to it, producers and importers can obtain RINs by buying biofuels and keeping the RIN.

Or they are able to buy RINs to meet their obligations.

“The market for RINs is an effective and efficient way to enforce the mandates,” Babcock said in the report. “Motor fuel producers who find that biofuel is too difficult to access or to blend buy RINs instead. Fuel producers who have ready access to biofuels, and find it profitable to blend biofuels, sell their excess RINs. By making RINs tradable, the mandates are met at the lowest possible cost.”

Though the U.S. ethanol industry has fought to keep the 54-cent tariff in place, Babcock said in the report that the new RFS essentially opens the door to Brazilian imports.

The RFS requires 15 billion gallons of corn-ethanol production by 2015 and an additional 21 billion gallons of cellulosic ethanol and other advanced biofuels production by 2022.

The new RFS classifies sugarcane ethanol as an advanced biofuel.

Part of the mandate requires the U.S. to use 200 million gallons of non-cellulosic advanced biofuels in 2010, 1 billion gallons in 2014, and 4 billion gallons in 2022.

The report said biodiesel would be the only cost-competitive biofuel alternative to Brazilian ethanol. However, Babcock said because soybean-based biodiesel is not cost-competitive, Brazilian ethanol would be the only alternative.

It likely would be 2013 before Brazilian ethanol is imported, the report said, when there will be new demand for advanced biofuels.

“Congress and the EPA have created a U.S. biofuel mandate specifically for Brazil,” Babcock said in the report. “This means that domestic gasoline producers will have to pay enough for Brazilian ethanol to induce Brazil to export enough to meet the mandate. Under this scenario, the only impact of the import tariff is to increase the price that domestic gasoline producers pay for Brazilian ethanol.

“As long as there is no alternative supply of domestically produced, non-cellulosic advanced biofuels, there will be no benefit to the U.S. biofuels industry from maintaining the import tariff.”

Todd Neeley, DTN