Changes to the Ethanol Tax Structure

In today’s guest post, Emerson’s Douglas Morris of the alternative energy industry team shares his thoughts on the impact on recently expired US ethanol tariffs.

This just in, there is a budget battle going on in Washington, DC. Okay, so the budget disagreements on the Hill are not news, but something once thought nearly impossible, occurred at the end of 2011 that is worth mentioning. Two ethanol tariffs in place for decades intended to support the domestic corn ethanol industry were allowed to expire. One was the 45 cent per gallon tax credit for fuel blenders called the Volumetric Ethanol Excise Tax Credit (VEETC) which was originally put in place as an incentive to use ethanol. The second was the tariff of 54 cents per gallon on imported ethanol meant to keep cheaper production options near parity with corn ethanol which, at the time of the tax legislation, was more expensive to produce.

How might the loss of these tax policies affect the industry? No one knows for certain, but it’s unlikely that the loss of the VEETC will have much of an impact since there are federal mandates already in place that specify how much ethanol must be blended into the US fuel supply. This mandate, called the Renewable Fuel Standard (RFS), is the primary driver for ethanol use into the foreseeable future. If anything, the removal of the VEETC may cause the industry to pay a bit more attention to operating efficiencies, which can lead to lower production costs.

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The result of removing the import tariff is a little more difficult to predict. For the next year or two, the removal of this tax will not have much impact because there is a supply/demand mismatch in Brazil, the main source of ethanol outside of the United States. It’s estimated that the Brazilian ethanol supply pool is 25 percent below demand and it may take up to two years to regain equilibrium. Comparing sugar cane ethanol to corn ethanol, the corn pathway is actually less expensive to produce right now. In a Renewable Fuels Association blog post, it highlighted that Brazilian sugar cane-based ethanol was, “…$1.56/gallon more expensive than corn ethanol delivered from the Midwest through the first eight months of 2011 and $1.04/gallon more expensive in 2010.”

The good news will most likely be for consumers as I expect market forces will drive efficiencies for both corn and sugar and will reduce the production cost. Only time will tell the real story.

Photo: Some rights reserved by Aunt Owwee.

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