BIOMASS HUB

Robert Rapier has written that the combination of the RFS 2.0 and the VEETC ethanol tax credit (VEETC) is like paying someone to obey the speed limit.  He elaborated further in an article following up the Brazilian government’s recent decision to ‘temporarily’ eliminate its 20 percent tariff on imported ethanol.

As a quick summary:

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.

In a new post, Understanding the Ethanol Tariff Issue, Rapier outlines three key issues that one should understand regarding the tariffs.

1. U.S. taxpayers directly support ethanol usage through the VEETC, but that tax credit does not require that the ethanol be domestically produced.  VEETC is there to ensure that U.S. taxpayer dollars are refunded for Brazilian ethanol.  But there is one wrinkle in this equation: namely, the amount of the tariff is higher than the amount of the VEETC (according to Rapier, 33% beyond merely offsetting the VEETC).
2. Brazil bypasses the tariff anyway by routing their ethanol through the Caribbean basin, dehydrating it, and then sending it to the U.S.  Under trade rules (see Caribbean Basin Initiative) — as an example — countries like Jamaica can remove water content from Brazilian ethanol and export the ‘new’ product to the U.S. as a Jamaican product.  But because dehydrating ethanol takes additional energy, the U.S. is actually directly subsidizing the process instead of collecting $.54 cents on the gallon.
3. There is a possibility that Brazilian ethanol receives generous subsidies from the Brazilian government.  This argument is endorsed by Growth Energy, but the truth is more difficult to divulge.  According to an UNICA representative Rapier spoke with, generous Brazilian subsidies ended in the 1980s.

Robert Rapier’s full discussion on understanding ethanol tariffs.