Posts tagged with: ethanol tariff

Blog author: lglinzak
Thursday, July 7, 2011
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Political news changes quickly, and now reports are coming out of Washington DC that Senator Dianne Feinstein, who has been leading the way in killing the ethanol subsidy and tariff, has struck a deal with Senators Amy Klobuchar and John Thune, two stalwarts for protecting ethanol. While the rumored deal does not indicate the repeal of the blending mandate it is a step in the right direction.

However, while we wait on Congress and the President for action, the Brazilian ethanol industry is eying the U.S. ethanol market. Repealing the tariff will allow Brazil to expand its ethanol industry. Many questions need to be answered before ethanol is imported into the U.S. from Brazil.

In a previous post I posed concerns about whether ethanol can meet both U.S. and Brazilian demands. Furthermore, what are the environmental consequences of ethanol? Reports are showing deforestation in the rainforest. Finally, what will happen to food prices?

It is unfortunate that there are even more questions that need to be answered.

Like the corn based ethanol in the U.S., Brazil’s sugar based ethanol is a false market created by the government. Brazil doesn’t subsidize ethanol; instead it resorts to high taxes. Brazilian gasoline taxes are at 53 percent while the tax placed on ethanol is much lower making ethanol cheaper than gasoline. The question is how long can an industry last and actually be sustainable when it is propped up by the government and is a false market?

It is also important to note that the Brazilian ethanol industry needs a large sum of new investment, about $80 billion worth in the next ten years, to meet global demand. In an industry that is heavily dependent on the government one must wonder, who will pay for these new investments?

Another potential hazard of relying on ethanol is crop shortages. Such crop shortages may occur for a variety of reasons, one of which is out of our control: the weather. What happens when fuel relies on crops, and there is actually a shortage in the harvest? How much of the crop goes to fuel and how much goes to the food supply? Both are important. Food nourishes, however, fuel gets people to their jobs where they earn a salary which they use to purchase food. Brazil may be forced to answer these questions this year as sugarcane production is currently down 25 percent as compared to last year. The lack of production is due to bad weather and aging plants.

However, because of the lack of production sugar prices are on the rise as they saw a 14 percent surge in June. While some are sounding the alarm, other analysts are remaining calm, such as Eli Mamoun Amrouk of the United Nations’ Food and Agriculture Organization:

El Mamoun Amrouk, sugar analyst at the Rome-based FAO, said: “It’s difficult to predict exactly what’s going to happen to the sugar price because the market’s so volatile and so any new information can have a big effect on price. The speculation is still there, exacerbating the trend and changes in the dollar also play a part.

“But the signs are that production is growing significantly and, especially in India and Thailand, the prospects are very positive, so we should see the price start coming down in the summer,” he said.

Whether sugar prices do come down or not, we still face a critical question. If we continue to pursue an energy plan based on biofuels, what happens when we do face a shortage in crop production? The world will be faced with not just rising food prices but also with rising fuel prices. How do people in developed countries, who already have a difficult time affording food, feed themselves when the food supply is actually going into the fuel supply?

The future of corn ethanol is up in the air, and while the Senate gave signs of repealing both the subsidy and the tariff on imported ethanol, the bill the repeal was attached to failed and Congress is back to square one in the ethanol debate. The uncertain future of corn ethanol has brought forth discussion on the possibility of importing sugar cane based ethanol from Brazil.

Before the U.S. begins importing ethanol from Brazil, a broad cost benefit analysis needs to be taken by the government to decide if it is actually a smart decision to begin importing and using sugar cane based ethanol from Brazil.

A concern of many critics of alternative fuels is whether or not alternative fuels can meet demand. According to the Energy Tribune, corn ethanol cannot meet U.S. demand whereas even the country turned all of its corn into ethanol only 6 percent of its total annual oil needs would be met.

This leaves ethanol supporters looking for another energy source to help close the gap. They may be looking no further than the sugar cane based ethanol produced in Brazil. However, even importing Brazilian ethanol will leave the U.S. looking for another energy resource.

In 2010 the U.S. consumed 138.6 billion gallons of gasoline and Brazil currently produces about 7.4 billion gallons of sugar cane based biofuels. Importing sugar cane based ethanol from Brazil while still consuming corn ethanol does not even get the U.S. close to meeting its energy demands especially when 75 percent of Brazil’s ethanol output is sold within its borders, and it experienced a shortage earlier this year.

And the simplistic answer to this problem, planting more sugar cane, may not be the best solution. The Brazilian government has been surprised by the deforestation of the Amazon rainforest. According to Brazil’s space research institute, deforestation of the Amazon rainforest increased from 103 sq km in March and April 2010 to 593 sq km during the same period this year. This surprised the Brazilian government which reported that deforestation had fallen to its lowest rate in 22 years when actually there was a 27 percent jump in deforestation from August 2010 to April 2011. The biggest rise in deforestation was in Mato Grosso, a state in Brazil, which produces more than a quarter of Brazil’s soybean harvest. However, what does that have to do with sugar cane causing deforestation?

A 2010 article by Foreign Policy explains how sugar cane based ethanol fosters “agricultural displacement” resulting in the deforestation of the rainforest:

Public officials declare that ethanol will not lead to deforestation in the Amazon or exacerbate climate change. They say that the particular soils and rainy weather characteristic of the rainforest are not suitable for the growth of sugar cane. Agriculture minister Reinhold Stephanes has been quoted as saying that “Cane does not exist in Amazonia.” In a withering blow to Stephanes’s credibility, however, authorities recently raided a sugar cane plantation in the state of Pará where 1,000 workers were laboring under appalling debt slavery conditions. In all, environmentalists claim, hundreds of thousands of acres of sugar cane have been planted in the Amazon.

Even if there are only a few cane plantations operating in the Amazon, ethanol may exert an indirect impact on the rainforest through a phenomenon known as “agricultural displacement.” Though the state of São Paulo is located far from the Amazon rainforest, the sugar cane there can drive other crops toward the agricultural frontier. In the state of São Paulo, sugar cane has been planted on former pastureland and this has pushed cattle into Mato Grosso. Hundreds of thousands of cattle are moving into the Amazon every year as a result of displacement by ethanol in the state of São Paulo alone, say environmentalists. This migration is becoming all the more likely since one can purchase 800 hectares of land in the Amazon for the price of just one hectare in São Paulo. Additionally, some soy plantations in the center of the country have been turned over to ethanol production, prompting concern among environmentalists that this will lead soy producers to move into the Amazon. And local observers say that sugar cane plantations are already pushing soy farmers and ranchers into the rainforest.

The same article by Foreign Policy states that sugar cane crops have also led to the deforestation in the Atlantic rainforest.

There are still many unintended consequences and factors the United States needs to take into account before importing sugar cane based ethanol. CNNMoney published an article stating that, “Some experts say the Brazilian formula gets even less gas mileage than its corn ethanol counterpart, which itself gets lower mileage generally than gasoline.” Furthermore, biofuels will have an adverse effect on food prices. According to the Organization for Economic Cooperation and Development, which is the UN’s Food and Agriculture Organization, biofuels will absorb 13 percent of global coarse grain production, 15 percent of vegetable oil, and some 30 percent of sugar by 2020. Again, what is more important, food or fuel? How are the poor and vulnerable expected to purchase food when it is being shipped to prosperous countries for fuel?

Just like corn based ethanol, sugar cane based ethanol also has its consequences. Experts continue to debate whether sugar cane based ethanol is a viable option. However, before jumping on the bandwagon, policy makers need to take a pragmatic approach when discussing the energy future of the U.S.

Ethanol subsidies, once considered a sacred cow, are facing the possibility of being axed from the budget. The Senate cast a deciding vote, 73-27 in repealing the 45 cent per gallon subsidy to refiners for blending gasoline with ethanol, and the 54 cent per gallon tariff on imported ethanol.

Cutting the ethanol subsidy and repealing the tariff still face an uphill battle as it must pass the house and get the signature of President Obama, who has vowed not to fully repeal the subsidy. Supporters of ethanol are fighting harder to preserve the subsidy and tariff, and are now issuing claims that the ethanol subsidy keeps gas prices lower than what they would be if the subsidy wasn’t in place.

Iowa State University released a study arguing that ethanol has helped suppress gasoline prices. It is of no surprise that supporters of the ethanol subsidy and tariff have embraced the study by Iowa State University with open arms and are using it to add weight to their position.

Unfortunately for supporters of the ethanol subsidy, the Institute for Energy Research, released its own study debunking the arguments from Iowa State. While the Institute for Energy Research admits that removing the ethanol subsidy will result in a short-term spike in gasoline prices, they argue that in the long run consumers are better off without the ethanol subsidy–ideally the country would’ve been better off if the subsidy had never existed.

Those who claim that removing the ethanol subsidy and tariff will increase gasoline prices also fail to acknowledge principles of basic market economics. By removing the tariff, the United States is able to import cheaper ethanol from countries like Brazil, which produce the cheaper sugar-based ethanol, thus making ethanol more affordable for consumers. As a result, the market adds a product to compete with gasoline, and through competition, may drive the price of gasoline lower.

The concept of competition driving down prices is explained by Joel Velasco, former chief representative in North America for the Brazilian Sugarcane Industry Association. Velasco argues that competition between corn and sugarcane ethanol will benefit consumers. The principle of competition found in his argument can be applied to competition between gasoline and ethanol as well.

While it may seem like ethanol from Brazil is a perfect solution, there are unintended consequences that must be weighed. Ecology professor at the University of São Paulo in Brazil, Luiz Martinelli, warns of the many problems with Brazilian ethanol in an article published in the Cornell Daily Sun. Martinelli explains that ethanol production pollutes the environment and results cause serious problems:

Ethanol production fosters deforestation in Brazil. Sugarcane needs a well-defined drought season to concentrate sugars in the cane stalk, making the wetter Amazon region less than ideal for growth. Consequently, growers convert increasing areas of land in the transitional area between the cerrado grasslands and the Amazon forests to sugarcane. As a result, the increase may indirectly lead to deforestation as other crops, like soybean, are pushed into the Amazon.

“We don’t have much room for deforestation. If sugarcane causes 1,000 of squared kilometers of deforestation, we’ve set off any savings [of avoided carbon emissions] that we have saved,” emphasized Martinelli.

Such unintended consequences were also articulated by Ray Nothstine on the PowerBlog in 2007 as religious leaders began to express alarm about increasing ethanol production:

Religious leaders are speaking out. In March, Roman Catholic bishops in Brazil warned that a rapid increase in ethanol production based on sugar cane could lead to widespread deforestation, massive relocation of workers and their communities, and harsh working conditions for cane cutters. Analysts predict that Brazil, the world’s largest exporter of ethanol, may increase ethanol production as much as 40 percent in the next four years. “We are going to turn the country into a huge cane (plantation),” said Cardinal Geraldo Majella Agnelo. In Colombia, Christian aid organizations say armed groups are driving peasants off their lands to make way for plantations of palm oil, another biofuel. Acreage dedicated to production of the palm oil tree has more than doubled in the last four years.

Nothstine later explains in “‘Big Corn’ and Unintended Consequences” how corn ethanol will increase food prices, is more costly to produce and transport, and has pollution problems.

If ethanol made from sugarcane gains traction in the United States and other countries, the same questions that have been raised by corn ethanol must also be asked when it comes to sugar-based ethanol. Will we have a problem with unintended consequences? Will sugar ethanol contribute to rising food prices in a manner similar to that of corn ethanol? What effects will sugar ethanol have on the environment, and what are the impacts of deforestation?

With rising gas and food prices, ethanol subsidies are getting strict scrutiny. Many have called for the end of ethanol subsidies, and now the Senate is acting. Senators Tom Coburn and Dianne Feinstein introduced legislation that would end ethanol subsidies and repeal the tariff that is placed on foreign ethanol.

The problems with ethanol subsidies have been vast as I’ve pointed out in previous posts including a tax credit for oil companies that blends ethanol with gasoline—even though they are mandated to do it by law. That’s right. Oil companies are being paid to follow the law. Senators Feinstein and Coburn put together a long list of problems associated with ethanol subsidies:

“The ethanol subsidy and tariff is bad economic policy, bad energy policy and bad environmental policy. As our nation faces a crushing debt burden, rising gas prices and the prospect of serious inflation, continuing our parochial ethanol policy that increases the cost of energy and food is irresponsible. I’m pleased to introduce this common sense bill with Senator Feinstein and will push for its consideration at the earliest opportunity,” Dr. Coburn said, noting that the bill has been filed as an amendment (#309) to the small business bill pending in the Senate.

“Ethanol is the only industry that benefits from a triple crown of government intervention: its use is mandated by law, it is protected by tariffs, and companies are paid by the federal government to use it. Ethanol subsidies and tariffs sap our budget, they’re bad for the environment, and they increase our dependence on foreign oil. It’s time we end subsidies that we cannot afford and tariffs that increase gas prices,” Sen. Feinstein said.

And, as the Heritage Foundation states in a recent blog post, this legislation, if passed, will “…fully eliminate the import tariff on ethanol and repeal the Volumetric Ethanol Excise Tax Credit. This would grant U.S. blenders cheaper inputs, which in effect lowers productions costs and, subsequently, prices.”