Tax Gasoline Imports, Not Ethanol

Next week, according to a story in the New York Times, the US is supposed to finalize an agreement with Brazil “to promote the production and use of ethanol throughout Latin America and the Caribbean.” We pay upwards of $.50/gallon subsidy for ethanol produced in the US both to reduce the net emissions of greenhouse gasses and to reduce our dependence on imported oil from dangerous places (and to win votes in the Iowa primaries). So we must think ethanol is a good thing, right?

Well, sort of depends where it gets made.  In a letter to President Bush, Republican Senator Grassley (from Iowa, natch) wrote that he doesn’t understand “why the United States would consider spending U.S. taxpayer dollars to encourage new ethanol production in other countries.”  He wants to make sure that we don’t lower the $.54/gallon tariff we now impose on imported ethanol like that made in Brazil.

This is more than sorta piggy. Grassley wants the subsidy for the domestic ethanol AND the tariff against imported ethanol. Fuhgetabout about reducing dependence on Mideast oil and carbon dioxide emissions; this is all buying votes in farm country – at least if you listen to Grassley. Taxing imported ethanol is also really stupid economics - even if your goal is only to help American farmers.

Ethanol competes with gasoline as a fuel. US gasoline consumption is currently 3.3 billion barrels/year (source).  In 2005 we imported 220 million barrels (source) of refined gasoline or about 7% of total usage (of course, we import a much bigger percentage of crude oil but let’s forget that for now). US ethanol production in 2005 was 93 million barrels and Brazilian production was slightly higher at 100 million (source).  Right now the US and Brazil together account for more than 70% of worldwide ethanol production.

There’s a point to all these numbers:  the quickest way to give ethanol production a further competitive advantage, if that’s what we want to do, is to impose a tax on the imported gasoline. If we taxed all that imported gasoline only $.25/gallon over whatever it now pays, we could eliminate the $.58/gallon (there are 42 gallons in a barrel) tariff on imported ethanol completely and US farmers and the treasury would still come out ahead. We’d be raising the price on 220 million barrels of competitive gasoline while lowering the price on whatever small amount of ethanol Brazil (and new producers eventually) can export to us. Even if Brazil suddenly sold us its whole annual yield, that’s only 100 million barrels (and obviously that’s not gonna happen).

The success of now-unsubsidized ethanol from sugar production in Brazil was due to initial heavy subsidy and draconian rules to force its use domestically. So, if you think that’s a good thing, it’s not unreasonable for government to keep its fingers on the scales here. But the competition is imported gasoline – not ethanol.  In fact, the sooner the supply of ethanol in the US increases, the sooner there’ll be more pure ethanol fueling stations and more vehicles that can burn pure ethanol.

Internationally, we send the right economic signals by raising the tariff on imported gasoline and eliminating it for ethanol.  Instead of sending incremental dollars to Venezuela for them to build more refineries, we send those dollars to other Latin American countries (eventually including Cuba) to make their sugar more profitable and to encourage them to build distilleries. We vastly diversify our energy dependence all while being green.

BTW, according to the February 9 edition of Science (not available online unless you’re a member of AAS), 3% of the world’s farmland could produce enough ethanol from sugar to reduce the current demand for gasoline by 10%. We don’t have nearly that capacity to expand the land devoted to corn in the US.  Someday (same source) we’ll coax much more ethanol or biodiesel or other fuels from biomass including stuff that currently goes to waste. But the obstacles are substantial and’ll take time to solve. Meanwhile, let’s encourage anyone anywhere near our backyard or even further away to make all the sugar based ethanol they can and sell it to us.

We’ll help the farmers and the politicians campaigning in Iowa much more by taxing imported gasoline than ethanol – and we’ll also help the voters in New Hampshire and other states – and ourselves. And it’s the green thing to do.  Somebody tell Grassley.

Comments

[James]

A great idea!

This would achieve a foreign policy objective while improving the "true efficiency" of our own domestic marketplace. We currently incent our farmers to shift production to corn that is used to produce ethanol - a product that can be (and perhaps should be) produced less expensively in Brazil.

By removing the U.S. incentive, and the associated tariff on imports, we would support the agriculture industry in Latin America and improve our relations with this region at a time when Hugo Chavez has gained popularity while the Bush Administration ignores the region.

BTW, the current subsidy will also result in higher prices for Americans who purchase food products that depend upon other agricultural production (e.g., wheat and corn). The prices of these commodities have already been rising as production shifts to earn the ethanol subsidies - lowering the available supply of food available for feeding our population.

[Bill]

In your scenario, the more expensive now ethanol gets some competitive help by increasing the price of substitutes. The added cost of fuel should also encourage conservation and long term behavior change. Reducing demand is another way to increase ethanol's share of total consumption.

[Daniel]

Right on. Instapundit posted a link to a youtube clip which exactly illustrates your point: http://www.setamericafree.org/wordpress/?p=301