Clarifying Misconceptions on Taxpayer-Subsidized Ethanol Exports

Last November, the Financial Times published an article charging that ethanol from the U.S. is collecting U.S. tax credits before being shipped to Europe, where it also qualifies for favorable tax treatment. I wrote an article about this called Taxpayer Subsidized Ethanol Exports May Bite Industry in the Future. The gist of my article was that if this charge is true, it completely undermines the supposed reasons U.S. taxpayers are subsidizing ethanol in the first place — to reduce dependence on foreign oil. In fact, as I showed in a later article, any ethanol that is exported actually increases our dependence on foreign oil because it takes some oil to make the ethanol and then ship it to the export market, but it displaces no fuel domestically.

I also pointed to a similar situation that had previously occurred in the biodiesel industry. Biodiesel was being subsidized by U.S. taxpayers, blended with a bit of petroleum diesel, and then shipped to Europe where it also qualified for subsidies. The EU ultimately put a stop to that practice by imposing duties on biodiesel originating from the U.S. in an effort to level the playing field for European producers who only qualified for the European subsidies. The result was devastating for a U.S. biodiesel industry whose production had grown on the basis of a lucrative export market, and I warned that U.S. ethanol producers would be wise to heed that lesson.

I got quite a few responses to the essay highlighting the issue of subsidized ethanol exports. I also read a number of quotes from the ethanol lobby that either 1). Flatly denied that any ethanol was collecting subsidies and leaving the country; 2). Stated that the practice was illegal; or 3). Claimed to know nothing of this.

In fact, someone working for one of the state Renewable Fuels Associations wrote to inform me that I need to get my facts straight. He challenged two of my arguments. I had written that there would be no ethanol available for export if E85 was more price-competitive with gasoline since it would all be consumed in the U.S.

In response he claimed that the issue was access and not price, claiming “Ethanol costs less than oil, even without the tax credit.” As I pointed out in my response back to him, “Ethanol for April delivery on the CBOT is $2.45 per gallon, meaning it currently costs $32 per million BTU. Oil at $100 per barrel is $17 per million BTU. (For reference, gasoline for April delivery is $2.91, or $24.43 per million BTU). Price is in fact the reason E85 sales have been tepid in the Midwest; the price differential between E85 and gasoline isn’t consistently wide enough to compensate for the loss of fuel economy.

But he also claimed that if the traders quoted in the FT article were telling the truth, then those exporters were breaking the law. He accused me of irresponsible reporting and using anecdotal evidence for quoting the FT article, suggesting that the sources were questionable. I pressed him for the specific law that is being broken in this case, and he essentially told me to go read the Internal Revenue Service (IRS) publications and to please refrain from speculating that any taxpayer-subsidized ethanol is being exported.

The Legality of Collecting Ethanol Credits on Blended Exports

In fact, there is no law preventing exporters from collecting the Volumetric Ethanol Excise Tax Credit (VEETC) prior to shipping ethanol out of the country. The code detailing the ethanol tax credits can be found in Section 6426 of the internal revenue code at:

Credit for alcohol fuel, biodiesel, and alternative fuel mixtures

Section 6426 (b) defines the alcohol fuel mixture credit and section (i) limits the credits to fuels with connection to the United States. Any ethanol produced and blended in the United States is obviously connected to the United States, and thus can collect the VEETC. There is no stipulation that after collecting the VEETC, the ethanol blend must remain in the U.S. So anyone asserting that the practice is illegal is either being disingenuous,  or are ignorant of the law. If an ethanol proponent wants to still assert that the practice is illegal, they need to point to the specific code that prevents someone from buying ethanol, blending it with some gasoline, collecting the tax credit, and then exporting the mixture to Europe.

I contacted Christoph Berg, who was quoted in the Financial Times article, about the issue. He responded:

The VEETC only applies when ethanol is blended with gasoline, so it would apply to exports of gasoline/ethanol fuel blends. Furthermore, the VEETC only applies to exports of gasoline/ethanol fuel blends containing domestically-produced ethanol. This restriction is in Title II, section 203 of PL 110-43 and resulted from the backlash about biodiesel “splash and dash” exports to the EU.

Therefore it is not illegal to export ethanol-gasoline blends.

He added that they do have records of ethanol that is being exported and collecting the subsidies on both ends, but said there are discrepancies between official export statistics and shipping reports by brokers. Data from the EIA also shows that despite the high level of U.S. dependence on petroleum imports, finished motor gasoline is being exported out of the U.S. Ethanol blends are considered finished motor gasoline.

The Outcome – It’s Just a Matter of Time

And just as I warned, producers in Europe are now considering legal action to stop the practice:

EU bioethanol group weighs U.S. subsidy lawsuit

Producers such as Germany’s CropEnergies and Spain’s Abengoa are gathering data on tax credits granted by the U.S. government to U.S. firms that blend ethanol with gasoline. They say the tax break squeezes the margins of competing European producers when the resulting blend is exported to the EU.

“By the end of the month we should know where we stand and whether we have a case that’s strong enough to take to the Commission,” Rob Vierhout, secretary-general of ePURE, an industry group representing firms that make up 80 percent of European bioethanol production, told Reuters.

“European producers are struggling with these imports that put pressure on prices.”

The article also quoted RFA spokesman Matt Harwig:

“While the complaints of the European ethanol industry are understandable, their angst is misguided at U.S. ethanol tax policy,” said Matt Hartwig, spokesman for the U.S.-based Renewable Fuels Association.

“It remains unclear if any additional volumes of ethanol are flowing into Europe under this particular tariff schedule. EU nations have yet to provide any data and we have not seen any to date that suggests this is happening at above normal levels.”

Those are interesting comments. Phrases like “it remains unclear”, “any additional volumes”, and “above normal levels” are probably about as close as the RFA will ever come to admitting that they are aware that it is happening.


Here is what I think. Ethanol is in fact being blended with gasoline in the U.S., benefiting from tax policy that has been defended on the basis of helping to reduce U.S. dependence on foreign oil, and then being shipped to foreign countries in increasing volumes. I think the ethanol lobbies know that this is happening, which is why you see the sort of carefully worded language Hartwig used above.

This issue highlights one reason I could never be an ethanol lobbyist. I could only say what Hartwig said if I was truly ignorant of the situation, and the only way I could be truly ignorant of the situation was if I avoided looking into it. In fact, I would look into it, so my statement would read more like “We are aware of a growing volume of ethanol that is taking advantage of both U.S. and European ethanol policies. We feel that this is unfair to U.S. taxpayers and against the intent of U.S. ethanol policies, and we urge legislation that would put an end to this practice so that our ethanol might fulfill the purpose it was designed to fulfill.” And that would be the end of my career as an ethanol lobbyist.

To be completely fair to the U.S. ethanol industry, even though this practice benefits them at the expense of U.S. taxpayers, there may be nothing they can do about it since they do not collect the tax credit. If someone wants to buy ethanol from them, they sell it to them. If the buyer then turns around and games U.S. tax policy by collecting the VEETC and exporting the ethanol after mixing it with gasoline, the ethanol industry is probably not in a position to stop that unless they simply refused to sell to companies that are suspected of these practices.

I also have heard some ethanol supporters agree — even within the ethanol lobby — that if subsidized ethanol is being exported that this needs to stop. I would hope to see the ethanol industry take the lead in investigating the practice and in urging legislation to stop it — instead of claiming that “it remains unclear.” In the short term, it will cost the ethanol industry some sales. In the longer term, it will prevent a public backlash and avoid having this matter decided by the EU courts.


Two things are probably important to note. First, it is true that unblended ethanol that is exported can’t qualify for the VEETC. So the export numbers on pure ethanol do not represent ethanol that has benefited from U.S. tax credits. But the export numbers on pure ethanol do not reflect ethanol/gasoline mixtures that have been exported — and this does qualify under current law for the VEETC.

Second, if the ethanol industry wishes to produce more ethanol than the market in the U.S. can bear and then export it, then it is their right to do so — provided that ethanol is not being subsidized by U.S. taxpayers. I have heard ethanol producers claim that the U.S. market is saturated, and this therefore justifies the export of ethanol. My view on that is that as long as the ethanol is being subsidized, they should have no reason to expect perpetually growing markets courtesy of U.S. taxpayers. If the U.S. market is saturated, then 1). Stop expanding ethanol production; 2). Grow the E85 market; or 3). Grow the export market, but do so without taxpayer assistance.