Taxpayer Subsidized Ethanol Exports May Bite Industry in the Future

Ulterior Motives Behind the Ethanol Pipeline?

Ethanol producers in the Midwest have lobbied for support to build a pipeline to ship their ethanol to the East Coast. As I have argued, given that the market for ethanol is nowhere close to being saturated in the Midwest (a large E85 market in the Midwest could consume all of the ethanol produced there), it would seem to be a better allocation of resources to build up the E85 market rather than try to export ethanol from the Midwest.

However, some have claimed that the real reason ethanol producers want the pipeline is so they can export ethanol out of the country. They argued that U.S. taxpayers would end up subsidizing ethanol exports (as we previously subsidized biodiesel exports). I thought this was unlikely, as the VEETC is given to the oil companies for blending ethanol into gasoline domestically. Thus, ethanol that is exported wouldn’t qualify for the VEETC.

A Biodiesel-Like Loophole

Turns out there is a loophole.

According to a report in the Financial Times (subscription req’d), U.S.-produced ethanol is being exported out of the country in record volumes. Citing government trade data, the report found that 251 million gallons of ethanol were exported in the first nine months of the year. However, this figure does not account for ethanol blended with gasoline — which the blenders receive a $0.45 per gallon federal tax credit for — and the much smaller European ethanol industry is quite upset about this creating an uneven playing field:

Companies that blend US ethanol with petrol may claim the credit even if the fuel is shipped overseas. Blends of up to 90 per cent ethanol imported in Europe also enjoy customs duties that are €60-€70 lower than the €102 per cu m duty on purer “denatured” ethanol, says Christoph Berg, managing director at consultant F.O. Licht in Hamburg. The US ethanol trade data mask additional volumes hidden in petrol blends.

“There is increasing trade from the US to Europe which is using domestically produced ethanol and blends this ethanol with gasoline, thus being eligible for the [US] tax credit and also being eligible for lower import duties in the European Union. This of course makes quite a profitable operation,” says Mr Berg.

Traders acknowledged using the credit for ethanol blends before it leaves the US. “If the [credit] is not there, the demand for product stays. It just means there are higher prices,” said a senior executive at one US exporter.

In addition to exporting record volumes of ethanol, the byproduct from the ethanol production process, Dried Distillers Grains with Solubles (DDGS), is also being exported in record volumes. It had been predicted that the U.S. market would saturate long before the RFS schedule was phased in, so ethanol producers are left with export markets as an only option.

One thing to note is that in their assessments of the energy balance of corn ethanol, USDA studies presume fairly local usage of both the ethanol and the DDGS. If the export market grows for ethanol and DDGS, so will the energy inputs that need to be accounted for. It is hard to imagine that ethanol produced in Nebraska by irrigated water drawn from the Ogallala Aquifer could possibly have a favorable energy balance if that ethanol is shipped to Europe. And if taxpayers are subsidizing that, they are getting a raw deal. But for now, this kind of practice will hide behind USDA studies that looked at very different conditions to come up with a favorable energy balance — as if that applied uniformly across the industry.

Pointing Fingers

The ethanol lobby blames government regulations:

Washington has been subsidizing corn-based ethanol for decades in an attempt to make the price of domestic fuel competitive with foreign oil.

Under that logic, exporting ethanol may seem odd. Why not just import less oil?

That’s a good question, with a deceptive answer provided by the Renewable Fuels Association (RFA):

The problem is, government regulations strictly limit how much ethanol can be used in gasoline.

The industry would rather use all the ethanol at home, but pointed to the government’s rules currently prohibiting higher amounts of ethanol in gasoline.

“We’d love to not have to export a drop, ” said Matt Hartwig, a spokesman for the Renewable Fuels Association. “But that just isn’t the case.”

So let’s get this straight. The same government that created your expanding markets in the first place through subsidies and mandates — it is now their fault you can’t grow your markets at home because they won’t increase the mandates? Let me suggest an alternate strategy. Develop an entrepreneurial attitude, get busy growing your market, and stop crying to the government all the time.

There is of course no rule in place limiting how much ethanol they can sell domestically. In fact, if they can grow the E85 market, they could sell every drop of ethanol they can hope to make for the next 10 years right in the Midwest where most of the ethanol is produced. (See E85 Case Study: Iowa). So why don’t they get busy working on that, instead of complaining that it’s the government’s fault? I have argued this case many times (e.g., here); that the best long-term strategy for the ethanol industry would be a Midwest-oriented E85 market. There is no reason — if they can keep their price competitive — that E85 couldn’t become the favored fuel in the Midwest. But the RFA seems determined that their long-term strategy will be to continue relying on the government to create, protect, and grow their markets.

Subsidizing Saudi

The biggest irony is perhaps that some of these ethanol exports, according to the article, are being sent to places like Saudi Arabia and the United Arab Emirates. It is possible that some of our tax dollars are being used to subsidize fuel purchases by Saudi Arabia. So the same people who have long complained that military spending in the Mideast is a hidden oil subsidy are potentially using tax dollars to sell their product to the Mideast at a discount.

One justification the ethanol lobby often gives for keeping the VEETC is that it helps to reduce oil imports. If taxpayers are spending $0.45 to subsidize a gallon of ethanol, and that ethanol is shipped to Saudi Arabia — just what did the taxpayer get for their money? Certainly not reduced oil imports.

Learning From the Biodiesel Debacle

While the articles I have seen don’t prove that we are subsidizing ethanol exports with the VEETC –they just say that the loophole is there that would allow it– based on the quotes from one US exporter and a European consultant, and the fact that the ethanol industry has not refuted those claims, I think it is likely that the credit is being collected on exported ethanol blends.

In any case, if that loophole isn’t closed, European governments will likely react the same way they did to the subsidized biodiesel the U.S. was shipping to Europe: They put anti-dumping duties on biodiesel coming from the U.S., and put the brakes on the practice. That set the biodiesel industry back immensely, because it had grown rapidly to capture that export market. If the ethanol industry continues to grow their export markets — on the back of the U.S. taxpayer — they will suffer the same fate as the biodiesel industry: Halting of the practice on the EU side and an immediate drop in demand for their product.