When Is Ethanol Not Ethanol?

23 July 2004

When it is imported. Or, perhaps, if it does not come from corn.

The flap over Cargill’s plan to import 63 million gallons of Brazilian ethanol into the 3 billion gallon a year market continues to escalate. (Earlier post here.)

Senator Daschle has fired off a letter stating his intention to introduce legislation that would preclude imported ethanol from qualifying underneath his proposed Renewable Fuels Standard (RFS).

The key to the next growth spurt in the domestic ethanol industry is bipartisan legislation I wrote with Sen. Dick Lugar (R-IN) that would encourage investment in new plants and expand a market for corn that farmers can count on through mandatory annual production targets created by a renewable fuels standard. Plans to import ethanol inject an element of market uncertainty into the RFS discussion that could dampen investment in community-sized ethanol facilities and compromise the RFS’s potential for farmers.

The RFS program is designed to stimulate domestic production and enhance US energy security, not to create a market opportunity for foreign ethanol. Cargill accountants should not count on the new demand created by the renewable fuels standard to justify any scheme to import ethanol. Therefore, I am leading a group that includes two Republicans, Senator Lugar and Senator Chuck Hagel (R-NE), and Senator Ben Nelson (D-NE) in introducing legislation to ensure that only domestically produced ethanol would qualify for eligibility under the RFS.

Some background:

• Since 1980, the US has imposed a $0.54 per gallon tariff on imported ethanol—the only exception to that being ethanol from CBI (Caribbean Basin Initiative) nations, and El Salvador, the portal through which Cargill would bring the Brazilian ethanol, being part of that group.
• The CBI allows up to 7% of the previous year’s US fuel grade ethanol production to be exempt from that import duty. Based on last year’s production of 2.81 billion gallons, that would allow 196 million gallons into the country via CBI nations tariff-free.
• Brazil is the leading world producer of ethanol (3.6 billion gallons of ethanol in 2003, although the US is closing fast). Brazilian ethanol is produced from sugar cane feedstock at a cost of about $0.50 per gallon to produce.
• Corn-based ethanol in the US costs between $1.00 to $1.25 per gallon to produce, depending up the size of the plant and the process used. (Detailed analysis of corn ethanol costs available from Kansas State University here.)

From the letter:

[South Dakota farmers] rightly fear that ethanol imports could undercut the growth of the domestic ethanol industry and undermine our effort to establish ethanol as a major domestic energy source.

But my obligation is to South Dakota farmers, ethanol producers, and motorists who view increased ethanol demand as a means to establish greater control over their economic and energy future.

I understand the Senator’s desire to protect his constituency (the corn growers), but this is bad logic and a bad precedent.

The analogy he draws between importing oil and importing ethanol seems flawed to me. In the case of the former, we do not have sufficient domestic resources, and those we have are dwindling. (A non-renewable resource.) In the case of the latter, we have plenty of raw material, and it is renewable. What we don’t seem to have is cost parity.

I haven’t seemed to notice a great deal of opposition and trepidation on building out new ethanol plants coming from the investment community. Where I have seen the opposition and trepidation is in local communities (primarily non-agricultural) that don’t want a plant in the neighborhood. (NIMBY) Let’s deal with that.

In general, I’m not wild about tariffs, although sometimes I think they are necessary. But with tariffs already in place and demand for ethanol booming, this just seems like a way to continue to shield an industry that has been shielded for 24 years. Where’s the competitive pressure to come up with a better, more cost-effective means of producing ethanol? What happens as biotech innovation provides second and third-generation production mechanisms that don’t use corn as a feedstock? Will those fuels not qualify under an RFS either, since conceptually one could regard them as “undercutting” corn ethanol?

The global market for ethanol is rapidly increasing; let’s get competitive. Let’s go get some of that market for ourselves. That’s a way to maintain energy independence: to have a market-leading renewable fuels industry that exports as well as serves our internal market.