Corn+Soybean Digest

Suspending the Ethanol Tariff Wouldn’t Solve the Gas Price Problem

In the midst of America’s persistent problem with high gas prices, a flurry of proposals has emerged, including a few calls to suspend the secondary tariff on the importation of ethanol. The American Coalition for Ethanol (ACE) reminded the public and key policymakers on May 5 that such a move would do nothing to solve motorists’ pain at the pump.

“Repealing the ethanol import tariff would have no impact on the price of gasoline because it does not address the primary culprit for pain at the pump – the record high cost of crude oil,” says Brian Jennings, ACE Executive Vice President. “There’s too much misleading propaganda claiming that ‘boat loads’ of ethanol from Brazil can save the day for U.S. motorists if we would simply suspend the secondary tariff on ethanol imports – this is nonsense.”

In a letter sent to President Bush and Congressional leaders, the organization states: “Repealing the secondary tariff on U.S. ethanol imports is unnecessary, burdensome to taxpayers and shifts attention from the primary factors causing pain at the pump: crude oil prices exceeding a record $70/barrel and diminished gasoline refining capacity.”

Lifting the tariff is unnecessary because significant volumes of ethanol already flow in the U.S. duty-free. Under the Caribbean Basin Initiative (CBI), up to 7 percent of the domestic market of ethanol can be imported duty-free on an annual basis. Through this mechanism, Brazilian ethanol is already moving freely into the U.S. In addition, the economics of Brazilian ethanol aren’t as favorable now as in the past – their own supply is currently tight, and with world sugar prices at high levels, Brazil’s cost of ethanol production has risen dramatically.

Lifting the tariff forces U.S. taxpayers to support the production of foreign ethanol that is already heavily subsidized in Brazil. The 51 cent per gallon blender’s tax credit is available to ethanol, no matter the country of origin, and the primary purpose of the 54 cent import duty is to protect American taxpayers from subsidizing foreign-produced ethanol.

Ethanol supplies are indeed adequate to meet the demand created by the removal of MTBE from the fuel supply. In the U.S., 97 ethanol production facilities are hitting new all-time production records each month, nearly a dozen of these plants are being expanded and more than 30 additional ethanol plants are under construction. The domestic industry is already producing more than 4.5 billion gallons of ethanol annually, and with this dramatic growth rate it is poised to add well over 2 billion additional gallons in the next 12-24 months.

Lifting the tariff would undermine the growth of the domestic ethanol industry. Jennings adds, “Suspending the import duty, even temporarily, would substantially undermine efforts to finance and construct new ethanol plants, taking the steam out of an economic engine that is creating jobs, driving economic development, and gaining ground on energy independence – one gallon at a time.”

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