Should the United States drop the 54 cents per gallon tariff on ethanol?

The ethanol policy of the United States provides very little environmental benefit and some economic damage.  By setting a tariff of 54 cents a gallon for imported ethanol, Congress has blocked environmentally efficient ethanol from Brazil and other sugarcane producing countries in favor of an inefficient corn-based ethanol produced by farmers in the Midwest of the US.  The economic damage is embodied in the higher prices for corn faced by American consumers.  The environmental concern emanates from the 800 gallons of ethanol produced per acre of sugarcane versus only 328 gallons per acre for corn.[1]

The situation is actually worse than implied by these gallons per acre figures.  Corn is a starch and must use additional energy to be converted to sugar before it can be transformed into ethanol.  Consequently, while sugarcane produces 8 units of output energy for every unit of input energy, corn produces only 1.3 output units.  While ethanol from corn reduces carbon emissions by between 10 and 20 percent relative to gasoline, ethanol from sugarcane reduces such emissions by between 87 and 96 percent.[2]

To make matters worse, the farm bill provides a special tax credit to US ethanol producers of 51 cents per gallon.  This means that the full hurdle that imported ethanol must exceed has risen to $1.05 per gallon.  That’s a significant addition to pain at the pump.  How can politicians tell us that they "feel our pain" if they hit us with this double-whammy?

Protectionists argue that we must have these ethanol import barriers to protect the Amazon Rain Forest.  This is a strange argument since wet areas like the Amazon would rot the roots of sugarcane plants.  Sugarcane is grown on just 2 percent of Brazil’s arable land.  The sugarcane growing regions are well over a thousand kilometers from the Amazon -- primarily in the southern state of Sao Paulo and along the easternmost tip of Brazil.  Even with flex-fuel vehicles accounting for 72 percent of vehicles sold in Brazil in 2007, only 3 million hectares of land are used for ethanol production versus 200 million hectares for pasture.  Moreover, the Brazilian government is acting to forbid the planting of sugarcane in the Amazon region or in the Pantanal swamplands, although it is hard to imagine that anyone would want to plant in such sugarcane-hostile regions in any case.[3]

[1] See article by Jack Chang of the McClatchy Newspapers as reported in The Kansas City Star on Sunday, May 4, 2008 on page A16.

[2] See article by John Rumsey and Jonathan Wheatley in The Financial Times, Wednesday, May 21, 2008 on page 6.

[3]Rumsey and Wheatley, ibid.