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The Economics of the U.S. Ethanol Import Tariff with a Blend Mandate and Tax Credit

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  • de Gorter Harry

    (Cornell University)

  • Just David R

    (Cornell University)

Abstract

U.S. import tariffs on ethanol are designed to offset a tax credit that benefits U.S. and foreign producers alike. The tax credit is an ethanol consumption subsidy but ethanol market prices increase by almost the full amount of the credit as the impact on world oil prices is small. Therefore, removing the tariff has a small impact on U.S. ethanol prices but increases the world price by almost the full tariff. Eliminating both the tariff and tax credit has the exact opposite effect: U.S. prices decline by almost the tariff (equal to the tax credit) while world prices remain essentially unchanged. With a mandate instead, an import tariff equal to the initial premium will necessarily result in a further increase in domestic ethanol prices as the resulting decline in imports requires more domestic supply to fulfill the mandate. This moderates the world price depressing effects of the tariff. For a given import tariff and price premium of ethanol over gasoline, exporters like Brazil therefore prefer mandates over tax credits but ideally only a mandate and no tax credit or tariff.

Suggested Citation

  • de Gorter Harry & Just David R, 2008. "The Economics of the U.S. Ethanol Import Tariff with a Blend Mandate and Tax Credit," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-23, December.
    • Handle: RePEc:bpj:bjafio:v:6:y:2008:i:2:n:6
    DOI: 10.2202/1542-0485.1239
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    References listed on IDEAS

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    1. Amani Elobeid & Simla Tokgoz, 2008. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(4), pages 918-932.
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    Cited by:

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    2. Sunil P. Dhoubhadel & Azzeddine M. Azzam & Matthew C. Stockton, 2017. "Does the USA have market power in importing ethanol from Brazil?," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 10(2/3), pages 251-266.
    3. Xiaoguang Chen & Haixiao Huang & Madhu Khanna & Hayri Önal, 2011. "Meeting the Mandate for Biofuels: Implications for Land Use, Food, and Fuel Prices," NBER Chapters, in: The Intended and Unintended Effects of US Agricultural and Biotechnology Policies, pages 223-267, National Bureau of Economic Research, Inc.
    4. Bielen, David A. & Newell, Richard G. & Pizer, William A., 2018. "Who did the ethanol tax credit benefit? An event analysis of subsidy incidence," Journal of Public Economics, Elsevier, vol. 161(C), pages 1-14.
    5. Chen, Xiaoguang & Huang, Haixiao & Khanna, Madhu & Önal, Hayri, 2014. "Alternative transportation fuel standards: Welfare effects and climate benefits," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 241-257.
    6. Crago, Christine Lasco & Khanna, Madhu, 2011. "Which biofuel market does the ethanol tariff protect? Implications for social welfare and GHG emissions," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103784, Agricultural and Applied Economics Association.
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    8. Khanna, Madhu & Hector, Nunez & David, Zilberman, 2014. "The Political-Economy of Biofuel and Cheap Oil Policies in Brazil," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169471, Agricultural and Applied Economics Association.
    9. Bowser, William & Khanna, Madhu & Onal, Hayri, 2010. "Spatial Equilibrium in the Bio-Fuel Economy: A Multi-Market Analysis of Trade Distortions in the U.S. and Brazilian Ethanol Sector," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61636, Agricultural and Applied Economics Association.
    10. McPhail, Lihong Lu & Babcock, Bruce A., 2012. "Impact of US biofuel policy on US corn and gasoline price variability," Energy, Elsevier, vol. 37(1), pages 505-513.
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    12. Schmit, T.M. & J., Luo & Conrad, J.M., 2011. "Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables," Energy Economics, Elsevier, vol. 33(6), pages 1194-1205.
    13. Devadoss, Stephen & Kuffel, Martin, 2010. "Is the U.S. Import Tariff on Brazilian Ethanol Justifiable?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(3), pages 1-13, December.
    14. Devadoss, Stephen & Kuffel, Martin, 2010. "Ethanol Trade between Brazil and the United States," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 60889, Agricultural and Applied Economics Association.
    15. Roberto Esposti, 2009. "Biofuels between International Markets, Policies and the Wto," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 4, December.
    16. Walls, W.D. & Rusco, Frank & Kendix, Michael, 2011. "Biofuels policy and the US market for motor fuels: Empirical analysis of ethanol splashing," Energy Policy, Elsevier, vol. 39(7), pages 3999-4006, July.
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    19. Stephen Devadoss & Jude Bayham, 2013. "US Ethanol Trade Policy: Pollution Reduction or Domestic Protection," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 568-584, August.

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