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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
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    References listed on IDEAS

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    Cited by:

    1. Chen, Xiaoguang & Khanna, Madhu & Onal, Hayri, 2009. "The Economic Potential of Second-Generation Biofuels: Implications for Social Welfare, Land Use and Greenhouse Gas Emissions in Illinois," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49484, Agricultural and Applied Economics Association.
    2. Schmit, Todd M. & Luo, Jianchuan & Conrad, Jon M., 2010. "Estimating the Influence of Ethanol Policy on Plant Investment Decisions: A Real Options Analysis with Two Stochastic Variables," Working Papers 126963, Cornell University, Department of Applied Economics and Management.
    3. Chen, Xiaoguang & Huang, Haixiao & Khanna, Madhu & ├ľnal, Hayri, 2014. "Alternative transportation fuel standards: Welfare effects and climate benefits," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 241-257.
    4. 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.
    5. Saifedean Ammous & Edmund Phelps, 2015. "Climate Change, the Knowledge Problem, and the Good Life," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Spring 20), pages 35-44.
    6. 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.
    7. Zhang, Dengjun & Asche, Frank & Oglend, Atle, 2014. "Ethanol and trade: An analysis of price transmission in the US market," Energy Economics, Elsevier, vol. 42(C), pages 1-8.

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