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The economics of U.S. ethanol import tariffs with a consumption mandate and tax credit

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  • de Gorter, Harry
  • Just, David R.

Abstract

This paper analyzes the impact of an ethanol import tariff in conjunction with a consumption mandate and tax credit. A tax credit alone acts as a subsidy to ethanol producers, equally benefiting exporters like Brazil. If an import tariff is imposed to offset the tax credit, world prices of ethanol decline by less than the tariff (unless oil prices are unaffected). Eliminating the tariff with a tax credit in place results in a significant gain to exporters like Brazil but eliminating the tax credit too reduces the initial benefits to Brazil of the tariff reduction substantially. The results change however if there is “water” in the tax credit. Then exporters benefit much more with the elimination of both the tariff and tax credit compared to a situation of both policies in place. If only a mandate was in place, exporters like Brazil again benefit as much as domestic ethanol producers do. Eliminating the tariff with a mandate results in an increase in domestic ethanol prices (even if oil prices do not change) because more domestic supply is required to maintain the mandate. The tariff therefore has a smaller negative impact on world ethanol prices with a mandate compared to a tax credit. A tax credit with a binding mandate is a subsidy to fuel consumers and only indirectly benefits ethanol producers if ethanol prices increase due to increased demand for ethanol with the increase in fuel consumption). Therefore, eliminating the tax credit with a binding mandate has little effect on market prices of ethanol – domestic and foreign producers alike benefit very little with a tax credit in this situation. Brazil would much prefer the elimination of the tax credit and the so-called offsetting import tariff when a mandate is binding. Hence, the protective effects of an import tariff are not additive with either a tax credit or the price premium due to a mandate.

Suggested Citation

  • de Gorter, Harry & Just, David R., 2007. "The economics of U.S. ethanol import tariffs with a consumption mandate and tax credit," MPRA Paper 5504, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:5504
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    References listed on IDEAS

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    1. Tokgoz, Simla & Elobeid, Amani E., 2007. "Understanding the Underlying Fundamentals of Ethanol Markets: Linkages between Energy and Agriculture," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon 9795, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. 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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    5. de Gorter, Harry & Just, David R., 2007. "The Welfare Economics of an Excise-Tax Exemption for Biofuels," MPRA Paper 5151, University Library of Munich, Germany, revised Sep 2007.
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    1. 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.
    2. Hochman Gal & Sexton Steven E & Zilberman David D, 2008. "The Economics of Biofuel Policy and Biotechnology," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-24, December.
    3. Snorre Kverndokk & Knut Einar Rosendahl, 2013. "Effects of Transport Regulation on the Oil Market: Does Market Power Matter?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(3), pages 662-694, July.
    4. Felippe Cauê Serigati & Paulo Furquim De Azevedo, 2016. "How To Indirectly Measure Market Transaction Costs," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 192, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Meyer, Ferdinand H. & Strauss, P.G. & Funke, Thomas, 2008. "Modelling the impacts of macro-economic variables on the South African biofuels industry," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 47(3), pages 1-19, September.
    6. Alexandre Gohin, 2008. "Impacts of the European Biofuel Policy on the Farm Sector: A General Equilibrium Assessment," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(4), pages 623-641.
    7. Geraldo Sant'ana de Camargo Barros & Lucilio Rogerio Aparecido Alves & Mauro Osaki, 2010. "Biofuels, food security and compensatory subsidies," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 2(4), pages 433-455, November.
    8. Birur, Dileep K. & Beach, Robert H., 2011. "Analyzing Trade Implications Of U.S. Biofuels Policies In A General Equilibrium Framework," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103996, Agricultural and Applied Economics Association.
    9. Guiné, Loic & Jacquet, Florence & Millet, Guy, 2008. "Impacts du développement des biocarburants sur la production française de grandes cultures," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement (RAEStud), Institut National de la Recherche Agronomique (INRA), vol. 89(4).
    10. Lade, Gabriel & Lin, C.-Y. Cynthia & Smith, Aaron, 2014. "Policy Uncertainty under Market-Based Regulations: Evidence from the Renewable Fuel Standard," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170673, Agricultural and Applied Economics Association.
    11. Blandford, David & Orden, David, 2008. "United States: Shadow WTO Agricultural Domestic Support Notifications," IFPRI discussion papers 821, International Food Policy Research Institute (IFPRI).
    12. Loïc Guindé & Florence Jacquet & Guy Millet, 2008. "Impacts du développement des biocarburants sur la production française de grandes cultures," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 89(4), pages 55-81.
    13. Yano, Yuki & Blandford, David & Surry, Yves R., 2010. "The Implications of Alternative U.S. Domestic and Trade Policies for Biofuels," 84th Annual Conference, March 29-31, 2010, Edinburgh, Scotland 91832, Agricultural Economics Society.
    14. Lihong Lu McPhail & Bruce A. Babcock, 2008. "Short-Run Price and Welfare Impacts of Federal Ethanol Policies," Center for Agricultural and Rural Development (CARD) Publications 08-wp468, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    15. James M. Griffin, 2013. "U.S. Ethanol Policy: Time to Reconsider?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    16. Castiblanco, Carmenza & Moreno, Alvaro & Etter, Andrés, 2015. "Impact of policies and subsidies in agribusiness: The case of oil palm and biofuels in Colombia," Energy Economics, Elsevier, vol. 49(C), pages 676-686.
    17. Espinola-Arredondo, Ana & Wandschneider, Philip R. & Yoder, Jonathan K., 2009. "Biofuel policy for the pursuit of multiple goals: The case of Washington State," Western Economics Forum, Western Agricultural Economics Association, vol. 8(1), pages 1-9.
    18. Blanco, Luisa & Isenhouer, Michelle, 2010. "Powering America: The impact of ethanol production in the Corn Belt states," Energy Economics, Elsevier, vol. 32(6), pages 1228-1234, November.

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    More about this item

    Keywords

    biofuels; mandate; tax credit; ethanol; tariff;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade

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