Last November, the Financial Times published an article charging that U.S.-produced ethanol is collecting U.S. tax credits before being shipped to Europe, where it also qualifies for favorable tax treatment. I covered this story in "Taxpayer Subsidized Ethanol Exports May Bite Industry in the Future". The gist of my article was that if this charge is true, it completely undermines the supposed reasons U.S. taxpayers are subsidizing ethanol in the first place: to reduce dependence on foreign oil. In fact, as I showed in a later article, any ethanol that is exported actually increases U.S. dependence on foreign oil because it takes some oil to make the ethanol and then ship it to the export market.

A similar situation had occurred previously in the biodiesel industry. Biodiesel was being subsidized by U.S. taxpayers, blended with a bit of petroleum diesel, and then shipped to Europe where it also qualified for subsidies. The EU ultimately put a stop to that practice by imposing countervailing and anti-dumping duties on biodiesel originating from the United States. The result was devastating for a U.S. biodiesel industry whose production had grown to serve a lucrative export market. U.S. ethanol producers would be wise to heed that lesson.

Since then, the ethanol lobby has either: 1) flatly denied that any ethanol was collecting subsidies and leaving the country; 2) stated that the practice was illegal; or 3) claimed to know nothing of this.

The Legality of Collecting Ethanol Credits on Blended Exports

In fact, there is no law preventing exporters from collecting the Volumetric Ethanol Excise Tax Credit(VEETC) prior to shipping ethanol out of the country. Details of how the ethanol tax credit is applied can be found in Section 6426 of the internal revenue code at: Credit for alcohol fuel, biodiesel, and alternative fuel mixtures.

Section 6426 (b) defines the alcohol fuel mixture credit and section (i) limits the credits to fuels with connection to the United States. Any ethanol produced and blended in the United States is obviously connected to the United States, and thus can collect the VEETC. There is no stipulation that, after collecting the VEETC, the ethanol blend must remain in the U.S. So anyone asserting that the practice is illegal is either being disingenuous, or is ignorant of the law. If an ethanol proponent wants to still assert that the practice is illegal, they need to point to the specific code that prevents someone from buying ethanol, blending it with some gasoline, collecting the tax credit, and then exporting the mixture to Europe.

Christoph Berg, Managing Director of F.O. Licht, an industry news service, has said that he has records showing that U.S. ethanol is being exported and collecting subsidies at both ends, but that there are discrepancies between official export statistics and shipping reports by brokers. Data from the U.S. Energy Information Administration also shows that, despite the high level of U.S. dependence on petroleum imports, finished motor gasoline is being exported out of the country. Ethanol blends are considered finished motor gasoline.

The Outcome - It's Just a Matter of Time

Just as I warned, producers in Europe are now considering legal action to stop the practice:

According to a recent article by Reuters, “EU bioethanol group weighs U.S. subsidy lawsuit”, producers such as Germany's CropEnergies and Spain's Abengoa are gathering data on tax credits granted by the U.S. government to U.S. firms that blend ethanol with gasoline. They say the tax break squeezes the margins of competing European producers when the resulting blend is exported to the EU. One industry spokesperson indicated that they expected by the end of March to know whether they have a case that's strong enough to take to the European Commission.

The article also quoted RFA spokesman Matt Harwig:

"While the complaints of the European ethanol industry are understandable, their angst is misguided at U.S. ethanol tax policy," said Matt Hartwig, spokesman for the U.S.-based Renewable Fuels Association.

"It remains unclear if any additional volumes of ethanol are flowing into Europe under this particular tariff schedule. EU nations have yet to provide any data and we have not seen any to date that suggests this is happening at above-normal levels."

Those are interesting comments. Phrases like "it remains unclear", "any additional volumes", and "above-normal levels" are probably about as close as the RFA will ever come to admitting that they are aware that it is happening.

Conclusions

Here is what I think. Ethanol is in fact being blended with gasoline in the United States − benefiting from tax policy that has been defended on the basis of helping to reduce U.S. dependence on foreign oil − and then being shipped to foreign countries in increasing volumes. I think the ethanol lobbies know that this is happening, which is why one sees the sort of carefully worded language Hartwig used above.

Even though this practice benefits the U.S. ethanol industry at the expense of U.S. taxpayers, there may be nothing they can do about it since they do not collect the tax credit themselves. If someone wants to buy ethanol from them, they sell it to them. If the buyer then turns around and games U.S. tax policy by collecting the VEETC and exporting the ethanol after mixing it with gasoline, the ethanol industry is probably not in a position to stop that unless they simply refuse to sell to companies that are suspected of these practices.

I also have heard some ethanol supporters − even within the ethanol lobby – agree that if subsidized ethanol is being exported that this practice needs to stop. It would be great if the ethanol industry itself were to take the lead in investigating the practice and in urging legislation to stop it, instead of claiming that "it remains unclear." In the short term, it will cost the ethanol industry some sales. In the longer term, it will prevent a public backlash and avoid having this matter decided by the EU courts.

If the ethanol industry wishes to produce more ethanol than the market in the U.S. can bear and then export it, then it is their right to do so − provided that ethanol is not being subsidized by U.S. taxpayers. I have heard ethanol producers claim that the U.S. market is saturated, and this therefore justifies the export of ethanol. My view is that as long as the ethanol is being subsidized, they should have no reason to expect perpetually growing markets courtesy of U.S. taxpayers. If the U.S. market is saturated, then: 1) stop expanding ethanol production; 2) grow the E85 market; or 3) grow the export market, but do so without taxpayer assistance.
 
Robert Rapier is an experienced professional in the energy industry, having worked on cellulosic ethanol, butanol production, oil refining, natural gas production and gas-to-liquids (GTL). He currently works as the Chief Technology Officer for bioenergy holding company Merica International. His blog, R-Squared Energy Blog, whose mission is to foster open discussions about energy and the environment, originally hosted a longer version of this article, which can be accessed here: http://www.consumerenergyreport.com/2011/03/22/clarifying-misconceptions-on-taxpayer-subsidized-ethanol-exports/