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

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.