NCPA - National Center for Policy Analysis

Ethanol: Let Protectionism Expire

December 13, 2010

After more than three decades, the U.S. ethanol blenders' tax credit and the ethanol-import tariff that was put in place to offset it are set to expire at the end of the year.  The ethanol tax credit alone costs taxpayers over $6 billion per year, say Harry de Gorter, a professor at Cornell University and a visiting fellow at the Cato Institute, and Jerry Taylor, a senior fellow at the Cato Institute.

  • The expiration of these policies will have little, if any, impact on the U.S. ethanol industry, because the Renewable Fuel Standard requires Americans to consume an increasing amount of biofuels each year.
  • The demand for ethanol will therefore not drop significantly even when the current tax credit (45 cents per gallon) and tariff (54 cents per gallon) expire.
  • As a mandate, the standard acts as a built-in market for U.S. ethanol producers.

If the economic rationale for the ethanol-import tariff is to offset the tax credit, then the tariff should expire along with the tax credit.  Letting the tariff expire can provide more competition in the ethanol market and allow more environmentally friendly ethanol onto the market -- such as Brazilian sugarcane ethanol, say de Gorter and Taylor.

The best thing President Obama and Congress could do for ethanol policy this year is nothing -- let the tax credit and tariff expire.

Source: Harry de Gorter and Jerry Taylor, "Ethanol: Let Protectionism Expire," National Review Online, December 8, 2010.

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