Transcript VEETC, Mandates and Import Tariffs

VEETC, Mandates and Import
Tariffs
Bruce A. Babcock
Center for Agricultural and Rural
Development
Iowa State University
Value Proposition of Ethanol to
Gasoline Manufacturers
• Provides an alternative source of BTU’s
– 2/3rds the number per gallon
• Provides octane
– allows refineries to save money by producing 84
octane gasoline, blend it with 10% ethanol and
come up with 87 octane gasoline
• Helps meet clean air standards
What is Willingness to Pay?
• 2/3rds the price of wholesale gasoline as a
source of BTU’s
• A lot to meet clean air standards
• I do not know the economics of refineries
• So something more than 2/3rds the price of
gasoline until the maximum allowable blend is
reached.
Impact of VEETC on Value Proposition
• $0.45 per gallon blenders tax credit increases
the value of ethanol to blenders by $0.45 per
gallon at all volumes.
Impact of VEETC on the Demand for Ethanol
Price of
Ethanol
$0.45/gal
D w/VEETC
D
Quantity
of Ethanol
Impact of VEETC on the Price of Ethanol
Price of
Ethanol
Supply
P1
D w/VEETC
P0
D
Q0
Q1
Quantity
of Ethanol
No Controversy About the Impact of
VEETC Alone
• By increasing the willingness to pay (demand)
of blenders for ethanol, VEETC increases the
quantity of ethanol produced and the price
that ethanol producers receive for their
product.
• Market price will increase by something less
than $0.45 per gallon if the willingness to pay
for ethanol decreases with increased
production
But VEETC Does not Act Alone
• In 2011, RFS for conventional biofuels is 12.6
billion gallons
• What is the effect of VEETC with this mandate
• It depends……….
Impact of a Mandate: Binding Mandate
Price of
Ethanol
Supply
PM
P0
D
Q0
QM
Quantity
of Ethanol
Impact of a Mandate: Non Binding Mandate
Price of
Ethanol
Supply
P0
PM
D
QM
Q0
Quantity
of Ethanol
Impact of a Mandate
• If mandate is “binding” (it increases ethanol
production relative to level with no mandate)
then ethanol price increases
• If mandate is not binding, then price of
ethanol determined by market supply and
demand
Impact of VEETC on the Price of Ethanol with a Mandate
Price of
Ethanol
Supply
P1
D w/VEETC
P0
D
Q0
Q1
Quantity
of Ethanol
Impact of VEETC on the Price of Ethanol with a Mandate
Price of
Ethanol
Supply
P1
D w/VEETC
P0
D
QM
Q0
Q1
Quantity
of Ethanol
Impact of Removing VEETC with a Mandate in Place
Price of
Ethanol
Supply
PM
P1
D w/VEETC
P0
D
Q0
Q 1 QM
Quantity
of Ethanol
Impact of Removing VEETC with a Mandate in Place
Price of
Ethanol
Supply
P1
PM
P0
D w/VEETC
D
Q0
Q 1 QM
Quantity
of Ethanol
Results from a Report
• Costs and Benefits to Taxpayers, Consumers,
and Producers from U.S. Ethanol Policies
• Bruce A. Babcock, Kanlaya Barr, and Miguel
Carriquiry CARD Staff Report 10-SR 106 July
2010
• Partial funding provided by UNICA. Rest of
funding provided by Iowa State University.
Estimated Impacts of Eliminating
VEETC: 2011
• U.S. ethanol production declines
– 13.51 BG to 12.83 BG (700 million gallons)
• Wholesale price of ethanol declines
– $1.82 to $1.71/gallon
• Price of corn declines
– $3.79 to $3.56/gallon
• Taxpayer costs decline
– $6.09 billion
• Cost per gallon in excess of mandate is $6.77/gal
Estimated Impacts of Eliminating VEETC:
2014 with E15 Generally Available
• U.S. ethanol production declines
– 14.9 BG to 14.7 BG (200 million gallons)
• Price of corn declines
– $3.79 to $3.71/gallon
• Taxpayer costs decline
– $6.8 billion
Conclusion
• Removal of VEETC with enforced mandate has
small impacts
• Taxpayer cost per gallon of ethanol or price
per bushel of corn very high
• When EPA allows higher blends, impact of
VEETC even lower
Impact of Removing Tariff
• $0.54 per gallon tax on imported ethanol +
2.5% tax
• $0.30 per gallon additional cost for
dehydrating hydrous ethanol through the CBI
• Net effect is Brazilian ethanol will not begin to
flow to U.S. markets unless the price of U.S.
ethanol is at least $0.40/gallon higher than
the Brazilian ethanol price
Data Sources
Proportion of FFVs that Use Ethanol
1
0.9
0.8
2009 average
0.7
alpha
0.6
0.5
Jan-Feb 2010
0.4
0.3
0.2
0.1
0
0
0.2
0.4
0.6
Ratio of Gasoline to Ethanol Retail Price
0.8
1
Brazil's Exportable Surplus
4
Billion gallons anhydrous
3
2
1
0
2011
-1
-2
-3
-4
2012
2013
2014
Alpha
100%
70%
60%
50%
Brazilian Domestic Demand for Ethanol for Different
Levels of Alpha
70
Forecasted Production
Billion liters hydrous
60
50
Alpha
100%
70%
60%
50%
40
30
20
10
0
2011
2012
2013
2014
Implications
• Elimination of the tariff in 2011 will have
minimal impacts on U.S. ethanol market
because of strong Brazilian demand for
ethanol even if tax credit is kept in place
• But elimination of the tariff would signal Brazil
to invest in more ethanol plants and sugar
cane fields.
• If the capital can be obtained, then U.S. would
have more exportable surplus in 2014.
2014 Impact
• Assumptions:
– Ethanol demand is increased because of
intermediate blends
– U.S. corn farmers do not cut acreage in response
to cut in tariff
– Brazil ramps up export infrastructure and
production
– Capacity of U.S. ethanol fixed at 15 BG
– Wholesale price of gasoline averages $2.30/gal
Impact of Removing Tariff
•
•
•
•
Average imports increase by 1.4 BG (9% of US consumption)
Average corn price decreases by 5 cents
Average US ethanol price decreases by 9 cents
Average Brazil ethanol price increases by 0.07 reals/liter (13.3
cents per gallon)
• Overall impacts are modest, but large in years when corn
yields are low and it is difficult to meet the mandate.
• Large incentive to invest in more ethanol plants in both Brazil
and U.S. with E15
Summary
• Two things important for the U.S. ethanol industry
– Enforce the mandate
– Make E15 widely available
• VEETC has relatively minor impacts
• Elimination of import tariff would equalize price of U.S.
and Brazilian ethanol
• Cost of production of U.S. ethanol would adjust by
adjustments in feedstock costs
• Corn prices would reflect sugar prices, both of which would
reflect the price of a gallon of gasoline
• Why should we artificially inflate the price of corn with an
import tariff?