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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.