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					North American Ethanol Bioenergy Policies and their NAFTA Policy Implications

                                 Glenn Fox
                                    and
                              Kenneth Shwedel

   FOURTH ANNUAL NORTH AMERICAN AGRIFOOD MARKET INTEGRATION WORKSHOP
                  CONTEMPORARY DRIVERS OF INTEGRATION

    The North American Agrifood Market Integration Consortium (NAAMIC)
                       Hilton Hotel, Cancun, Mexico
                             June 13-15, 2007
Overview
 Background and Context
 Ethanol Policies and Policy Rumblings
    Range of Policy Instruments
    Rationales for Government Action
    Emerging Criticisms
 Assessment of the prospects for trade and trade
 disputes
 Thesis
 Fuel Ethanol has not been, is not, and, in our assessment,
  is unlikely to be treated as a freely traded international
  commodity with production locations determined by
  comparative advantage or production levels determined
  by relative cost.
 Policy measures to support ethanol are based on various
  forms of government intervention in the marketplace –
  regulations, subsidies, and trade restrictions, among
  others
 There are plenty of grounds for trade disputes regarding
  ethanol, but no one would seem to have a clear
  motivation to initiate a complaint
Policy Measures Used to Promote Ethanol Production
 fuel excise tax exemptions
 production and blending requirements
 government-procurement preferences
 local tax breaks on property taxes or and state/provincial taxes
 accelerated write-off schedules biofuels-related capital
 tax exempt bonds
 subsidized loans or loan guarantees
 capital gains exemptions
 regulatory exemptions
 producer credits
 state/provincial/federal subsidies
 environmental legislation mandating certain specific types of fuel additives (typically for fuel
  oxygen-ation)
 government purchases of surplus agricultural stocks for conversion to bio-ethanol
  agricultural farm supports
 government supported R&D.
Ethanol Production
 Global production ~ 45 billion litres per year
    Brazil ~ 16 billion litres
    United States ~ 16 billion litres
    Canada~ 230 million litres
    Mexico ~ 50 million litres
 Gasoline Consumption
    United States ~ 550 billion litres per year
    Canada ~ 45 billion litres per year
  Global Policy Context
                                                    The EU:
                                                    •Largest producer; strong ambitions
                                                    •Huge capacity; largest plants in the world
                                                    •Rapeseed-based, but increasingly multi-feedstock

  Canada:
  •5% renewable energy target by 2010                                      China:
  •Canola, waste oils                                                      •Mandatory blend targets expected in 2007
                                                                           •Massive potential, but not realised

     USA:                                                               South Korea, Japan, Thailand, Philippines:
                                                                        •Various targets and initiatives
     •Mandatory biofuel use of 7.5 billion gallons
     by 2012; primarily ethanol                                         •Small industries or imports
     •Biodiesel potential huge due to only 1%
                                                                             India:
     diesel car penetration
                                                                             •Infant industry; policies under
     •Soybean oil - canola upcoming
                                                                             preparation
                                                                             •Jatropha-based
           Brazil:
           •B2 (2008) and B5 (2013) targets introduced                 Malaysia & Indonesia:
           •Aim: rural support (palm, castor oils)                     •Aim to set-aside 40% of palm oil production for
           •Reality: primarily soybean oil; large-scale projects       biodiesel (aimed for exports – specifically to EU)
                                                                       •MAL: 5% blend (voluntary) of palm and diesel
                                 Argentina:                            •IND: B2 mandatory target by 2008
                                 •Legislation passed in 2006
                                 •Focus on soybean oil                           Australia:
                                                                                 •Non-mandatory target by 2010
                                                                                 •Canola, waste oils, animal fats
Source: Susan Hansen, Rabobank
Rationales for Ethanol Policy
1. Balance of Payments and Import Substitution (Brazil and
   Mexico)
2. Anti-terrorism (United States)
3. Reduce oil imports/consumption (Brazil and United
   States)
     1.   Reduce air pollution (United States and Canada)
     2.   Reduce greenhouse gas emissions (United States and
          Canada)
4. Increase farm and rural incomes (United States, Mexico
   and Canada)
5. Infant Industry Argument (Canada)
The closest thing to a state religion in America today isn’t
Christianity – it’s corn. Whether liberal or conservative, Democrat
or Republican, urban or rural, virtually everyone in the business of
offering opinions is in firm and total agreement that America’s ills,
from Islamic terrorism to global warming to economic stagnation in
the heartland, could be solved by a hefty dose of 200-proof grain
alcohol.
                         Jerry Taylor and Peter Van Doren (2007)
Emerging (?) Criticisms
 Net Energy Balance
    Reduction in Oil Use
    GHG reduction
    Anti-terrorism
 Food vs Fuel
 Distributional Effects and Efficiency of Income
  Transfers
 Air Pollution Claims
 Reduce dependence on foreign oil – borders on
national security arguments (U.S.)
 Improve trade balance reducing imports of secondary
petroleum products (Mexico)
•Net energy calculations suggest small gains at best
•High cost way of reducing GHG emissions
•Other emission results are mixed
                                                 Figure 1: Price of Crude Oil in Constant (2007) $US 1913-2007

                               100


                                90


                                80
Constant 2007 $US per Barrel




                                                                                                                            May 8, 2007
                                70
                                                                                                                            2006 Average

                                60                                                                                          Jan - Apr 2007
                                                                                                                            Average

                                50


                                40


                                30


                                20


                                10


                                 0
                                 1913   1919   1925   1931   1937   1943   1949   1955   1961   1967   1973   1979   1985    1991   1997     2003

                                                                                         Year
                                                            Figure 2: US CPI Adjusted Gasoline Prices, 1970-2007 (2007
                                                                                   cents/gallon)

                                                   350

                                                                                                                              May 7, 2007
Price, All Types of Gasoline (2007 cents/gallon)




                                                   300
                                                                                                                       2006 Average

                                                                                                                  Jan - Mar 2007
                                                   250
                                                                                                                  Average


                                                   200



                                                   150



                                                   100



                                                    50



                                                     0
                                                     1970    1973   1976   1979   1982   1985   1988     1991   1994   1997   2000    2003   2006
                                                                                                  Year
Source: US Biofuel Outlook, Credit Suisse, May 9, 2007
                                                              Figure 3: Toronto CPI Adjusted Gasoline Prices, 1979-2007 (2007 cents/litre)

                                                     120
                                                                                                                                      May 7, 2007
Price, Regular Unleaded Gasoline (2007cents/litre)




                                                                                                                           2006 Average
                                                     100
                                                                                                                           Jan - Mar 2007
                                                                                                                           Average

                                                      80




                                                      60




                                                      40




                                                      20




                                                       0
                                                       1979     1982      1985     1988     1991      1994     1997     2000        2003        2006

                                                                                                    Year
                        Figure 4: Constant (Jul, 2006) Peso Mexican Gasoline Price Converted to $US, Jan 1996 - Jul
                                                                   2006

                 3.5



                  3                                                                               Premium




                 2.5
US$ per Gallon




                  2

                                                                                                 Regular

                 1.5



                  1



                 0.5



                  0
                  Jan-96 Oct-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 May-03 Feb-04 Nov-04 Aug-05 May-06
                                                                 Year and Month
               Figure 8: Supply and Demand for Gasoline and Ethanol - Increasing Marginal Cost of
                                                  Gasoline




                  MCeP


                  MCeO
Price




                                                                                                               MCg+t




                                                                                                               MCg



                                                                                                     D

Notes:                                                               Quantity                Q*
    P                                                  O
MCe = Marginal cost of ethanol (pessimistic view); MCe = Marginal cost of ethanol (optimistic view)
MCg = Marginal cost of gasoline; MCg+t = Marginal cost of gasoline plus tax; D = Demand for gasoline/ethanol
                       Figure 10: Supply and Demand for Gasoline, Ethanol and Ethanol Blends (Blends Only
                                             Exempt From Tax on Ethanol Proportion)




                                                                                                                S-20% Blend

      P20               MCeO
                                                                                                                                                                 S-10% Blend
                                            S-50% Blend




P10                                                                                                                                                              S-5% Blend
       Price




      P5


                                                                                                                                                                 MCg+t
      P0


                                                                                                                                                                 MCg



                                                                                                                               D

                                                                                        Quantity
       Notes:
       MCeO = Marginal cost of ethanol (optimistic view); S-50% Blend = Supply of 50% blend ethanol; S-20% Blend = Supply of 20% blend ethanol; S-10% Blend = Supply of 10% blend
       ethanol; S-5% Blend = Supply of 5% blend ethanol; MCg = Marginal cost of gasoline; MCg+t = Marginal cost of gasoline plus tax; D = Demand for gasoline/ethanol
                  Figure 11: Supply and Demand for Gasoline, Ethanol and Brazil-Produced Ethanol


                                    MCeB+tarrif
                       MCeO




                                    MCeB
     Price




                                                                                                                                    MCg+t

     P*



                                                                                                                                    MCg




                                                                                                        D

Notes:                                                                    Quantity                  Q*
    O                                                  B
MCe = Marginal cost of ethanol (optimistic view); MCe = Marginal cost of Brazil-produced ethanol; MCeB+tarrif = Marginal cost of Brazil-produced
ethanol plus tarrif; MCg = Marginal cost of gasoline; MCg+t = Marginal cost of gasoline plus tax; D = Demand for gasoline/ethanol
•Benefit to grain farmers is a cost to livestock producers
•Capitalization of gains into land prices
•Food vs fuel tradeoffs globally
•Subsidy cost per “job created” is high
•Competition among jurisdictions for facilities dissipates
net benefits
•Movement toward consolidation of ownership of ethanol
plants
Subsidized ethanol is a very inefficient way to raise farm income. It
would be much more economical to burn straight gasoline in our
automobiles and pay farmers a direct subsidy equal to the amount
that they would receive as a result of ethanol production.

       Earle Gavett, Gerald Grinnell and Nancy Smith, USDA (1986)
Impact of grain in livestock production: the Mexican case


                              Grains as % of              Feed costs as % of   Grains as % of   Impacto of higher
        Products
                                tfeed costs                   total costs        total costs       grain costs
                                                                                                D=(C* % of increase of
                                        A                         B               C=(A*B)           grain costs**)
    Milk                              40%                        65%                26%                15.6%
    Broilers                          65%                        62%                40%                24.2%
    Eggs                              60%                        55%                33%                19.8%
    Beef                              65%                        60%                39%                23.4%
    Hogs                              72%                        56%                40%                24.2%



     * Essentially corn and sorghum
     ** 60% average increase in price of feed grains




 Source: CNA ith data from producer based organizations
Because corn is the major feedstock for ethanol, in North America
less is becoming available for the animal industry and for export

      Use and production of corn in the U.S.: % and million of bu.                   Use and production of corn in the U.S.: % of total use
70%                                                                      350   70%

60%                                                                      300   60%

50%                                                                      250   50%
40%                                                                      200   40%
30%                                                                      150   30%
20%                                                                      100
                                                                               20%
10%                                                                      50
                                                                               10%
0%                                                                       0
                                                                               0%
        2001       2003       2005       2006      2007e         2008p
                                                                                        Alim. Animal                 Exportación                  Etanol

                 Animal    Exports    Etanol        Production                                         2001   2003   2005    2006   2007   2008




                                                                                        p
 2007 – estimación 2008 - proyección
 Fuente: Rabobank con datos del USDA- ERS,
Do we need to talk about this rationale to this
audience?
The experience of the 1970s and 1980s taught us that if a
technology is commercially viable, then government support is not
needed and if a technology is not commercially viable, no amount
of government support will make it so

              Thomas Lee , Ben Ball and Richard Tabors, (1990)
Potential Trade Irritants?
 Differential levels of support and divergent Policy
 Goals
 Divergent Policy Goals
                                                       Southeast
Drivers                   EU - 27            US          Asia      Rest of Asia
Energy Security         Medium - High       High          Low      Medium - High
Environmental Concern       High        Low - Medium      Low           Low
Agriculture Revenues      Medium            High         High      Low - Medium




Source: Rabobank
Table 2 Comparison of Ethanol Support Policies in Canada, Mexico and the United States

                                 Canada                            Mexico                                  United States
Category of     Federal      Provincial                        Federal                   Federal              State
Support
Import Duties   $US          Not Applicable                    $US 0.20/litre            $US 0.142/litre      Not Applicable
                0.09/litre
Excise Tax      $US          Alberta $US 0.081/litre           Not contemplated          $US 0.134/litre      Illinois $US 0.079/litre
Exemptions      0.09/litre   British Columbia $US 0.13/litre   in Bioenergy Law                               Iowa      $US 0.003/litre
and Income                   Manitoba $US 0.30/litre                                                          California $US 0.079/litre
Tax Credits                  Ontario $US 0.132/litre                                                          Indiana $US 0.03/litre
                             Quebec $US 0.18/litre
                             Saskatchewan $US 0.135/litre
Capital         Ethanol      Ontario Ethanol Growth Fund       Ad hoc support
Grants or       Expansion    up to $US 0.09 per litre of       from Federal
Concessional    Program      capacity                          Agricultural
Loans           up to $US                                      Infrastructure Fund
                0.03/litre
Operating       2007         Alberta       $US 0.126/litre                                                    Minnesota    $US 0.053/litre
Grants          Budget       Ontario up to $US 0.099/litre                                                    Texas        $US 0.053/litre
                $US                                                                                           Wisconsin    $US 0.053/litre
                0.09/litre
Blending        5% by        Alberta                           No target given,                               Minnesota               10%
Requirements    2010         British Columbia                  but government
                             Manitoba 8.5 % in 2005            will make effort to
                             Ontario 5% in 2007, rising to     use blended fuel
                             10% by 2010
                             Quebec
                             Saskatchewan
Potential Trade Irritants?
 Differential levels of support and divergent Policy
  Goals
 Ambiguous status of fuel ethanol
   Agricultural good?
   Industrial good?
   Environmental good?
   Tariff category
   Blue, amber, green or black box?
 Biotechnology
 Food vs Fuel
                    Figure 5: Index of Consumer Level Tortilla Prices and the Overall CPI in Mexico: Jan 2006 = 100

              125




              120




              115
                                                                                              Tortilla Price Index
Price Index




              110




              105




              100
                                                                                                              Overall CPI



              95




              90
                    Jan-06   Feb-06   Mar-06   Apr-06   May-06   Jun-06   Jul-06   Aug-06   Sep-06   Oct-06    Nov-06   Dec-06   Jan-07

                                                                    Year and Month
Food vs Fuel
 Higher grain prices from ethanol
                                              Percentage of total household food expenditure on
  demand has continental and event
                                              corn and corn products: I = 10% poorest, X = 10%
  global consequences                         richest households

                                        12%
 Runge and Senauer project that the
  accompanying price increases from
  the use of food products to produce   8%
  biofuels will “exacerbate world
  hunger
                                        4%
 They project an increase in the
  number of chronically hungry in the
  world of 600 million                  0%
                                               I      II   III   IV   V   VI   VII   VIII   IX   X

                                                   Source: Rabobank with data from INEGI
Land Required to Replace 25% of
World Gasoline Consumption
Policy response

• Quasi price controls on tortillas (Mexico)
• Promotion of corn production (Mexico)
• Export prohibition
    • Argentina
    • Ukraine
    • China
Patria: tu superficie es el maíz
… y los veneros del petróleo el diablo

Ramón López Velarde, La Suave Patria (1920)
Potential Trade Irritants?
 Differential levels of support and divergent Policy Goals
 Ambiguous status of fuel ethanol
    Agricultural good?
    Industrial good?
    Environmental good?
    Tariff category
    Blue, amber, green or black box?
 Biotechnology
 Food vs Fuel
 Who would mount a trade challenge?
    OPEC countries?
    South and southeast Asian countries who might be future
     exporters?
A final consideration is that legislation could be adopted that
makes it less favorable to import ethanol into the U.S.; while
Congress would likely respect trade agreements that have been
ratified, it is possible that more inventive legislation would be
considered if imports grew and had a significant impact on the
U.S. market. Therefore, it is necessary to keep one eye on the
markets and the other on the politicians as ethanol trade
evolves.
                                        Scott Richman (2006)

				
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