With ethanol subsidies set to expire at the end of this year, should Congress extend the ethanol blend tax credit and import tax on foreign ethanol? During today's OnPoint, Joel Velasco, the North American representative for UNICA, the Brazilian Sugarcane Industry Association, explains why he believes Congress should allow these subsidies to expire. He discusses the economic impacts of such a move and explains how it would affect Brazil's sugar cane and ethanol industries.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Joel Velasco, the North American rep for the Brazilian Sugarcane Industry Association. Joel, it's good to see you again.
Joel Velasco: Very good to see you.
Monica Trauzzi: Joel, ethanol subsidies are set to expire at the end of this year and the debate is heating up over whether to extend these incentives and there are two credits at play here, a tax credit for blending ethanol with gasoline and an import tax on foreign ethanol. Let's talk about the import tax, because that's what concerns your organization. Obviously, it would be to your organization's best interest if it was removed, but what about the U.S. economy and the biofuels industry here in the U.S.? What would that mean?
Joel Velasco: Well, the reality is we think that both the tax credit and the import duty should actually be removed. In fact, coming December 5 we'll be celebrating 30 years of these programs. It was actually created in a lame-duck session of Congress. And we think that it's now time to move on and the reality is every academic or government agency, Congressional Budget Office, General Accounting Office have looked at this and said that, actually, with competition the U.S. ethanol industry, primarily corn ethanol, can compete in an open marketplace. And there's no reason to spend $6 billion of taxpayer money, plus impose a trade distorting tariff on imported ethanol to maintain this market.
Monica Trauzzi: So, what position would it put the Brazilian industry in if the tariff was removed?
Joel Velasco: Well, I think what it's actually going to do is it's going to put in a position where the world is going to be -- Brazil reduced its barriers on ethanol earlier this year and has committed to doing so, so long as the U.S. moves forward. So Brazil took the first step and because both countries needed to really build the global biofuels industry, if both countries reduce these barriers, there's going to be more competition. And we'll actually be able to tell the rest of the world that, indeed, now it's time to give biofuels a chance, to impose our sustainability requirements, to impose greenhouse gas requirements around the world. But the first step is really for the first -- the biggest countries in this space to take the first step and remove their barriers and open themselves to competition.
Monica Trauzzi: And there's a lot of money to be made for your industry.
Joel Velasco: Well, most studies have indicated that what there would be is lower volatility in ethanol prices, which is going to allow for greater investments in ethanol production here in the U.S. and abroad. In fact, Iowa State University Professor Bruce Babcock looked at this and he said, yes, Brazil will export a little bit more, probably about I think 700 million gallons by 2014. But what it would really mean to consumers is actually a lower price at the pump with that added competition. So, you would be saving, between now and then, about $30 billion in taxpayer subsidies. You would have lower prices at the pump for consumers and you would diversify America's fuel supply away from just one feedstock.
Monica Trauzzi: So, this essentially means that the U.S. ethanol industry would be losing its training wheels. What ...
Joel Velasco: Thirty-year-old training wheels.
Monica Trauzzi: So, in terms of maturity and profitability, where do you think the U.S. ethanol industry stands right now?
Joel Velasco: Well, it's clearly profitable. In fact, last count, in fact, you're still seeing consolidation in the industry. Just the last few days you've seen some of those movements and today there's about -- I would think, nearly half of the industry is consolidated into about four players. And why are they doing that? Because it is a profitable business. In fact, corn ethanol today is competitive with gasoline, even without the tax credit. And I think that's what consumers and voters are realizing. Why are we putting money into an industry that is already mature? President Obama has called them mature earlier this year during a report of the Interagency Biofuels Working Group. Most scholars have come to that conclusion. It's a mature industry. So why do we need to spend those taxpayer dollars to subsidize an industry that is very mature? A 30-year-old person, I'm a little bit more than 30 years old and I can handle myself here. How about the corn ethanol industry compete on a level playing ground? And what that will do, again, it is diversifying America's fuel supply. It is reducing prices at the pumps and, again, remembering the key thing here will be also to mitigate climate change, which I think the EPA has really taken a great step forward in that.
Monica Trauzzi: So, let's make sure we're being clear here. You're talking about the corn ethanol industry. Well, what about the next generation, the second generation biofuels?
Joel Velasco: Well, the VEETC, the $0.45 per gallon tax credit does not apply to the second generation, because the second-generation is guaranteed -- in fact, Congress and the House has already approved expanding the one dollar gallon tax credit to the algae industry. So the algae industry, the cellulosic industry is guaranteed about a dollar per gallon tax credit. And that is a domestic subsidy only. There's no way the imported product can get that subsidy. So the second and third generation industry have a bright future in front of it. You've just seen, I think, Ameris, raising about $100 million. Ameris is a second-generation technology in the New York stock market this past week. And I think those are the signs that you're going to see that that industry is going to succeed. But it's only going to succeed if we put them on a level playing field and if corn ethanol, you know, is able to dominate the fuels market and the biofuels market in the U.S., I'm not sure that we're ever going to get there.
Monica Trauzzi: The U.S. government has offered plenty of other industries, including the oil industry, incentives for decades. So why should the ethanol industry be different?
Joel Velasco: Well, first, I think the oil industry -- I'm not sending all those subsidies. In fact, I think those should also go and I think there's a pretty clear mood in Congress that they should go. We'll see if they can live up to - but this is sort of, you know, my five-year-old debating with my three-year-old. Well, he hit me first. Let's just start with the facts. It's time to deal with this policy. This subsidy, the VEETC, the $0.45-per-gallon tax credit cost us $6 billion a year. The $0.54 tariff on imported ethanol, that's been there for 30 years, is protecting that industry from competition. And plus, we have a mandate. The oil industry does not have a mandate to consume their product. Now, we've got to deal with flex-fuel cars and other things like that, but the ethanol industry has a mandate, so it needs to say which one it wants, mandates or subsidies, because I don't think they can have both.
Monica Trauzzi: Considering the state of the U.S. economy, is it even logical to remove these incentives at this point? I mean is there a risk posed for job losses and a risk to the industry? And do we want to do it right now with the economy where it is?
Joel Velasco: Well, clearly, the domestic ethanol industry is trying to put forth this fear mongering idea that there will be 150,000 job losses. Iowa State University Professor Bruce Babcock looked at and says, maybe 300, 400 jobs in 2014 would be lost. That's about $20 million per job that the U.S. would be spending to save those jobs. I think there's probably a better way to do that and, at the end of the day, this is an industry that needs to compete and we're ready to compete and I think the corn ethanol industry is more than ready to compete and Congress just needs to let these two policies expire.
Monica Trauzzi: OK, we'll end it there. Thank you for coming on the show.
Joel Velasco: Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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