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Making Ethanol Policy Practical

Prepared by: Lee Hudson Teslik
March 13, 2007

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On March 9, the U.S. and Brazilian presidents signed a pact agreeing to share technologies and some development costs in ethanol production. The agreement was described as a U.S. attempt (Telegraph) to “mend fences in its own backyard,” but nonetheless raised some eyebrows for what it seemingly ignored. As the Financial Times put it, the deal “fails to address the central issue of access to the U.S. market for Brazilian producers”—that is, the substantial tariffs levied on countries like Brazil trying to import ethanol into the United States.

More generally, the deal highlighted the uneven path the United States has taken toward modernizing its energy policies. Since January 2006, when President Bush outlined a plan for establishing American “energy independence” in his State of the Union address, the United States has encouraged ethanol production—including the implementation of massive and hotly contested (IHT) subsidies for U.S. corn producers. But other alternative energy strategies have gotten far less attention, including methods Bush specifically mentioned in his speech. An October 2006 CFR Task Force report argues a lack of sustained attention to energy issues is undermining both U.S. foreign policy and national security. The report presses for increases in both fossil fuel exploration and alternative energy research. More recently, a March 13 CFR symposium on energy policy questioned whether alternative sources of energy are a "panacea or pipe dream."

The new Democrat-controlled Congress has signaled it will be looking to expand alternative energy choices. But for the moment, the focus appears to rest squarely on ethanol. Bush has called for quotas that would require production of 35 billion gallons of fuel annually from alternative energy sources by 2017. But ethanol production, despite tripling in the past six years, currently provides only five billion gallons of fuel per year, and sky-high tariffs of fifty-four cents per gallon make large-scale importation more or less impossible.

To boost these numbers, the U.S. government has implemented a fifty-one cent per gallon subsidy on ethanol. But corn is still an expensive commodity, and the production of corn-based ethanol is sufficiently inefficient that the government concedes it will be years before new biotechnologies could provide a viable alternative to gasoline on the open consumer market.

For Washington to meet its stated targets, CFR Senior Fellow Edward Alden and Brazil expert Paulo Sotero argue the United States must increase (WashPost) its ethanol imports. Alden and Sotero say a “modified tariff scheme well short of a full repeal” could help make this possible. A new report (PDF) from the Brookings Institution recommends that the United States make an effort to proactively “transform its auto fleet” to hybrid and flex-fuel vehicles, given that the vast majority of American cars cannot run on ethanol products, even if they were made more cost-effective.

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