Bloomberg News

EU Plans Probe of U.S. Bioethanol Imports, Threatening Taxes

November 18, 2011

Nov. 17 (Bloomberg) -- The European Union plans to threaten to tack tariffs onto U.S. bioethanol imports over concerns that American producers may be using trade-distorting government aid to sell in Europe below cost, an internal EU document shows.

The European Commission, the EU’s executive arm in Brussels, may announce inquiries into the U.S. subsidies and so- called dumping by Nov. 25, said Barry Magee, a spokesman at the ethanol lobby group ePure. The probes may result in extra taxes on U.S. producers such as Poet LLC, Archer Daniels Midland Co. and Valero Energy Corp. The document was on the EU’s website.

The U.S. government has subsidized ethanol since the Energy Tax Act of 1978 was enacted under President Jimmy Carter. President George W. Bush made it the centerpiece of his plan to cut U.S. dependence on foreign oil as fuel prices climbed.

The EU inquiries stem from a complaint by ePure, which represents 21 ethanol producers including Sued-Chemie AG and Tereos Internacional SA’s French unit as well as 26 companies in the ethanol value chain such as DuPont Co. and Novozymes A/S. “Generous” federal excise-tax and income-tax credits subsidies and aid at “all levels of government” helped the U.S. become the top ethanol producer as output fell in Brazil, once the largest exporter, ePure said in a Nov. 2 statement.

The U.S. is benefiting from higher costs and production shortfalls in Europe, where output is about 165 million gallons short of the 2.45 billion gallons that drivers are mandated to use this year, according to Bloomberg New Energy Finance. Ethanol in New York Harbor is $2.95 a gallon compared with $3.21 in Rotterdam, data compiled by Bloomberg show.

Surging Sales

International traders are shipping ethanol blends to Europe to take advantage of the EU’s lower tariff as well as a U.S. tax incentive for ethanol blending, according to ePure. U.S. exports of ethanol to Europe climbed more than 500 percent from 2008 to 2010 and probably doubled this year from last, ePure said.

Federal tax breaks for ethanol and other renewable fuels were worth $6.3 billion in 2010, according to the Congressional Research Service. While the ethanol aid is due to expire at the end of this year, manufacturers are set to thrive as a government mandate for increased use of the fuel may add $6.9 billion a year in sales.

Ethanol is a form of alcohol distilled from grain or sugar that boosts the oxygen content of fuel so it burns more thoroughly, reducing polluting emissions. The additive also enhances engine performance and extends fuel supplies.

Ethanol Industry

No one at the commission’s trade division was available today to comment about the document.

The U.S. subsidizes the ethanol industry with a 45-cent tax break for every gallon added to fuel. The tax break makes it profitable to blend ethanol with wholesale gasoline when the margin is less than 45 cents.

“Domestic ethanol producers are not eligible for the tax incentive referenced by the Europeans,” the Washington-based Renewable Fuels Association said in a Nov. 2 statement. “That tax incentive is specifically made available to gasoline blenders, marketers and other end users. Therefore, U.S. ethanol producers cannot nor should not be the focus of any potential European action.”

Oil companies, required to blend ethanol into gasoline under the Renewable Fuels Standard, are the direct beneficiaries of the federal tax break. Ethanol makers benefit as the tax credit helps create a market for their product and ensures it remains competitive if prices rise above gasoline.

The 209 ethanol refineries in the U.S., the biggest consumer and importer of the fuel, produced a record 13.2 million gallons last year, according to the Renewable Fuels Association. Daily production averaged 911,000 barrels, or 14 billion gallons on an annualized basis, in the week ended Nov. 4, the Energy Department said.

Start a Probe?

The EU has 45 days from the date of a subsidy or dumping complaint to decide whether to open an inquiry. After the start of a probe, the commission can impose provisional anti-subsidy levies for four months and provisional anti-dumping tariffs for six months. The EU’s 27 national governments, acting on a commission proposal, can turn those measures into “definitive” five-year levies at the same or different rates.

In 2009, the EU imposed five-year duties on imports of U.S. biodiesel, a type of biofuel made from vegetable oils and animal fats for use in diesel engines, to counter subsidies and price- undercutting. The EU widened the tariffs on U.S. biodiesel in May to cover more blends and extended the levies to Canada, saying American exporters dodged the trade protection that halted shipments valued at $1 billion a year.

The bloc, the world’s biggest biodiesel market, said U.S. producers shipped new blends directly to Europe and traditional blends there via Canada to avoid the European import duties.

‘Quite Ironic’

“The EU acting against renewable, green, environmentally friendly energy, apart from representing an alarming trend, is also quite ironic,” said Konstantinos Adamantopoulos, a trade partner at Holman, Fenwick & Willan in Brussels, which represented U.S. biodiesel exporters in the anti-subsidy case.

“It is the EU consumer that will become the only real victim of such trends as he could be cut off from competitive alternative sources of supply, whereas the goal of the EU is, of course, also to protect its own consumers and to promote green energy, not to discourage its use,” he said.

--Editors: Randall Hackley, Reed Landberg

To contact the reporter on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Reed Landberg at landberg@bloomberg.net


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