European Ethanol Producers' Taxing Issue

BRUSSELS—European ethanol producers say the extension of a U.S. ethanol tax credit for 2011, approved by Congress last month as part of the $858 billion tax-reduction bill, could prompt them to file a trade complaint with the European Union.

European producers failed in lobbying efforts to halt the credit, however, the extension would apply only on sales to U.S. buyers, and not on sales abroad.

The tax credit has helped fuel record production by U.S. ethanol producers. Combined with high sugar prices in Brazil and a wheat shortage in Europe, the tax credit has made mostly corn-based U.S. ethanol the cheapest on the European market.

“If exports continue to grow, and there is harm to European industry, we will have to take legal action,” says Rob Vierhout, secretary-general of ePure, a lobby group representing European ethanol producers.

U.S. producers say their growth isn’t dependent on tax credits or loopholes. “Right now, the price of wheat is so high that you just can’t produce enough in Europe,” says Chet Perry, CEO of ITEC Refining and Marketing Ltd., an Illinois-based ethanol producer. “That’s the opening, not the tax credit.”

A spokesman for EU trade commission Karel De Gucht declined to comment.

U.S. ethanol destined for the European Union is currently priced at $561 per cubic meter, including the tax credit, at the Port of Houston, compared to $705 at Rotterdam, the Netherlands, and $770 for São Paulo. Those three ports are the principal price points for ethanol, say traders.

A complaint from European producers would most likely be an antisubsidy claim filed with the European Commission, the EU’s executive arm, which if upheld could lead to the imposition of duties. Mr. Vierhout is coming to the U.S. next month to try to broker a compromise with U.S. officials.

Ethanol can be shipped under various tariff codes, so it is difficult to compile accurate trade data. But shipments from the U.S. to the EU of one kind of ethanol rose to 26,848 tons in the first nine months of 2010 from 13,654 tons for all of 2009, according to Global Trade Information Services, a Geneva-based data firm.

“We expect U.S. ethanol to continue coming to Europe until it no longer makes economic sense,” says Kevin McGeeney, CEO of Starsupply Renewables SA, a Switzerland-based brokerage firm that specializes in renewable energy.

Even as its dependence on foreign oil grows, U.S. exports of other forms of energy are increasing. Overall, U.S. ethanol exports increased to 976.6 million liters in the first nine months of 2010, compared with 323 million liters over the same period in 2009, mostly due to the tax credit, according to traders. The biggest shipments went to Brazil, India and the United Arab Emirates, a trans-shipment hub for the rest of the Middle East.

The EU, whose cars mainly run on diesel fuel, traditionally uses biodiesel to advance its leaders’ pledge to use 10% renewable energy in automobiles by 2020. Biodiesel, a market valued at around $10 billion a year in Europe, is made from feedstocks like wheat, rapeseed and palm oil.

In 2009, the EU slapped antidumping tariffs on imports of biodiesel from the U.S., which it said was being produced below cost thanks to tax breaks and other incentives. The U.S. tax incentives for biodiesel and ethanol production are justified by Washington’s own target of using roughly 7% renewable energy in cars by 2020.

“At this point, we have not seen any such complaint or request for an investigation, so we are not in a position to comment,” said a U.S. trade spokeswoman.

Since 1978, refiners in the U.S. that blend ethanol with gasoline have received a 45 cents-per-gallon tax credit, a program that costs roughly $5 billion last year. Seventeen senators last month signed a letter calling for the credit to be abolished. But the tax credit continues to enjoy solid support from farm and ethanol lobbies because it is lucrative for farmers.

Fuel ethanol is a much smaller market than biodiesel in the EU, at around $2 billion a year, but it is growing. Total demand is expected at 4.75 billion liters in 2010, rising to 12.4 billion liters by 2020.

Demand in Europe has traditionally been met by domestic sugar beet, sugar cane from Brazil, and wheat from Russia and Kazakhstan. This summer, however, an increase in global sugar prices and a shortage of wheat, caused partly by a drought in eastern Europe, have dried up those sources.

People in the biofuels industry say they are used to turmoil.

“In this business, politics are always the joker in the game,” says Marc Van Driessche, whose company, GreenDiesel Trading SA, imports ethanol to Antwerp from the U.S. on behalf of European oil giants like Total SA and BP PLC. “It makes it very difficult to predict anything in biofuels. You never know where it’s going to be in three months.”