The Economic and Environmental Effects of Eliminating the U.S. Tariff on Ethanol

Abstract

The U. S. ethanol industry has grown dramatically over the last ten years to be a major supplier of liquid fuels and an even larger user of corn. However, a tariff and subsidy give the domestic ethanol industry a substantial advantage over its major competitor, Brazil. This thesis analyzes the effect of eliminating the tariff on imports of Brazilian ethanol and the subsequent economic and environmental effects. First, the paper provides a substantial review of the current state of ethanol production and a review of the literature to motivate and provide the necessary information for the analysis. This leads to a numerical assessment of the effect of eliminating the tariff on several key markets, including the U. S. ethanol market, the corn market, the Brazilian ethanol market, and the U. S. gasoline market. To provide intuition, the numerical analysis includes graphs to help demonstrate the changes in each market. The findings are that removing the tariff would increase U. S. welfare by $14 million, decrease greenhouse gases at a value of$36 million, and increase Brazilian welfare by $361 million, leading to a global welfare increase of$411 million. While the overall effect is positive but small, the redistributive effect of eliminating the tariff is large, with low-income groups gaining most. Despite the overall positive effect of eliminating the tariff, an analysis of the political economy indicates that the removal of the tariff is unlikely.Environment, Health and Safety, Regulatory Reform