Florida's "Port-to-Pump" Advanced Biofuel Initiative

State's "Farm-to-Fuel" initiative lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.
By Brian J. Donovan
August 1, 2009

According to the U.S. Energy Information Administration, for the period from January 1, 2003 to January 1, 2009, the State of Florida consumed an average of approximately 23.1 million gallons of gasoline per day. This equates to an average of approximately 8.43 billion gallons of gasoline per year.

Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline. "Blended gasoline" means a mixture of 90 to 91 percent gasoline and 9 to 10 percent fuel ethanol, by volume, that meets the specifications as adopted by the Florida Department of Revenue. The fuel ethanol portion may be derived from any agricultural source.

For discussion purposes, let us assume Florida's average annual consumption of gasoline does not change. Beginning December 31, 2010, the State of Florida will require an annual supply of approximately 843 million gallons of fuel ethanol to meet its E10 mandate.

Ethanol Import Tariff
Ethanol imported into the United States is subject to two customs duties: an ad valorem tariff rate of 2.5 percent and a secondary tariff of 54 cents per gallon. The Ethanol Import Tariff of 1980 imposed the 54 cent-per-gallon tariff on imported ethanol. In many cases, this tariff negates lower production costs in other countries. For example, by some estimates, Brazilian ethanol production costs are roughly 50% lower than in the United States. A key motivation for the establishment of the tariff on imported ethanol was to offset the Blender’s Tax Credit incentive for ethanol-blended gasoline. Unless imports enter the United States duty-free, the tariff effectively negates the incentive for those imports.

Caribbean Basin Initiative
U.S. oil companies, due to a loophole in the Caribbean Basin Initiative (“CBI”), are currently allowed to import thousands of barrels of fuel ethanol every month without having to pay the 54-cent-per-gallon tariff.

The CBI was established in 1983 to promote a stable political and economic climate in the Caribbean region. As part of the initiative, duty-free status is granted to a large array of products from beneficiary countries, including fuel ethanol under certain conditions. If produced from at least 50% local feedstocks (e.g., ethanol produced from sugarcane grown in the CBI beneficiary countries), ethanol may be imported duty-free. If the local feedstock content is lower, limitations apply on the quantity of duty-free ethanol. Nevertheless, up to 7% of the U.S. market may be supplied duty-free by CBI ethanol containing no local feedstock. In this case, hydrous (“wet”) ethanol produced in other countries, historically Brazil or European countries, can be shipped to a dehydration plant in a CBI country for reprocessing. After the ethanol is dehydrated, it is imported duty-free into the United States. Currently, imports of dehydrated ethanol under the CBI are far below the 7% cap. CBI imports have the potential to increase significantly over the next few years, especially as the domestic market grows under the renewable fuels standard.

The issue is whether an oil company or refiner, or an affiliate of such oil company or refiner, that imports duty-free fuel ethanol from the Caribbean and subsequently blends the duty-free fuel ethanol with unblended gasoline in the State of Florida has an unfair competitive advantage in the marketing of motor fuel in the State of Florida.

Fair and Healthy Competition in the Marketing of Ethanol Blends
It was never the legislative intent of the U.S. Congress, nor the intent of the U.S. Environmental Protection Agency, to allow oil companies to be the sole beneficiaries of the blender’s tax credit. Section 6426 of the Internal Revenue Code creates a credit against the excise tax on taxable fuels. The excise tax credit is generally available to any person that blends alcohol or biodiesel with taxable fuel in a mixture. To qualify for the credit, a qualifying mixture must either be sold by the producer to a buyer for use by the buyer as a fuel or be used as a fuel in the trade or business of the producer.

Section 526.302 of the Florida Statutes clearly states the findings and intent of the Florida Legislature, “The Legislature finds that fair and healthy competition in the marketing of motor fuel provides maximum benefits to consumers in this state, and that certain marketing practices which impair such competition are contrary to the public interest. Predatory practices and, under certain conditions, discriminatory practices, are unfair trade practices and restraints which adversely affect motor fuel competition. It is the intent of the Legislature to encourage competition and promote the general welfare of citizens of this state by prohibiting such unfair practices.”

Section 526.203 of the Florida Statutes provides states:
“(2) FUEL STANDARD.--Beginning December 31, 2010, all gasoline sold or offered for sale in Florida by a terminal supplier, importer, blender, or wholesaler shall be blended gasoline.
(3) EXEMPTIONS.--The requirements of this act do not apply to the following:
(a) Fuel used in aircraft.
(b) Fuel sold for use in boats and similar watercraft.
(c) Fuel sold to a blender.”

Permitting oil companies to import relatively inexpensive duty-free foreign ethanol under the CBI and subsequently permitting only such oil companies and their affiliates to blend and receive the 45 cents-per-gallon blender’s tax credit impairs fair and healthy competition in the marketing of ethanol blends in the State of Florida. Independent ethanol producers in Florida clearly have the legal right, and must be assured the availability of unblended gasoline, to blend fuel ethanol and unblended gasoline to receive the 45 cents-per-gallon blender’s tax credit and be cost-competitive.

Florida: Leading Ethanol Producer or Leading Ethanol Importer?
Currently, not a single drop of fuel ethanol is produced in the State of Florida.

In November, 2007, Governor Charlie Crist led a five-day trade and economic development mission to São Paulo, Brazil. During the mission, coordinated by Enterprise Florida, Inc., Governor Crist was quoted as saying that he was determined to fight the U.S. tariff on ethanol, while making Florida a gateway for U.S. imports of the Brazilian biofuel.

As recently as January 30, 2009, the president of Gateway Florida, Brian C. Dean, traveled to the Dominican Republic and was quoted as saying that the State of Florida needs to find permanent suppliers of ethanol to cover a demand estimated at 786 million gallons starting next year, when it implements a norm calling for a 10% mix of that fuel in gasoline. Dean further stated, “Gateway Florida aims to get public policies implemented in Latin American and Caribbean countries to support the development of the ethanol and biofuels industry.”

Clearly, the ethanol import tariff should be repealed for the following reasons:
(a) Record prices for gasoline are increasing the costs of producing, transporting, and processing food products. Research shows that energy prices are quickly passed through to higher retail food prices, with retail prices rising 0.52 percent in the short-term for every 1 percent rise in energy prices. As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices;

(b) Imported petroleum does not pay a tariff, yet clean, renewable ethanol from our own hemisphere is assessed a 54 cent-per-gallon tariff;

(c) Elimination of the ethanol import tariff would provide the U.S. with sufficient ethanol to move ethanol demand beyond being just a blending component in gasoline to a truer fuel alternative and create the required fueling infrastructure;

(d) The Energy Independence and Security Act of 2007 set a new RFS that starts at 9.0 billion gallons of renewable fuel in 2008 and rises to 36 billion gallons by 2022. Of the latter total, 21 billion gallons of renewable fuel in U.S. transportation fuel is required to be obtained from renewable fuel, other than ethanol derived from corn; and

(e) U.S. oil companies, due to a loophole in the CBI, are currently allowed to import thousands of barrels of ethanol every month without having to pay the 54 cents per gallon tariff.

Repeal of the 54 cent-per-gallon import tariff on foreign ethanol would create market competition by allowing U.S. blenders, not only oil companies, to purchase cheaper ethanol from foreign sources, which could help lower gas prices, increase the supply of ethanol to coastal markets, and ease the economic strain that is impacting the agriculture, food and beverage industries.

However, equally as clear:
(a) an oil company or refiner, or an affiliate of such oil company or refiner, that imports duty-free fuel ethanol from the Caribbean and subsequently blends the duty-free fuel ethanol with unblended gasoline in the State of Florida currently has an unfair competitive advantage in the marketing of motor fuel in the State of Florida; and

(b) an oil company or refiner, or an affiliate of such oil company or refiner, must not be allowed to have a monopoly on blending fuel ethanol with unblended gasoline when the fuel ethanol and unblended gasoline are blended in the State of Florida.

Currently, the sole beneficiaries of the duty-free import of fuel ethanol to Florida from the Dominican Republic, or any CBI nation, are the oil companies and refiners and their affiliates in Florida. These same oil companies and refiners and affiliates blend these duty-free ethanol imports with unblended gasoline in the State of Florida and capture the additional blender’s tax credit of 45 cents-per-gallon. As a result, the farmers/landowners and consumers never realize any benefit, rural economic development is ignored, and jobs are not created in Florida.

Rural Development and Job Creation
Beginning December 31, 2010, the State of Florida will need to import an annual supply of approximately 843 million gallons of fuel ethanol to meet its E10 mandate.

Let's calculate the Blender's Tax Credit:
(843 million gallons of imported ethanol per year)($0.45/gallon) = $379,350,000

This $379 million per year will go directly into the coffers of out-of-state oil companies. Not one cent of this $379 million per year will be made available for rural development and job creation in the State of Florida! I doubt this issue will be addressed at the 4th Annual Farm-to-Fuel Summit currently being held in Orlando.

The State of Florida has the resources to be the leading producer of advanced biofuel in the nation. At this point, the state merely lacks the political will to ensure fair and healthy competition in the marketing of ethanol blends.