Continuing increases of US ethanol exports to the EU will fuel further tension

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7 December 2010, Oil

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Regulation is a significant factor driving the increased production of ethanol. Both the US and the EU require that biofuels replace fossil fuels in transportation to some extent. The share of biofuel in the EU's fuel mix was 1% in 2005, but this is set to increase to 20% in 2020. In the US, the Renewable Fuels Standard Schedule requires production of 12.95 billion barrels per year, increasing to 30 billion barrels per year in 2020. The US Renewable Fuels Association (RFA) says that the increase in ethanol exports is due to advanced ethanol production techniques, the productivity of American farmers, and legislation limiting the amount of ethanol that can be blended with petrol to 10% of the mix (E10).

As the US market cannot absorb all of the produced ethanol, traders look to other locations. By September 2010, US export volumes had already doubled over full-year 2009 volumes, registering exports of 51 million gallons. The RFA expects exports of 330-350 million gallons by the end of 2010.

EU ethanol producers feel disadvantaged due to the increased imports of cheaper, tax-subsidized ethanol from the US, making European ethanol harder to market. US foreign trade statistics show that between September 2008 and August 2009 40.7 million liters of ethanol were exported to EU member states. In the next 12 months, exports to these countries reached nearly 2.94 billion liters. The biggest European buyers of denatured ethanol in September 2010 were the Netherlands, Finland, and the UK, while the Netherlands was the biggest European buyer of US undenatured (non-beverage) ethanol.

The EU's anti-dumping and countervailing duties for biodiesel from the US, which were imposed in March 2009, serve as a precedent for possible import tariffs on ethanol from the country. The EU has argued that unfair subsidies and dumping of US biodiesel caused material injury to European biodiesel producers as the US share rose from 1% of the European market in 2007 to 11% in 2008 and 17% in 2009. In June 2010 the European Biodiesel Board lodged a complaint with the European Commission claiming that US biodiesel enters the EU via other countries, hence avoiding the duties and further harming the EU industry.

The current ethanol blenders' tax credit of $0.45 per gallon will expire at the end of 2010, and the US Congress needs to decide whether to extend it. Given the country's recent criticism of European austerity measures, an extension can be expected.

If US ethanol swamps the European market in a manner similar to biodiesel, local ethanol producers will ask the European Commission to investigate possible import duties for ethanol from the US that are compliant with World Trade Organization rules, putting trade relations between the country and the union at risk.

Source: Datamonitor

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