Canada Falling Behind U.S. Ethanol Industry

by Bliss Baker, President,
Canadian Renewable Fuels Assoc.

The United States ethanol industry continues to set production records and this past February set another one by surpassing 126,000 barrels per day – an increase of 16% over last year. Trends indicate a record year of production totalling over 7 billion litres.

Since 1990 when the Clean Air Act introduced the oxygen mandate, over 900 million gallons of production has been added. This additional capacity can be attributed directly to the oxygen mandate south of the border, combined with significant tax exemptions at the federal level of government. This policy environment has transformed a fledgling industry into a bona fide industry that employs over 35,000 people and helps clean up over 70 billion gallons of U.S. gasoline.

The following chart compares Ontario ethanol with some of the more attractive mid-west States.
Tax Incentives for Ethanol by Jurisdiction
Jurisdiction	U.S. Federal Government Canadian Federal Government	Tax Exemption 23 cents/litre (equivalent) 10 cents/litre
Ontario	14.5	24.5
Wyoming	15	38
Montana	12	35
Minnesota	8	31
South Dakota	8	31
Nebraska	8	31
Missouri	8	31
Iowa	1	24
The above chart clearly illustrates the competitive advantage that the U.S. federal government has created for the U.S. ethanol industry. A similar federal tax exemption in Canada would undoubtedly kick-start ethanol production “north of the border”. These conditions combined with other programs such as a corn subsidy for ethanol expansion have made for very attractive conditions for U.S. production.

The CRFA has recently conducted a comparison between the Canadian and U.S. ethanol markets and the respective public policy environments. Based on concerns about the growing spread in value between U.S. and Canadian ethanol, the CRFA has highlighted some significant findings about the level of support that the Canadian industry receives. While it is widely accepted that the differences in the Canadian and U.S. marketplace largely result from the existing oxygen mandate in the United States, it is important to understand what this mandate and tax exemptions have done for the industry south of the border and how Canada can learn from this experience.

From a microeconomic point of view, this relatively new industry in the U.S. has now created the conditions that will encourage new entrants into the marketplace. Key among these conditions is the creation of a reformulated gasoline pool. This “market” allows for the short-term sale of ethanol into a pool at premium prices. In Canada, due to the lack of a mandate, the majority of ethanol is sold on long-term contracts at a discount to gasoline. These long-term contracts are also critical to obtaining project financing in Canada. This systemic obstacle to expanding production needs to be addressed if facilities are to be built in Canada.

Today, over 300 million litres of potential ethanol production in Canada may never be realized because of some of these obstacles. In addition, a growing gap between the value for ethanol in the U.S. and Canada has put future ethanol production in jeopardy. In short, Canada needs to create more value for ethanol if we are to achieve the growth targets set by the federal government.

Meeting the federal government’s target of 1 billion litres of production by 2010 will require a clear renewable fuels strategy from the federal government.

“The federal government is going to have to decide how important ethanol is to them,” said Bliss Baker, President of the Canadian Renewable Fuels Association. “If they want this industry to succeed, they will have to commit to a clear national strategy that includes a Renewable Fuels mandate and tax parity with the United States,” concluded Baker.

The CRFA has urged Finance Minister Paul Martin to introduce a federal 2-cent per litre tax credit to encourage oil companies to begin using ethanol and bring Canada in line with U.S. support for ethanol.

We need your help to make this happen. Please go to the CRFA’s website at www.greenfuels.org and click on the ethanol icon to send an important message to our federal government in support of expanding ethanol production in Canada.

Thanks for your support.