Ethanol markets
January 16, 2012
For more than 30 years, Brazil fought against the United States' high tariffs on imported ethanol. Now, the South American nation is celebrating its victory against US protectionism. On December 31, 2011, the US tariff on imported ethanol expired.
The tariff had made exporting ethanol to the US very difficult for Brazilian producers, said Géraldine Kutas, who heads the international affairs department at the Brazilian Sugarcane Industry Union Unica. The tariff had amounted to $0.54 (0.41 euros) per gallon (4.5 liters) of ethanol.
Worldwide, Brazil is among the leading producers of biological fuels based on sugarcane. Reacting to the oil crisis in 1973, Brazil initiated a project called "Proálcool," aiming to increase the national production of fuel made from sugarcane. Today, Brazil is the second-largest producer of ethanol on the globe. Only the US produces more ethanol, albeit ethanol based on corn. Together, the two countries account for 70 percent of global ethanol prduction and for more than 80 percent of the global ethanol trade.
Géraldine Kutas, based in Unica's Brussels office, said the fact that the US did not renew the tariff was "a strong signal to other countries and to the European Union, who also imposes high tariffs on ethanol. The fact that the biggest actors on the ethanol market now trade freely will put the EU under considerable pressure."
Major challenges
In the short term, however, the lifting of the US tariff will not have much of an impact on Brazilian ethanol exports. "There won't be a boom of exports to the US," said Kutas. "We don't produce enough ethanol to greatly increase exports. That's the way things are at the moment and how I think they will be within the next two years."
The Brazilian industry is facing big challenges. In order to meet increasing demand within Brazil, the country would need 120 new production plants by 2020. According to Bruce Babcock, an energy expert with the University of Iowa, Brazil has a problem: "Brazil cannot even meet its own demand for ethanol," he told Deutsche Welle, "much less increase exports to the US."
Still, Babcock thinks there will be an increase in trade. He expects Brazil to start importing US ethanol rather than exporting to the US. "US ethanol is less expensive than Brazilian ethanol. So that means that the Brazilians will be interested in importing US ethanol made from corn crops."
Brazilian ethanol producers, however, take a different view. They say that sugarcane-based ethanol is a cleaner and more efficient type of fuel, and will hold sway in the long run. Even the US Environmental Protection Agency EPA considers ethanol made from sugarcane a "progressive biofuel." By using biofuels instead of traditional gas, CO2 emissions can be reduced by up to 90 percent.
Increasing exports
Brazilian exports of ethanol are expected to increase step-by-step as the US starts implementing its so-called biofuels action plan. This action plan appears to be the most ambitious project in this regard worldwide: By 2022, the US plans to reach an annual demand of 146 billion liters of ethanol.
Out of these 146 billion liters, 15 billion liters are supposed to come from "progressive" ethanol - which encompasses Brazilian ethanol made from sugarcane. "So that ensures that Brazilian producers can plan a step-by-step expansion. It's not about exporting ethanol that was produced for domestic needs," explained Géraldine Kutas. "Producers will have enough time to get used to the new situation and can adapt their production to it."
Expired subsidies
Besides the tariff for imported ethanol, the US also let the tax subsidy for its ethanol expire. Prior to January 1, 2012, US ethanol production was subsidized with $0.45. "But there is still another law that promotes ethanol consumption, so the US ethanol industry doesn't need this subsidy," explained economist Bruce Babcock. "And the high prices for mineral oil do their bit to foster demand for biofuels."
The American Coalition for Ethanol however is less convinced of the changes in US ethanol trade policies. "Ending subsidies means cutting jobs as well as cuts in US ethanol production," the US ethanol industry's lobby group complained. It fears up to 112,000 jobs may be cut and domestic production to decrease by 38 percent as a result of the move to end subsidies for American ethanol.
Author: Nádia Pontes/ ar
Editor: Rob Mudge