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Public policies and Transportation Fuel Markets in Brazil and U.S.
Hayri ÖnalUniversity of Illinois at Urbana-Champaign
Hector M. NuñezDepartment of Economics. Centro de Investigación y Docencia
Económicas (CIDE), México
Lemann Dialogue, Nov.8 2013 1
Developments in Brazil and US Ethanol Industry
MTBE Banned
RFS1RFS2
Pro-AlcoolEDV
Industry deregulation
FFV era
2Lemann Dialogue, Nov.8 2013
Fuel Ethanol Production
Lemann Dialogue, Nov.8 2013 3
2007 2008 2009 2010 2011 2012 -
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20
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50
60
70
80
90
100
WorldUSBrazil
billi
on li
ters
Trends in Fuel and Sugar Prices
Jan-05Feb-05Apr-05M
ay-05Jul-05Sep-05Oct-05Dec-05Jan-06M
ar-06M
ay-06Jun-06Aug-06Oct-06Nov-06Jan-07Feb-07Apr-07Jun-07Jul-07Sep-07Oct-07Dec-07Feb-08M
ar-08M
ay-08Jun-08Aug-08Oct-08Nov-08Jan-09M
ar-09Apr-09Jun-09Jul-09Sep-09Nov-09Dec-09Feb-10M
ar-10M
ay-10Jul-10Aug-10Oct-10Nov-10Jan-11M
ar-11Apr-11Jun-11Jul-11Sep-11Nov-11Dec-11Feb-12
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
0
200
400
600
800
1000
1200
1400
1600
1800
Gasoline Brazil Gasoline US Hydrous BrazilSugar Brazil
R$/l
t
R$/T
on
Lemann Dialogue, Nov.8 2013 4
Light Duty Vehicle Fleet Size Projections for Brazil
Lemann Dialogue, Nov.8 2013 5
RFS Biofuel Blending Mandates(BGY, 2008-2022)
Lemann Dialogue, Nov.8 2013 6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
0
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Other advanced Cellulosic biofuel
Biodiesel Corn ethanol
Where U.S. is Now
• Corn ethanol production tripled from 14.7 BL in 2005 to about 53.2 BL in 2011. Current capacity is 55.6 BL, near the maximum capacity envisioned by the RFS.
• Future biorefineries must produce advanced and cellulosic biofuels to meet the RFS targets.
• Cellulosic ethanol and Sugarcane ethanol are advanced biofuel, with 60% and 90% GHG emission reduction. Currently, in US, the only other advanced biofuel is biodiesel produced from soybean oil. Cellulosic ethanol production at commercial scale has not been realized yet.
• This leaves sugarcane ethanol as the only other economical alternative for meeting the advanced biofuels demand in US.
7Lemann Dialogue, Nov.8 2013
Policy Interventions in U.S. and Brazil
• In U.S.: • blending mandates, biofuel production subsidies, import tariffs, ad
valorem tax, and import quotas. Subsidies, tariff and trade restrictions are eliminated in Dec. 2011.
• In Brazil: • Ethanol blending mandate within 18%-25% range, the rate was reduced
from 25% to 20% in 2011 and 2012, recently raised back to 25%.• Tax rates applied to gasoline and ethanol are often modified to make E100
competitive with gasohol.• Tax rate for pure gasoline is >100%, for E100 and anhydrous ethanol it is
<40% • PETROBRAS regulates the refinery price of gasoline. During the past 5
years, price was almost fixed not to expose Brazilian consumers to world price volatility.
8Lemann Dialogue, Nov.8 2013
Ethanol Blending Ratio in Brazil
Lemann Dialogue, Nov.8 2013 9
19811982198419871987198919931999200020012002200320042005200620072008200920102011201220130
5
10
15
20
25
30
Blending ratio (Avg., %)
Brazil Sugarcane Production and Allocation Between Uses
Lemann Dialogue, Nov.8 2013 10
Ethanol Exports by Brazil and U.S.
Lemann Dialogue, Nov.8 2013
Sources: EIA (2013) and UNICA (2013)11
Policy Research Issues
•World Biofuel demand is growing along with the food demand, production resources are limited•Already a significant amount of land is allocated to the production of biofuel feedstocks in Brazil (~8 million ha) and US (~16 million ha).•Feasibility of meeting the demand for renewable transportation fuels is a challenge•It is argued frequently that improving the efficiency of land use in Brazil can be a solution, particularly by intensifying the use of pasturelands for beef cattle production
Lemann Dialogue, Nov.8 2013 12
Potential for Land Use Changes in Brazil
Annual Crops >48 Million Ha Pastures >166 Million Ha
13Lemann Dialogue, Nov.8 2013
Pasture Conversion
Intensification
Feed
Conversion to cropland
14Lemann Dialogue, Nov.8 2013
Modeling Methodology
We developed a large scale spatially explicit economic simulation model for both Brazil and US incorporating the domestic production and consumption in both countries and trade between them in a price endogenous framework
• Explicit demand functions for food and transportation (miles driven by different vehicles categories), blending restrictions
• 295 production regions in U.S., 137 production regions in Brazil• 15 annual crops, 8 livestock categories, two dedicated perennial
energy crops and crop residues in U.S.• 8 crops and sugarcane in Brazil, sugarcane expansion limited to
agro-ecological zones• A detailed fuel transportation component in Brazil (pipelines)
Lemann Dialogue, Nov.8 2013 15
2022 Scenarios for US
• Business-As-Usual (BAU): Benchmark Scenario• Scenario 1: Mandates, US Import barriers and
subsidies – Policy until Dec. 2011• Scenario 2: US mandates only
17Lemann Dialogue, Nov.8 2013
Simulated Ethanol Production & Trade
18Lemann Dialogue, Nov.8 2013
Simulated Livestock Intensification
17-21 million heads under a semi-intensive system
BAU 2022 All-Inclusive Mandates-
Only
Intensification Rate (%) 11.5 12.0 13.9
Beef Production (Million Tons) 2.42 -2.7% -2.6%
Beef Price $/Ton 11,380 +18.9% +18.5%
19Lemann Dialogue, Nov.8 2013
Expansion in Sugarcane Area
BAU (9Million Ha)
All-Inclusive(+1.2Million Ha)
Mandates-only (+3.4 Million Ha)
20Lemann Dialogue, Nov.8 2013
New Croplands & Intensified Pasture Lands
BAU New: 5.2Million HaIntensified: 13Million HaNew SCane: 0.6Million Ha
All-InclusiveNew: 8.4Million HaIntensified: 12.8Million HaNew SCane: 1.9Million Ha
Mandates-only New: 9.5Million HaIntensified: 14.9Million HaNew SCane: 4.0Million Ha
Intensified Pastures21Lemann Dialogue, Nov.8 2013
Introduction of Ethanol Pipelines
22Lemann Dialogue, Nov.8 2013
Simulated Effects on Ethanol Market
23Lemann Dialogue, Nov.8 2013
Simulated Effects on Sugarcane Area
24Lemann Dialogue, Nov.8 2013
No pipelines(10.26Million Ha)
Pipelines(12.35Million Ha)
Conclusions - I
•There is considerable potential for increasing biofuel production in Brazil to meet the domestic and export demand. •This can be done by improving the productivity on pasture lands and intensifying the beef cattle production systems.•Most of the intensified pastures and beef cattle operations would be in the Center West.•Introduction of the pipelines would increase the sugarcane production in those regions traversed by the pipelines
Lemann Dialogue, Nov.8 2013 25
Fuel Policy Changes in Brazil
Simulation scenarios:
1. Base case (baseline 2007).2. Sugar exports increase by 44% and sugarcane yield
decreases by 9%.3. Same as scenario 2 + 7.5% cut on gasoline tax rates (from
R$0.23/liter to R$0.19)
All three scenarios are run under blending rates ranging from 15% to 25%.
26Lemann Dialogue, Nov.8 2013
Distance Driven
C
B
A
D
27Lemann Dialogue, Nov.8 2013
Welfare Effects (B $)
A B
AB
28Lemann Dialogue, Nov.8 2013
Lemann Dialogue, Nov.8 2013
Fuel Consumption by Vehicle Categories (Blt)
Gasohol by CV Gasohol by FFV E100 by FFV
25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%0
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45Base Case
Ethanol Blending Rate
25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%0
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Scenario-1
Ethanol Blending Rate
25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%0
5
10
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35
Scenario-2
Ethanol Blending Rate29
Total GHG emissions
Lemann Dialogue, Nov.8 2013
25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%260.0
265.0
270.0
275.0
280.0
285.0
290.0
Ethanol Blending Rate
B To
n CO
2e
Baseline Scenario-1 Scenario-2
30
Conclusions - II
• Lowering the blending rate temporarily to cope with a short supply of ethanol may be a sound policy in the short run, but if continued it is not a good policy for consumers and producers.• Lowering the tax rate on gasoline may reduce some of the adverse effect on consumers, but it is a harmful policy for the environment.• A sound policy would be to invest in agriculture (livestock intensification) and infrastructure development (e.g. transportation pipelines connecting new sugarcane expansion areas in Serrado and center-west to the main demand areas in southeast).• Agricultural land and pasture land are considered as the only restrictive productive resources here. Another crucial input is irrigation water which may be a restrictive factor for expansion of sugarcane production in center-west and northeast. Work in this direction is currently under way.
Lemann Dialogue, Nov.8 2013 31
THANK YOU!
Lemann Dialogue, Nov.8 2013 32