Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of...

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


2007 2008 2009 2010 2011 2012 -

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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

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Gasoline Brazil Gasoline US Hydrous BrazilSugar Brazil

R$/l

t

R$/T

on


Light Duty Vehicle Fleet Size Projections for Brazil


RFS Biofuel Blending Mandates(BGY, 2008-2022)


2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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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.


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.


Ethanol Blending Ratio in Brazil


19811982198419871987198919931999200020012002200320042005200620072008200920102011201220130

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Blending ratio (Avg., %)

Brazil Sugarcane Production and Allocation Between Uses


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


Potential for Land Use Changes in Brazil

Annual Crops >48 Million Ha Pastures >166 Million Ha


Pasture Conversion

Intensification

Feed

Conversion to cropland


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)


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


Simulated Ethanol Production & Trade


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%


Expansion in Sugarcane Area

BAU (9Million Ha)

All-Inclusive(+1.2Million Ha)

Mandates-only (+3.4 Million Ha)


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


Simulated Effects on Ethanol Market


Simulated Effects on Sugarcane Area


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


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%.


Distance Driven

C

B

A

D


Welfare Effects (B $)

A B

AB



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


25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%0

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Scenario-2

Ethanol Blending Rate29

Total GHG emissions


25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%260.0

265.0

270.0

275.0

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285.0

290.0


B To

n CO

2e

Baseline Scenario-1 Scenario-2

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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.


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Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of...

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