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Public policies and Transportation Fuel Markets in Brazil and U.S.

Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of Illinois at Urbana-Champaign Hector M. Nuñez Department of Economics. Centro de Investigación y Docencia Económicas (CIDE), México. Developments in Brazil and US Ethanol Industry. RFS2. RFS1.

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Public policies and Transportation Fuel Markets in Brazil and U.S.

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  1. Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of Illinois at Urbana-Champaign Hector M. Nuñez Department of Economics. Centro de Investigación y Docencia Económicas (CIDE), México Lemann Dialogue, Nov.8 2013

  2. Developments in Brazil and US Ethanol Industry RFS2 RFS1 Industry deregulation Pro-Alcool EDV MTBE Banned FFV era Lemann Dialogue, Nov.8 2013

  3. Fuel Ethanol Production Lemann Dialogue, Nov.8 2013

  4. Trends in Fuel and Sugar Prices Lemann Dialogue, Nov.8 2013

  5. Light Duty Vehicle Fleet Size Projections for Brazil Lemann Dialogue, Nov.8 2013

  6. RFS Biofuel Blending Mandates(BGY, 2008-2022) Lemann Dialogue, Nov.8 2013

  7. 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. Lemann Dialogue, Nov.8 2013

  8. 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. Lemann Dialogue, Nov.8 2013

  9. Ethanol Blending Ratio in Brazil Lemann Dialogue, Nov.8 2013

  10. Brazil Sugarcane Production and Allocation Between Uses Lemann Dialogue, Nov.8 2013

  11. Ethanol Exports by Brazil and U.S. Sources: EIA (2013) and UNICA (2013) Lemann Dialogue, Nov.8 2013

  12. 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 biofuelfeedstocks 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

  13. Potential for Land Use Changes in Brazil Annual Crops >48 Million Ha Pastures >166 Million Ha Lemann Dialogue, Nov.8 2013

  14. Pasture Conversion Intensification Conversion to cropland Feed Lemann Dialogue, Nov.8 2013

  15. 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

  16. 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 Lemann Dialogue, Nov.8 2013

  17. Simulated Ethanol Production & Trade Lemann Dialogue, Nov.8 2013

  18. Simulated Livestock Intensification 17-21 million heads under a semi-intensive system Lemann Dialogue, Nov.8 2013

  19. Expansion in Sugarcane Area All-Inclusive (+1.2Million Ha) BAU (9Million Ha) Mandates-only (+3.4 Million Ha) Lemann Dialogue, Nov.8 2013

  20. New Croplands & Intensified Pasture Lands All-Inclusive New: 8.4Million Ha Intensified: 12.8Million Ha New SCane: 1.9Million Ha Intensified Pastures BAU New: 5.2Million Ha Intensified: 13Million Ha New SCane: 0.6Million Ha Mandates-only New: 9.5Million Ha Intensified: 14.9Million Ha New SCane: 4.0Million Ha Lemann Dialogue, Nov.8 2013

  21. Introduction of Ethanol Pipelines Lemann Dialogue, Nov.8 2013

  22. Simulated Effects on Ethanol Market Lemann Dialogue, Nov.8 2013

  23. Simulated Effects on Sugarcane Area No pipelines (10.26Million Ha) Pipelines (12.35Million Ha) Lemann Dialogue, Nov.8 2013

  24. 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: • Base case (baseline 2007). • Sugar exports increase by 44% and sugarcane yield decreases by 9%. • 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%. Lemann Dialogue, Nov.8 2013

  26. Distance Driven A B D C Lemann Dialogue, Nov.8 2013

  27. Welfare Effects (B $) A B B A Lemann Dialogue, Nov.8 2013

  28. Gasohol by CV Gasohol by FFV E100 by FFV Fuel Consumption by Vehicle Categories (Blt) Lemann Dialogue, Nov.8 2013

  29. Total GHG emissions Baseline Scenario-1 Scenario-2 Lemann Dialogue, Nov.8 2013

  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

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