Ethanol regulation in Brazil evolution and current situation Luiz A Horta Nogueira Universidade Federal de Itajubá BRAZIL

Biofuels represent about 30% of automotive energy consumption in Brazil, where regulation has always played a decisive role. Outline Bioenergy in Brazil: basic figures and facts Relevance of regulation in biofuels markets Ethanol regulation in Brazil Ethanol prices: evolution and concerns Final remarks Ethanol regulation in Brazil L Horta Nogueira BRAZIL

Primary energy production in Brazil Bioenergy in Brazil Biofuels always accounted for a significant share of Brazilian energy matrix. Currently, sugar cane, wood and several waste biomass mean 1/3 of total energy supply. Primary energy production in Brazil (EPE, 2012)

Sugarcane energy in Brazil Sugarcane energy products (ethanol and electricity) demand in Brazil is equivalent to about 800 thousand barrels of oil per day. More than 32 million Brazilian cars run using ethanol, either pure (E100) or blended with gasoline (E25-E18). The area occupied with sugarcane plantation for energy represents a small share of arable land (<1%), with reduced impacts on biodiversity and the production of other agricultural products. Typical sugarcane mill in the Brazilian Center South region (BNDES, 2009)

Sugarcane bioelectricity in Brazil In 2011, 6.6% of whole electricity generation in Brazil (532 TWh) was based on biomass, used in 432 power plants with 8.3 GW of capacity. . 35.1 TWh 80% bagasse 20% wood Energy Sources for Electricity Production in Brazil, 2011 (EPE, 2012)

Ethanol use: the initial steps Gasoline blended with ethanol has been a mandatory practice in Brazil since 1931 (minimum E5, average E7.5), reinforced after the oil crisis during the seventies, when the use of high blends (E25) in all gasoline motors and pure hydrous ethanol in dedicated motors was adopted. Ford Model T adapted for pure ethanol, used for public demonstrations in the 20’s % ethanol (INT, 2006) Ethanol content in the Brazilian gasoline (BNDES, 2008)

Ethanol use today Since the Seventies, all Brazilian gas stations sell just two different liquid fuels for spark ignited engines (Otto): Gasoline / Anhydrous Ethanol blends (E18 to E25, specified as regular (AKI* 87) and super (AKI 91) gasoline) Hydrous Ethanol (94.5 % Ethanol, AKI 105) *Anti-Knock Index (AKI) = (RON + MON)/2 In Brazil is not allowed to use diesel oil in light vehicles. Nowadays, the consumption (in volume) of ethanol and pure gasoline are approx. the same.

Ethanol use: flexfuel era Vehicles with engines able to use any blend of hydrous ethanol (E100) and gasoline (blended with 25% anhydrous ethanol, E25), with good performance and accomplishing environmental requirements, were introduced successfully in 2003 in Brazil. Today they correspond to 90% of new cars sold. 100% gasoline 100% water 100% ethanol Two phases region Ternary diagram ethanol/gasoline/water (CTC, 2004) Hydrous Ethanol (6% water) “Brazilian gasoline” E25

The ethanol evolution: productivity During the last three decades improvements has been introduced in the ethanol production, multiplying the total productivity by 2.6, due to agronomic and industrial gains. (CONAB/MAPA, 2010)

Sugarcane production improvements Sugarcane breeding (CTC, 2009) Use of vinasse as fertilizer (UNICA, 2008) Mechanized sugarcane harvesting (UNICA, 2008) Efficient feedstock logistics (Scania, 2007)

Sugarcane expansion potential The sugarcane agro-ecological zoning has defined that 65 Mha is available for sugarcane production (new and traditional) respecting environmental constraints and minimum productivity conditions In Brazil, better practices in calf breeding can liberated about 75 M ha. (FGV, IBGE, 2008)

Relevance of regulation in biofuels market To foster biofuels production and use, just market forces will be not enough. It is necessary also: - to inform consumers - to reduce risk perception of investors - to guarantee benefits for the society and environment. More than this, it is necessary to conciliate interests, generally powerful in the energy scenario and obtain political support among stakeholders. The actual experience with biofuels introduction in several countries confirm the importance of public perception and a careful planning of the program, frequently involving oil companies, which generally are the owners of logistic chain of oil products.

Relevance of regulation in biofuels market In 1975, after the Oil Shock, the Brazilian government launched the Proalcool program to promote ethanol as fuel, with clear incentives: a) establishing mandatory blending of ethanol in gasoline at increasing levels. b) guaranteeing lower consumer prices for hydrated ethanol relative to gasoline (at the time, fuel prices were determined by the government) c) guaranteeing competitive prices for the ethanol producer, even in the face of more attractive international prices for sugar than for ethanol; d) offering financing under favorable conditions for mills to increase their production capacity e) reducing taxes on new cars and reducing annual registration fees for hydrated ethanol vehicles f) making compulsory the sale of hydrated ethanol at gas stations g) maintaining strategic reserves to ensure supply outside of the production season. After 1986 practically all those inventive were removed.

Relevance of regulation in biofuels market To create effective and sound conditions for biofuels market development, besides creating proper conditions for investments in biofuels production, some measures can be advised: Biofuel quality specifications should be established An equilibrated tax regime should be implemented A blending program should be implemented § A R&D program must be promoted Ethanol regulation in Brazil L Horta Nogueira BRAZIL

Proper biofuels specs are essential Any fuel specification should harmonize basically different perspectives: Consumers Fuel producers It is generally a government role to define fuel specification, by its regulatory agencies.

Proper biofuels specs are essential Any fuel specification should harmonize basically different perspectives: Consumers Environment Fuel producers It is generally a government role to define fuel specification, by its regulatory agencies. Beyond set fuel specifications, to evaluate systematically the product in market and enforce properly any distortion are also relevant governmental responsibility.

Brazilian Spec of Anhydrous Ethanol (ANP 36, 2005) Proper biofuels specs are essential In Brazil, ethanol (pure or in gasoline blends) and biodiesel specs are established by ANP, the Brazilian regulatory agency for oil, natural gas and biofuels. These values are defined after a several audiences with stakeholders. Brazilian Spec of Anhydrous Ethanol (ANP 36, 2005)

Fuel prices breakdown in Rio de Janeiro, May 2009 The tax regime makes difference In order to balance final costs in the fuel market and introduce the externalities costs and benefits, an equilibrated tax regime should be implemented. In the Brazilian context the fiscal target is to offer to consumers final costs approx. similar using either ethanol, or gasoline. Fair prices are crucial for biofuel promotion. Taxes on fuels Fuel prices breakdown in Rio de Janeiro, May 2009 (Sindicomb, 2009).

The ethanol conundrum in Brazil Alleging inflation control, the Brazilian government (which holds the control of Petrobras, the main oil products supplier) has kept the gasoline price (at the refinery gate) at approximately 70 US$/barrel for the last 5 years, while the international price of gasoline was above 120 US$/barrel . More recently some price adjustment have been done, but a relevant lag remains, with regards the international parity price, imposing losses to Petrobras. Those price corrections were compensate by federal tax reduction, in order to keep the price at gas stations stable. In this period, the ethanol production cost increased (introduction of mechanical harvesting, increase of wages and inputs, etc.), reducing the ethanol competitiveness and moving the fleet (predominantly flex-fuel) to consume gasoline. Thus, due to this intervention in gasoline prices and gasoline tax reduction, ethanol has been substituted by gasoline, and ethanol production in 2010 was 30% less than in 2008.

Prices of regular gasoline, at producer gate, ex-taxes The ethanol conundrum in Brazil Prices of regular gasoline, at producer gate, ex-taxes (ANP, 2012; IPEADATA, 2012; IEA, 2012) Issues on price parity: definition, exchange rate influence, FOB/CIF conditions.

CIDE (main federal tax) on gasoline in Brazil The ethanol conundrum in Brazil (MINFAZ, 2012) CIDE (main federal tax) on gasoline in Brazil The CIDE reduction means an annual subsidy of US$ 2.2 billion to gasoline consumers.

FFV's owners behaviour in relation to fuel price The ethanol conundrum in Brazil (EPE, 2013) FFV's owners behaviour in relation to fuel price A Brazilian fleet of light vehicles, largely FFV's, reacts very quickly to changes in the relative price of fuels, rationally looking for the cheapest one.

Sales of fuel for light vehicles in Brazil The ethanol conundrum in Brazil Vendas (milhões de litros) Variação das vendas (%) Sales of fuel for light vehicles in Brazil (ANP, 2012, edited by: Neves, M.F./ Markestrat)

Net outcome of gasoline trade in Brazil The ethanol conundrum in Brazil Net outcome of gasoline trade in Brazil (ANP, 2012) Brazil started to import gasoline, after many decades of self- sufficiency.

Ethanol sales (anhydrous and hydrous) The ethanol conundrum in Brazil Ethanol sales (anhydrous and hydrous) Gasoline sales (ANP, 2012) There are some signals that the Brazilian government will correct these distortions, but up to now it was "just for show".

Final remarks   Planning and economic regulation are crucial for promoting bioenergy in sustainable bases, with a clear role for public policies. Besides incentives for implementing production infrastructure and facilities, adopt a proper biofuel specification and a balanced tax regime, taking into account externalities, are decisive to success. Ethanol from sugarcane is competitive with fossil fuels, when a balanced tax regime is implemented. The Brazilian ethanol program offers useful example of good and bad government actions towards the development of the bioenergy agroindustry. Ethanol regulation in Brazil L Horta Nogueira BRAZIL

L. A. Horta Nogueira horta@unifei.edu.br EXCEN/UNIFEI Thanks for your attention. L. A. Horta Nogueira horta@unifei.edu.br EXCEN/UNIFEI EXCEN Excellence Centre on Energy Efficiency