Political economy of biofuel in Brazil

Transcription

1 Political economy of biofuel in Brazil David Zilberman Agricultural Economics Eerkeley and EBI Based on work with Madhu Khanna, University of Illinois at Urbana- Champaign Hector Nuñez, Centro de Investigación y Docencia Económicas, Mexico Presented at FAPESP-UC BERKELEY WORKSHOP November

2 Diverse Motivations for Fuel Policies in Brazil Reduce domestic consumption of oil Rural economic development for sugarcane sector Stabilize domestic fuel prices Generate tax revenues

3 Diverse Motivations for Fuel Policies in Brazil Reduce domestic consumption of oil Rural economic development for sugarcane sector Stabilize domestic fuel prices Generate tax revenues

4 Sugarcane ethanol in Brazil World s second largest producer Seven-fold growth since % share in transportation fuel Enabled export of oil Stalling of production since 2010

5 Key Policy Interventions in Fuel Market Blend mandate: 18-25% of gasoline consumed High tax on gasoline: 110% and tax credit for E100 and anhydrous ethanol: 42% Significant dependence on fuel tax revenue 4-5% of total tax revenue in Brazil from fuel market Domestic wholesale price of gasoline fixed to stabilize domestic fuel price Resulted in an implicit price subsidy on oil Counteracting effect on incentives for biofuels and gasoline demand reduction

6 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 R$/lt Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 R$/lt 2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 Wholesale Gasoline Price Wholesale price below import parity price Resulted in $3.6B lower revenue for Petrobras ( ) Gasoline Price Brazil Gasoline Price US Anhydrous ethanol blended with gasoline Hydrous ethanol consumed as E100 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Wholesale Ethanol Prices Gasoline Price Brazil Anhydrous Price eeq Hydrous Price eeq

7 Gasoline Anhydrous Ethanol Hydrous Ethanol $R per liter Fuel Taxes in Brazil 2011 ($R per energy equivalent liter) Freight and Marketing Margins Federal and State Taxes Wholesale

8 R$/lt Gasoline & Ethanol Prices 3,5 Heavy subsidies 3,0 2,5 2,0 1,5 1,0 0,5 Gasoline A Hydrous eeq Gasoline C Price E100 Price

9 Research Questions Analyze the impact of these policies for gains and losses to consumers, producers, government and GHG emissions in the fuel and sugar markets political economic motivations for the chosen mix of policies trade-offs being made among the various objectives Compare outcomes under the existing policies to those under a socially optimal policy for Brazil No intervention and other alternative second best policies

10 Conceptual Framework Partial equilibrium open economy model of fuel and sugarcane sectors in Brazil Fuel needs can be met by gasoline and/or ethanol Generates a greenhouse gas externality Price taker in the world oil market but large market share in world sugar market Maximize consumer and producer benefits in the Oil sector and Sugarcane related sector and internalize GHG externality First best policies: Carbon Tax and an Export Tax on Sugar Consumer price of ethanol and price of sugar determined by the price of oil Tax on gasoline and ethanol based on carbon intensity Export tax on sugar depends on elasticity of demand for sugar export

11 Domestic Sugar World Sugar World Gasoline Domestic Gasoline Ethanol ESg o Sg o Se o Pw Pg o Pe o P E De o Dg o g o Dg o Sg o E o Sr o ESr o Pr o Prx o Dr o EDr o Dr o Sr o r o

12 Domestic Sugar World Sugar ESg o Sg World Gasoline Domestic Gasoline 2 Ethanol ESg 2 First- Best Policies Sg o Se o Se 2 Pw Pg o Pe o De 2 De o g o Dg 2 Dg 2 Dg o Sg o Dg o E o E 2 Sr 2 ESr 2 ESr o Sr o Pr o Prx o Dr o EDr o Dr o Sr 2 Sr 1 Sr o r 2 r o

13 Second Best Policies in the Fuel Market: Blend Mandate S E S G ES o G ES M Pw P D D E X o X M X T D 0 E o E M S o D G World Gasoline Domestic Gasoline Ethanol

14 Second Best Policies in the Fuel Market: Mandate and Fuel Tax, Oil Price Subsidy S G S E ES o G Pw ES M ES T P D T D E X o X M X T D 0 E o E M S o D G World Gasoline Domestic Gasoline Ethanol

15 Numerical Simulation Model is calibrated for 2010/2011 using estimates of price elasticities for various demand and supply functions from the literature Supply quantities and prices: oil and sugarcane Demand: oil and sugar exports; gasoline, other oil products, anhydrous and hydrous ethanol and sugar Policy parameters: fuel tax/tax credits, mandate, carbon tax (set equal to marginal external damage for Latin America) Monte Carlo simulation of sensitivity to price elasticities

16 Policy Scenarios No Policy Status Quo: Blend Mandate + Fuel Tax/Tax Credit + Oil Price Subsidy Carbon tax and Export Tax on Sugar

17 Effect of Alternative Policies on Consumer Prices (% Deviation Relative to No Policy Baseline) Current policy result in Higher prices for fuel than optimal and Free market policies Status Quo First Best -20 Domestic sugar International sugar Hydrous Ethanol Gasohol

18 Effect of Alternative Policies on Production Levels (% Deviation Relative to No Policy Baseline) It is optimal for Brazil to export less sugar and produce more ethanol Status Quo First Best Sugarcane Sugar Sugar Exports Ethanol Gasoline

19 Welfare and GHG Effects (% Deviation Relative to No-Policy Baseline) Current policy result in big loss to fuel consumers, oil industry producers And society Status Quo First Best Fuel Consumers Sugar Consumers Oil Industry Producers Sugarcane Industry Producers GHG Emissions Total

20 Change in Government Revenue Relative to No Policy Baseline ($R Billion) 100 Current policy increases government revenue Status Quo First Best Increase in Oil Exports Relative to No Policy Baseline (MTOE) Status Quo First Best

21 Implications Current mix of fuel policies is sub-optimal from an aggregate social welfare perspective Significant negative impact on fuel and sugar consumers, that are only partially mitigated by the gas subsidy Increase GHG emissions by 1.5% relative to optimal policy Leads to lowest level of social welfare even among second best policies First best policy would have achieved larger ethanol production than current mix of policies- but lower exports and tax revenue Existing policies likely to be more politically acceptable than first best Provide higher benefits for sugarcane industry Higher tax revenue and export revenue Squeezes out profitability of oil producer but less than it would have if there was no biofuel policy

22 The bigger picture Biofuel in Brazil is managed sub-optimally Its is used to provide government revenue and allow export of gasoline The country does not reach its potential to be the leading producers of biofuel It emphasizes Pre salt oil - prestigious but expensive

23 Only a small fraction of the land suited for farming is utilized The are 60 million HAs in crop production 160 million HAs in pasture 137 million HAs is available At least 40 million HAs can produce sugar cane without any deforestation Potential is under-utilized

24 Land use in Brazil

25 Land cover and states in Brazil

26 Location of Sugarcane Production in Brazil: far from forest

27 Area Planted with the Main Temporal Crops in Brazil: **doubling of Soybean- some double cropping- moderate expansion of sugar cane

28 biofuel expansion will not lead to deforestation Drivers of Deforestation: I Brazilian government has encouraged settling the wilderness for years Built roads, subsidies..and thank goodness to large extent, it failed Only recently new environmental legislation has been introduced- with limited effectiveness Pig iron mills were built relying on wood as renewable fueleucalyptus is partially used to replace them Main cause of deforestation is the wood Second establishing land rights

29 Drivers of Deforestation: II There is land clearing in Cerrado for soybeans- Lessons from US-accessible land will be settled if not protected.it is only a matter of time Biofuel is a less than minor cause of deforestation of tropical forest Soybean is expanding because Brazilians developed technologies to grow it effectively There is some foreign (Chinese) ownership of this land

30 Sugarcane Area Planted and Potential Areas for Expansion on Pasture Land sugarcane area planted 2009 pasture area suitable for sugarcane

31 Sugarcane Production Costs For Independent Producers: 2008/2009 (R$/Ha) Traditional Expansion Northeast Machinery, repairs, and fuel 1, , Labor hired Fertilizer, chemicals and seed Leasing cost Management Marketing Margin Depreciation Total Operational Cost 3, , , Return to land Return to capital Total Cost (R$/Ha) 3, , , Total Cost (R$/Ton) *new lands have cost advantages- cheap land

32 Costs of Production and Price of Sugarcane COE-operation cost, COT=depreciation, CT return for land

33 Sugarcane Costs of Production various regions: Cost of production in Sao Paulo increases

34 Sugarcane yield and ATR, various regions: ATR recoverable sugar- we observe decline in yields- weather problems longer rotation

35 Land leasing cost and return to the land: New lands (Goyas) become more profitable

36 Petrobras Publically traded company with Brazilian government the major share holder Controls most reserves in Brazil including pre-salt Oil prices in Brazil are controlled by government- political economy matters Low inflation is an objective Gas prices source of government revenue There are federal and state taxes There is subsidy to biofuel Petrobras sells biofuels- does not produce much Biofuel allows it to sell more oil internationally at higher price

37 Petrobras interested in exporting oil With high gasoline taxes and pressure to reduce consumer prices, Petrobras is interested in exporting oil and increasing the domestic use of ethanol But it is not investing much in ethanol The oil is its specialty In oil it has to pay a small royalty- but captures most benefits With ethanol must value stay on farm with land owner farmer

38 Blemishes of the system- Brazil was a net importer of ethanol from the US in 2010 Japan declines to establish biofuel mandates due to lack of a reliable supplier Why is biofuel in Brazil not growing faster? Petrobras is an oil company Expects others to invest in domestic biofuel

39 Potential for Second Generation Biofuels Bagasse can be used for energy or second generation biofuels- can increase yields by 50% or more With new breeding methods there is potential for 25% increase in yield no GMO So if yield doubles and we add 40 million acres output of sugar can for fuel will grown 18 times. Markets and investor are needed (Asia) Supporting policy is essential

40 What about FDI?? Foreign companies can invest with lower interest rates They know that if they develop in new regions- they will reap benefits especially if but they buy cheap land (which they can sell for higher price later) There is challenge to share the gains But there are constraints on foreign ownership Develop of new regions requires major investments in infrastructure training, etc- there are price and ownership risks

41 CONCLUSIONS Current energy and biofuel in Brazil are suboptimal There is much potential to increase biofuel Sugar ethanol has infinitesimal impact on deforestation There is much land to increase biofuel capacity by more than 10X Need to develop new lands to expand production Not major priority for Petrobras Uncertainty about foreign ownership is a problem Brazilian ethanol if potential is reached, can address global energy situation substantially