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Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of Illinois at Urbana-Champaign Hector M. Nuñez Department of.

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Presentation on theme: "Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of Illinois at Urbana-Champaign Hector M. Nuñez Department of."— Presentation transcript:

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 20131

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

3 Fuel Ethanol Production Lemann Dialogue, Nov.8 20133

4 Trends in Fuel and Sugar Prices Lemann Dialogue, Nov.8 20134

5 Light Duty Vehicle Fleet Size Projections for Brazil Lemann Dialogue, Nov.8 20135

6 RFS Biofuel Blending Mandates (BGY, 2008-2022) Lemann Dialogue, Nov.8 20136

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. 7Lemann 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. 8Lemann Dialogue, Nov.8 2013

9 Ethanol Blending Ratio in Brazil Lemann Dialogue, Nov.8 20139

10 Brazil Sugarcane Production and Allocation Between Uses Lemann Dialogue, Nov.8 201310

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

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 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 201312

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

14 Pasture Conversion Intensification Feed Conversion to cropland 14Lemann 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 201315

16 Alternatives for Production Increases Livestock intensification and conversion of pastures to cropland Transportation infrastructure development 16 Lemann Dialogue, Nov.8 2013

17 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

18 Simulated Ethanol Production & Trade 18Lemann Dialogue, Nov.8 2013

19 Simulated Livestock Intensification 17-21 million heads under a semi-intensive system 19Lemann Dialogue, Nov.8 2013

20 Expansion in Sugarcane Area BAU (9Million Ha) All-Inclusive (+1.2Million Ha) Mandates-only (+3.4 Million Ha) 20Lemann Dialogue, Nov.8 2013

21 New Croplands & Intensified Pasture Lands BAU New: 5.2Million Ha Intensified: 13Million Ha New SCane: 0.6Million Ha All-Inclusive New: 8.4Million Ha Intensified: 12.8Million Ha New SCane: 1.9Million Ha Mandates-only New: 9.5Million Ha Intensified: 14.9Million Ha New SCane: 4.0Million Ha Intensified Pastures 21Lemann Dialogue, Nov.8 2013

22 Introduction of Ethanol Pipelines 22Lemann Dialogue, Nov.8 2013

23 Simulated Effects on Ethanol Market 23Lemann Dialogue, Nov.8 2013

24 Simulated Effects on Sugarcane Area 24Lemann Dialogue, Nov.8 2013 No pipelines (10.26Million Ha) Pipelines (12.35Million Ha)

25 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 201325

26 Fuel Policy Changes in Brazil Simulation scenarios: 1. 1. Base case (baseline 2007). 2. 2. Sugar exports increase by 44% and sugarcane yield decreases by 9%. 3. 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

27 Distance Driven 27Lemann Dialogue, Nov.8 2013

28 Welfare Effects (B $) 28Lemann Dialogue, Nov.8 2013

29 Fuel Consumption by Vehicle Categories (Blt) Gasohol by CV Gasohol by FFV E100 by FFV 29

30 Total GHG emissions Lemann Dialogue, Nov.8 2013 Baseline Scenario-1 Scenario-2 30

31 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 201331

32 THANK YOU! Lemann Dialogue, Nov.8 201332

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