By Gustavo de Lima Palhares
After decades of taxing foreign ethanol, the United States government decided to open up its market by allowing the federal tariff impost to expire on December 31, 2011. Previously, foreign ethanol producers had to forfeit USD 0.54 in taxes per gallon of ethanol exported to the U.S. In addition, Congress passed the country’s federal spending bill without renewing the VEEC subsidy that would have been granted to domestic U.S. ethanol producers.
Brazil is quite interested in this change, as it is the biggest sugarcane ethanol producer on the globe. The revocation of the trading barrier represents a big win for the country’s ethanol industry, which seeks to maximize its production and exportation to the United States. Marcos Jank, President of UNICA (Union of the Sugarcane Industry), Brazil’s biggest representative of the sugar and bioethanol market, expects an increase of 12 billion liters of Brazilian ethanol exported to the U.S. until 2020.
Currently, the majority of the ethanol production in the U.S. comes from corn crops, which have heavily influenced world food price increases in recent years. This is because it takes a significant amount of corn to produce ethanol and, consequently, more land is needed for food production. On the other hand, Brazilian ethanol originates from sugarcane, which involves a cleaner production process and is 5 times better than corn ethanol. Also, since the use of ethanol reduces around 90 percent of pollutants compared to gas use, the aforementioned measures also represent a significant achievement for environmentalists.
A combination of hard work done by UNICA’s office in Washington, headed by its Washington representative Letícia Philips, and the American Ethanol proponent’s acceptance of the new measures, made the tax cuts possible. During an exclusive interview given by Letícia Philips to the Council on Hemispheric Affairs (COHA), she explained that when UNICA’s Washington office opened, their first step was to establish an “educational” project in association with APEX (Brazilian Trade and Investment Promotion Agency) and with Brazilian government support, they began to publicize what was then largely unfamiliar sugar-cane ethanol.
In regards to Brazilian consumers, Letícia Philips also clarified that the price of ethanol is likely to go down on a medium-to-long term basis once the opening of the American market incentivizes the production of the Brazilian ethanol. As for the U.S. fuel consumer, the competition will increase and a reduction of the fuel price can also be expected.
The U.S. tax cut is in accordance with President Obama’s will to set an example by “creating innovative ways to reduce greenhouse-gas emissions, increase energy efficiency, conserve water, reduce waste and use environmentally responsible products and technologies”.
Currently, U.S. flex-fuel vehicles are manufactured to accept a maximum blend of 15 percent gasoline with 85 percent anhydrous ethanol, which is also called E85 fuel. On the other hand, Brazilian flex fuel vehicles can run on any blend of E20-E25 gasoline and up to 100 percent hydrous ethanol fuel, called E100. The measures at stake represent a major incentive to push the U.S. closer to the Brazilian scenario, making ethanol more common and improving its accessibility to the public. However, the automobile industry holds the power to make this approximation real. Nevertheless, since the U.S. is currently the biggest petroleum consumer in the world, it is hard to believe that the petroleum industry will laid down its sword and embrace the ethanol era.
Besides Obama’s effort toward fuel innovation and his concerns about environmental issues related to the matter, the situation must also be seen from a bigger picture. On March 19th, 2011, Obama paid a visit to Rio de Janeiro and on October 21st, 2011, Florida Governor Rick Scott spent approximately a week talking to businessmen in São Paulo. Now one of the potential Republican candidates for president, Texas Governor, Rick Perry might depart to Brazil as well. This demonstrates the potential that the Latin American country has shown in terms of playing an even bigger role in United States foreign trading relations. Countries that recently have had strenuous relations, because of Brazil’s negligence to support the United States sanctions against Iran over its nuclear environment program, now seem to be back on the right track, showing even stronger yen to strengthen their trade relations.
Gustavo de Lima Palhares is a Research Associate for the Washington based Council on Hemispheric Affairs.