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Thoughts on Brazil’s Temporary Tariff-Rate Quota for Ethanol

By Leticia Phillips posted Apr 03, 2018
Many observers were surprised last year when Brazil imposed a limit on duty free ethanol imports. With the tariff-rate quota (TRQ) policy in place since September, we take a closer look at this temporary solution to what UNICA hopes will be a temporary problem.

As the world’s largest ethanol producers, the U.S. and Brazil enjoy the benefits of trading biofuels. Our two countries have worked together for many years to build a global biofuels market that provides clean, affordable and sustainable solutions to our planet’s growing energy needs.

That’s why many observers were surprised last year when Brazil imposed a limit on duty free ethanol imports. With the tariff-rate quota (TRQ) policy in place since September, let’s take a closer look at this temporary solution to what UNICA hopes will be a temporary problem.

The Context
China and Europe recently closed their biofuel markets, making Brazil the only major market that was open to receive excess ethanol supplies. Because of this domino effect, ethanol imports to Brazil skyrocketed in 2017. Brazil received triple the amount of foreign ethanol last year than it did in 2016 and five times more than 2015 imports.

Long term, UNICA wants to address this challenge by removing trade barriers and working with other international leaders to expand free trade of biofuels. But in the short term, Brazil’s government needed to act for two reasons:

• Environmental: Brazil intends to fulfill its commitments made under the 2015 Paris Climate Agreement and had to safeguard against displacing lower-carbon fuels with higher-carbon fuels.

• Economic: The Brazilian sugarcane sector generates nearly 1 million direct jobs and is still recovering from a crippling financial crisis during which approximately 20 percent of sugarcane mills closed.

A Fair Compromise
As Brazilian officials mulled options for how best to respond, UNICA worked to moderate extreme positions and produce a fair compromise. We advocated—and the Brazilian government adopted—a temporary response that still allows a large volume of duty-free exports into Brazil.

Up to 158.5 million gallons of foreign ethanol can still enter Brazil annually without paying any import tax. For two years starting last September, volumes above that amount will pay a 20 percent tax. But there is no limit on the total volume of foreign ethanol that can be exported to Brazil.

The annual duty-free limit of 158.5 million gallons equals Brazil’s average annual ethanol imports from 2014 to 2016. In practice, the TRQ maintains what was the status quo before the 2017 spike, while protecting Brazil’s environment and economy from such an unwelcome surge generated by other closed markets. UNICA views this temporary response as a reasonable compromise that moderates what would have been harsher alternatives, such as imposing a 20 percent import tax on all ethanol as allowed by Mercosur policy.

The duty-free limit resets quarterly, and so far, the TRQ system appears to be working as intended. During the first three months under the new policy (September to November 2017), Brazil imported the maximum 39.6 million gallons allowed to enter duty free each quarter. An additional 26.7 million gallons also entered the country during that time, with a 20 percent import tax.

What’s Next
UNICA remains committed to removing trade barriers and working together with other biofuel leaders toward our ultimate goal of a global market for clean, renewable fuels. For starters, we will continue to collaborate with our allies and competitors on opening Asian markets, which should generate billions of gallons of new demand.

Opening the closed U.S. market for sugar also would help. While our American friends tend to view sugar and ethanol policy as unrelated issues, the lack of open trading partners for sugar directly pressures sugarcane ethanol producers in Brazil, especially those in the northeast. This region is economically underdeveloped but politically influential in the capital city of Brasilia. Producers in the northeast were some of the loudest voices calling for a tariff on imported ethanol and would most directly benefit from access to larger sugar quotas on the international market.  

Finally, our organization is optimistic that RenovaBio—a new program in Brazil modeled on both the U.S. Renewable Fuel Standard and California’s Low Carbon Fuel Standard—will be a game changer. By providing more predictability for investors and incentives for technological innovation, RenovaBio should stabilize Brazil’s sugarcane sector and benefit global biofuels players.

NOTE: This essay originally appeared in the April issue of Ethanol Producer Magazine.

Reflections from the FFA: There is no protection in protectionism

By Géraldine Kutas posted Apr 03, 2018
As every year, the 2018 edition of the Forum for the Future of Agriculture (FFA) which was held in Brussels last week was another impressive event. There was a clear message of the need for greater cooperation and trade among the different agricultural regions of the world.

As every year, the 2018 edition of the Forum for the Future of Agriculture (FFA) which was held in Brussels last week was another impressive event. There are very few agriculture-focused events in Brussels of the same calibre that manage to gather such an impressive number of quality speakers, key opinion leaders, and such truly global representation. The debates and conversations that the forum provided for were really inspiring.

What stood out for me this year was the broad global perspective on agriculture that was the major focus of the discussions, shedding light on agricultural challenges in both the developing as well as the developed worlds. There was a clear message of the need for greater cooperation and trade among the different agricultural regions of the world, and I was personally encouraged to hear Commission Vice-President, Frans Timmermans, extoll the virtues of freer agricultural trade and reconfirmed that there is no protection in protectionism.

We strongly support that view, and this is just the kind of thinking we all need to adopt to get the ambitious EU-Mercosur trade deal over the finish line – hopefully before the summer! The great potential of Brazilian sugarcane to provide food, low-carbon energy and bio-plastics to the benefit of the world will not be realised if it stays blocked in Brazil.

Brazilian sugarcane is a low-carbon crop whose sustainability has long been proven and that has many useful applications as we transition towards a more circular, low-carbon economy: it provides the sugar demanded by the thriving European food and drink industry; it provides 1G and 2G ethanol for low-carbon road transportation; it is the source of bio-based products that will help reducing the greenhouse gas emissions of plastics and lubricants; and it also provides for renewable electricity generation.

Sugarcane products

 

That the two major global household brands of Lego and Ikea recently announced that they would be turning to sugarcane as a source material for their bricks and sandwich bags is testament not just to its versatility, but to how it is destined to become a critical component of our daily lives.

At the FFA it was very encouraging to see that there is a genuine interest in the many products derived from sugarcane, and I am very optimistic that this versatile feedstock will contribute much more to global sustainability in the future. The many global challenges discussed at the FFA can only be tackled through global responses, and as Mr Timmermans said, these are not possible without freer trade in agriculture. That would allow the innovative solutions such as those provided by Brazilian sugarcane to be deployed around the world to the benefit of everyone.

Our Authors

 

Géraldine Kutas, Head of International Affairs & Senior International Adviser to the President of UNICA Géraldine Kutas
Head of International Affairs & Senior International Adviser to the President

 

Leticia Phillips, Representative-North AmericaLeticia Phillips
Representative, North America

 

Sugarcane Solutions Blog

Thoughts on Brazil’s Temporary Tariff-Rate Quota for Ethanol

Many observers were surprised last year when Brazil imposed a limit on duty free ethanol imports. With the tariff-rate quota (TRQ) policy in place since September, we take a closer look at this temporary solution to what UNICA hopes will be a temporary problem.

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