Order Code RL34191
Ethanol and Other Biofuels:
Potential for U. S.- Brazil Energy Cooperation
September 27, 2007
Clare Ribando Seelke
Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Brent D. Yacobucci
Specialist in Environmental and Energy Policy
Resources, Science, and Industry Division
Ethanol and Other Biofuels:
Potential for U. S.- Brazil Energy Cooperation
Summary
In the past several years, high oil and gas prices, instability in many oil-producing
countries, and concerns about global climate change have heightened
interest in ethanol and other biofuels as alternatives to petroleum products. Reducing
oil dependency is a goal shared by the United States and many countries in Latin
America and the Caribbean, a region composed primarily of energy- importing
countries. In the region, Brazil stands out as an example of a country that has
become a net exporter of energy, partially by increasing its production and use of
sugar- based ethanol.
On March 9, 2007, the United States and Brazil, which together produce almost
70% of the world’s ethanol, signed a Memorandum of Understanding ( MOU) to
promote greater cooperation on ethanol and other biofuels in the Western
Hemisphere. The countries agreed to ( 1) advance research and development
bilaterally, ( 2) help build domestic biofuels industries in third countries, and ( 3) work
multilaterally to advance the global development of biofuels.
Many analysts maintain that the United States would benefit from having more
energy producers in the region, while Brazil stands to further its goal of developing
ethanol into a globally traded commodity. In addition to these economic benefits,
some analysts think that an ethanol partnership with Brazil could help improve the
U. S. image in Latin America and lessen the influence of oil- rich Venezuela under
Hugo Chávez. However, obstacles to increased U. S.- Brazil cooperation on biofuels
exist, including current U. S. tariffs on most Brazilian ethanol imports.
While some Members of Congress support greater hemispheric cooperation on
biofuels development, others are wary of any cooperative efforts that might
negatively affect U. S. ethanol producers. The Energy Diplomacy and Security Act
of 2007, S. 193 ( Lugar), approved by the Senate Foreign Relations Committee on
March 28, 2007, would increase hemispheric cooperation on energy. S. 1007
( Lugar), the United States- Brazil Energy Cooperation Pact of 2007, calls for the same
hemispheric cooperation groups as S. 193, and directs the Secretary of State to work
with Brazil and other Western Hemisphere countries to develop biofuels
partnerships. H. Res. 651 ( Engel) recognizes and supports the importance of the
U. S.- Brazil MOU on biofuels. In the 109th Congress, legislation was introduced that
would have eliminated current tariffs on foreign ethanol, but in December 2006,
Congress voted to extend the ethanol tariffs through December 31, 2008 ( P. L. 109-
432). In the 110th Congress, S. 1106 ( Thune) would extend those tariffs through
2011, and H. R. 196 ( Pomeroy) would make the tariffs permanent.
This report discusses the opportunities and barriers related to increasing U. S.
cooperation with other countries in the hemisphere on biofuels development,
focusing on the U. S.- Brazil agreement. This report may be updated. For more
information, see CRS Report RL33290, Fuel Ethanol: Background and Public Policy
Issues, and CRS Report RL33693, Latin America: Energy Supply, Political
Developments, and U. S. Policy Approaches.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Biofuels: A Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Biofuels: A Potential Solution to Latin America’s Oil Dependency? . . . . . . . . . . 3
Brazil and the United States: Hemispheric Leaders in Ethanol Production . . . . . . 6
Ethanol Production Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U. S. Ethanol Industry and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Brazil’s Ethanol Industry and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Role of Ethanol and Gasoline in the United States and Brazil . . . . . . . 10
U. S. Ethanol Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
U. S.- Brazilian Memorandum of Understanding on Biofuels . . . . . . . . . . . . . . . 13
Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Import Tariffs and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Energy Bill and Farm Bill Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Energy Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Farm Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Food vs. Fuel Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Environmental Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Greenhouse Gas Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Water Contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Water Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Land Use/ Soil Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Labor Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Biofuels and Geo- politics in Latin America . . . . . . . . . . . . . . . . . . . . . . . . 21
Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Figures
Figure 1. Annual Ethanol Production in Brazil and the United States . . . . . . . . . 8
Figure 2. Fuel Consumption in the United States and Brazil ( billion gallons) . . 10
Figure 3. Vehicles Per 1,000 People in the United States and Brazil . . . . . . . . . 11
Figure 4. Ethanol as a Share of Fuel Demand in the United States and Brazil . . 11
Figure 5. Annual Ethanol Imports to the United States . . . . . . . . . . . . . . . . . . . . 13
1 Inter- American Development Bank ( IDB), A Blueprint for Green Energy in the Americas,
April 2007, p. 7, available at [ http:// www. iadb. org/ biofuels].
2 “ Memorandum of Understanding Between the United States and Brazil to Advance
Cooperation on Biofuels,” U. S. Department of State, Office of the Spokesman, March 9,
2007, available at [ http:// www. state. gov/ r/ pa/ prs/ ps/ 2007/ mar/ 81607. htm].
3 “ Energy Summit was Stage for Oblique Regional Leadership Contest,” Latin News Weekly
Report, April 19, 2007; “ Chávez, Lula Promote Competing Visions,” Miami Herald, August
10, 2007.
Ethanol and Other Biofuels:
Potential for U. S.- Brazil Energy Cooperation
Introduction
Recent high oil and gas prices and concerns about global climate change have
heightened interest in ethanol and other biofuels as alternatives to petroleum
products. The Western Hemisphere produces more than 80% of the world’s biofuels,
led by Brazil ( producing sugar- based ethanol) and the United States ( producing corn-based
ethanol). 1 Some have argued that increasing biofuels production in Latin
America could bolster energy security, reduce greenhouse gas emissions, and
promote rural development in the region. Others are concerned about the huge
investment outlays and government subsidies needed to build up nascent biofuels
industries. Skeptics also worry about the potential negative effects that increased
biofuels production may have on the environment, labor conditions, and food prices
in the region.
The United States and Brazil, the world’s largest ethanol producers, have
recently agreed to work together to promote the use and production of ethanol and
other biofuels throughout the Western hemisphere. Increasing U. S.- Brazil energy
cooperation was a top agenda issue when President Bush visited Brazil and when
President Lula visited Camp David earlier this year. On March 9, 2007, the two
countries signed an agreement to ( 1) advance research and development bilaterally,
( 2) help build domestic biofuels industries in third countries, and ( 3) work
multilaterally to advance the global development of biofuels. 2
Many Bush Administration officials and Members of Congress note that the new
biofuels partnership with Brazil may help improve the U. S. image in Latin America
and diminish the influence of President Chávez in the region. In the past few
months, the U. S.- Brazil biofuels agreement has already had a significant political
effect in Latin America. “ Ethanol diplomacy” appears to be helping Brazil reassert
regional leadership relative to oil- rich Venezuela under Hugo Chávez. 3
CRS- 2
4 Ethanol can also be produced from petrochemical feedstocks, but such fuel is generally
considered a fossil fuel, as opposed to a biofuel. For more information on ethanol, see CRS
Report RL33290, Fuel Ethanol: Background and Public Policy Issues, by Brent D.
Yacobucci.
5 However, interest is growing. In February 2007, the U. S. Department of Energy
announced $ 385 million in grants to construct the first six commercial- scale cellulosic
ethanol plants in the United States. It is expected that these plants will be operational
between 2009 and 2011.
6 For more information on biodiesel and other renewable fuels, see CRS Report RL32712,
Agriculture- Based Renewable Energy Production, by Brent D. Yacobucci.
Increasing biofuels cooperation with Brazil and other countries in Latin America
may prompt challenges to existing U. S. trade, energy, and agriculture policies. For
example, U. S. tariffs on foreign ethanol imports may prove to be an obstacle to U. S.-
Brazil energy cooperation. In the 109th Congress, legislation was introduced that
would have eliminated current tariffs on foreign ethanol. While some Members
support ending the ethanol tariffs, other Members of Congress support further
extensions of the ethanol import tariffs. Some have also proposed using tariff duties
collected on foreign ethanol imports to fund advanced ethanol research and
production within the United States.
This report examines the opportunities and barriers related to increasing U. S.
cooperation with other countries in the hemisphere on biofuels development,
focusing on the U. S.- Brazil agreement. It provides background information on
Western hemisphere energy challenges, the ethanol industries in Brazil and the
United States, and the biofuels potential in the region. It then raises a number of
policy issues that Congress may choose to consider related to bolstering the
development of ethanol and other biofuels in Latin America.
Biofuels: A Definition
The term biofuels generally refers to motor fuels produced from agricultural
commodities or other biological materials such as agricultural and municipal wastes.
The most widely used biofuel is ethanol ( both in the United States and worldwide),
an alcohol usually produced from the fermentation and distillation of sugar- or
starch- based crops such as sugarcane or corn. 4 Ethanol can also be produced from
cellulose- based materials ( such as perennial grasses and trees), although the
technology to produce cellulosic ethanol is in its infancy, and no commercial- scale
cellulosic ethanol plants have been constructed. 5 Other biofuels include biodiesel
and other renewable diesel fuel substitutes produced from vegetable oils or animal
fats ( such as soybean or palm oil), and butanol produced from various biological
feedstocks. 6
Biofuels have several potential benefits relative to petroleum- based fuels. First,
the use of biofuels can reduce emissions of some pollutants relative to gasoline or
diesel fuel. Second, most biofuels lead to lower emissions of greenhouse gases than
petroleum fuels — some can lead to substantial greenhouse gas reductions. Third,
biofuels can be produced domestically to displace some petroleum that would
CRS- 3
7 In 2006, the United States produced roughly 5.4 billion gallons of ethanol, as opposed to
roughly 200 million gallons of biodiesel. The production of all other biofuels was even less.
8 Biodiesel and other renewable diesel fuels must be used in diesel engines, which play a
larger role in transporting goods. In those countries where diesel engines play a larger role
in the light- duty vehicle market, renewable diesel fuels could play a larger role.
9 For background on energy challenges facing countries in the Western Hemisphere, see
CRS Report RL33693, Latin America: Energy Supply, Political Developments, and U. S.
Policy Approaches, by Mark P. Sullivan, Clare M. Ribando, and Nelson Olhero.
10 U. S. Department of Energy, March 2, 2006, “ Latin America and High Oil Prices:
Economic and Political Impact,” Latin American Special Report, October 2006; House
International Relations Committee, Hearing on “ Western Hemisphere Energy Security,”
Testimony by Karen A. Harbert, Assistant Secretary for Policy and International Affairs.
otherwise be imported. Finally, some biofuels can reduce overall fossil energy
consumption, given that much of the energy needed to grow the feedstock plant
material is supplied by the sun.
There are also many potential drawbacks to biofuels. First, in nearly all cases,
biofuels are more expensive to produce than petroleum fuels. Second, infrastructure
limitations can lead to even higher costs for biofuels than for conventional fuels.
Third, biofuels have their own potential environmental drawbacks, including
increased emissions of some pollutants and the potential for increased greenhouse gas
emissions ( in some cases, depending on the particular biofuel) when the entire
production process is taken into account.
While both the United States and Brazil — as well as many other countries —
are studying and investing in many different biofuels, this report focuses on ethanol
supply and use for several reasons: ( 1) ethanol production and consumption far
exceeds that of other biofuels; 7 ( 2) ethanol can be ( and is) used as a direct blending
component with gasoline, and gasoline engines are dominant in passenger
automobiles and light trucks; 8 and ( 3) current mandates in both Brazil and the United
States favor ethanol use, either directly or indirectly.
Biofuels: A Potential Solution to Latin America’s
Oil Dependency? 9
While oil and gas producers such as Venezuela, Mexico, Argentina, Bolivia,
Colombia, Ecuador, and Trinidad, and Tobago are net energy exporters, most Latin
American and Caribbean nations are net energy importers. Countries that rely on oil
as their primary energy source are particularly vulnerable to increases in global oil
prices. In many Caribbean island nations, oil accounts for more than 90% of total
energy consumed. In Central America, oil dependency ranges from an estimated
51% in Costa Rica to 73%- 78% in El Salvador, Honduras, and Panama, and to 84-
85% in Guatemala and Nicaragua. 10
Many Latin American countries experienced dramatic increases in their energy
bills after oil price hikes began in 2005, straining government budgets in Central
CRS- 4
11 For more information, see CRS Report RL34288, Venezuela: Political Conditions and
U. S. Policy, by Mark P. Sullivan and Nelson Olhero.
12 Mexico Challenges Venezuela in Petro- Diplomacy Game,” EFE News Service, June 2,
2006.
13 IDB report, April 2007.
14 Worldwatch Institute, “ Biofuels for Transportation,” Washington, D. C., June 7, 2006;
Masami Kojima and Todd Johnson, “ Potential for Biofuels for Transport in Developing
Countries,” World Bank, February 2006.
15 IDB report, April 2007.
America and the Caribbean. To fill a clear need and attempt to extend his influence
in the region, Venezuelan President Hugo Chávez has offered oil on preferential
terms in a program known as PetroCaribe launched in 2005.11 His government has
also reached preferential energy agreements with South American countries such as
Argentina, Bolivia, and Ecuador. In December 2005, Mexico, perhaps in an attempt
to act as a countervailing force to Venezuela in the region, initiated the Meso-
American Energy Integration Program ( PIEM) with Central America, the Dominican
Republic, and Colombia. 12 As part of the plan, Mexico will supply the bulk of the
crude oil to be processed by a new oil refinery in either Guatemala or Panama, which
will be used primarily to satisfy Central America’s energy needs.
Given declining oil production levels in both Venezuela and Mexico and the
unstable political environment in Bolivia, a major natural gas producer in the region,
some analysts have pointed to biofuels as a potential solution to Latin America’s
petroleum dependency. Producing biofuels would, some argue, allow oil- importing
countries in the region to reduce energy costs and the need for imported oil. The
Western Hemisphere produces more than 80% of the world’s biofuels, led by Brazil
( producing ethanol from sugar) and the United States ( producing ethanol from corn).
Biofuels proponents argue that the climate, surplus of arable land, and excess
production of sugarcane and other potential biofuels crops make parts of Latin
America ideally suited for an expanded biofuels industry. 13 The potential is greatest
in tropical countries that have high crop yields and low costs for land and labor,
characteristics that are present in several countries in Central America and the
Caribbean. 14
An April 2007 study by the Inter- American Development Bank ( IDB), A
Blueprint for Green Energy in the Americas, reports that some Latin American and
Caribbean countries have shown great interest and promise in the development of
biofuels. Beyond Brazil, which has been the leader in ethanol development and
production, the study also highlights several other countries with potential for
biofuels development. The study also suggests ways the IDB could support the
development of biofuels production in the region, including support for a biofuels
development fund, the development of regulatory frameworks, and research and
development. 15 Regional highlights from the IDB study include the following:
! Central America: The bulk of ethanol production in Central
America involves reprocessing hydrous ethanol from Brazil or the
European Union ( EU) for export to the United States. The IDB
CRS- 5
16 Most ethanol imports to the United States are subject to a 2.5% ad valorem tariff and
( more significantly) a 54- cent- per- gallon added duty. However, to promote development
and stability in the Caribbean region and Central America, the Caribbean Basin Initiative
( CBI) allows imports of most products from those countries, including ethanol, duty- free.
While many of these products are produced in CBI countries, ethanol entering the United
States under the CBI is generally produced elsewhere and reprocessed in CBI countries for
export to the United States. Up to 7% of the U. S. ethanol market may be supplied duty- free
by ethanol imports from CBI countries. For more information, see CRS Report RS21930,
Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci.
17 Johanna Mendelson Forman, “ Jatropha and Peace- building in Haiti,” Statement for the
Record for the House Foreign Affairs Committee, Subcommittee on the Western
Hemisphere, March 19, 2007.
study asserts that while the sugarcane harvesting season in Central
America is shorter than in Brazil, Costa Rica, El Salvador, and
Guatemala have efficient sugar industries and could produce
significant sugar- based ethanol. Costa Rica and Guatemala, which
house 44% of Cental America’s ethanol processing factories, have
the most well- developed policies in place for biofuels development.
Under the Dominican Republic- Central America- United States Free
Trade Agreement ( CAFTA- DR), signatory countries continue to
share duty- free access for some ethanol exports to the United States
under conditions established by the Caribbean Basin Initiative
( CBI) 16, but exports from Costa Rica and El Salvador enjoy specific
allocations. In the future, CAFTA- DR could spur indigenous
ethanol production in Central America.
! Caribbean: Within the Caribbean, Jamaica has exported the largest
amount of ethanol to the United States under CBI, most of it
reprocessed hydrous ethanol from Brazil. Trinidad and Tobago has
an ethanol dehydration plant, but the largest ethanol plants in the
Caribbean are located in Jamaica and the Dominican Republic.
Beyond Jamaica and the Dominican Republic, Grenada has been
identified as having future production potential for sugar- based
ethanol. The United Nations is working with Brazil to provide
technology transfer and technical assistance to examine the potential
of a biodiesel industry in Haiti from jatropha, a drought- resistant
shrub that can grow almost anywhere. 17
! South America: Most biofuels production in South America
currently goes to satisfy domestic consumption, with Colombia and
Argentina possessing the largest government programs in support of
biofuels development. Biofuels exports from non- CBI countries are
constrained by tariff barriers in the United States and the EU.
Should Colombia and/ or Peru conclude free trade agreements with
the United States, their biofuels export potentials could expand.
Argentina, Colombia, and Peru have potential to further develop
ethanol from sugarcane; Colombia and Ecuador to produce more
biodiesel from palm oil; and Chile has potential for second-generation
ethanol production from woodchips.
CRS- 6
18 When ethanol is shipped long distances, fuel costs are higher, as the fuel cannot be
transported by pipeline and must be shipped by rail, truck, or barge. This added transport
cost can be as much as 5 to 10 cents per gallon.
Brazil and the United States: Hemispheric Leaders
in Ethanol Production
Brazil and the United States are by far the world’s largest ethanol producers.
In 2006, the United States was the largest producer of ethanol, with almost 4.9 billion
gallons, followed closely by Brazil, with 4.5 billion gallons; together, the two
countries produced 69% of ethanol in the world. Prior to discussing the U. S.- Brazil
Memorandum of Understanding on biofuels, this section provides background
information on ethanol production and usage in the two countries.
Ethanol Production Process
U. S. ethanol is generally produced and consumed in the Midwest, close to where
the corn feedstock is produced. 18 In Brazil, São Paulo state is the key area for
sugarcane and ethanol production, where integrated sugar plantations and mills
produce refined sugar and fuel ethanol. Regardless of the feedstock, the main steps
to ethanol production from sugar- or starch- based crops are as follows:
! the feedstock ( e. g., corn or sugar) is processed to separate
fermentable sugars;
! yeast is added to ferment the sugars;
! the resulting alcohol is distilled, resulting in “ wet” or hydrous
ethanol; and
! for use in gasoline, the distilled alcohol is dehydrated to remove any
remaining water, resulting in “ dry” or anhydrous ethanol.
To produce ethanol from cellulosic materials, considerably more physical and
chemical/ enzymatic processing is necessary to separate fermentable sugars that can
then be converted to ethanol. This additional processing adds significant costs,
making cellulosic ethanol currently uncompetitive with corn- or sugar- based ethanol.
U. S. Ethanol Industry and Market
The United States is currently the largest producer and consumer of fuel ethanol
in the world. In 2006, the United States consumed roughly 5.4 billion gallons of fuel
ethanol. Most of that ethanol ( 4.9 billion gallons) was produced in the Midwest from
corn. A smaller amount was produced domestically from other feedstocks ( e. g.,
sorghum) or imported directly or indirectly from Brazil. Over 99% of U. S. ethanol
is blended into gasoline. Ethanol is blended into gasoline at up to the 10% level
( E10), although much is blended at lower levels ( 5% to 7%). Roughly one- third of
U. S. gasoline contains some ethanol. A small amount of ethanol is blended in purer
CRS- 7
19 It should be noted that while FFVs in the United States are designed to use any mixture
of ethanol and gasoline up to E85, these vehicles are generally optimized to run on
conventional gasoline and thus may not achieve some of the potential efficiency benefits
possible with higher- level ethanol blends.
20 For more information on federal biofuels incentives, see CRS Report RL33572, Biofuels
Incentives: A Summary of Federal Programs, by Brent D. Yacobucci.
21 F. Joseph Demetrius, Brazil’s National Alcohol Program: Technology and Development
in an Authoritarian Regime, New York, 1990, p. 11.
22 Demetrius, Op. cit. p. 44.
form as E85 ( a blend of 85% ethanol and 15% gasoline), which can be used in
flexible fuel vehicles ( FFVs) specifically designed for its use. 19
Various federal and state incentives promote the production and use of ethanol
in the United States. 20 Since the 1970s, ethanol blended into gasoline ( to make
“ gasohol”) has been eligible for tax incentives of various forms. Currently, each
gallon of pure ethanol blended into gasoline earns the blender a tax credit of 51 cents
per gallon. Additional tax incentives exist for small producers. Further, as part of
the Energy Policy Act of 2005 ( P. L. 109- 58), Congress established a Renewable Fuel
Standard ( RFS). Each year, the RFS requires a certain amount of renewable fuel be
blended into gasoline. For 2007, the mandate is 4.7 billion gallons. The vast
majority of this mandate will be met using ethanol. The mandate increases annually
and will reach 7.5 billion gallons in 2012.
U. S. ethanol production capacity has grown rapidly in recent years, and is
expected to grow even faster in the next few years. This rapid growth has generated
upward pressure on corn demand and corn prices ( as well as production of co-products
such as animal feed), while lowering wholesale ethanol prices.
Brazil’s Ethanol Industry and Market
Until 2004, Brazil was the largest producer of ethanol in the world. Since then,
the United States has moved ahead of Brazil in annual production. Brazilian ethanol
is produced almost exclusively from sugar cane. Brazilian ethanol plants tend to be
integrated with sugar plantations and sugar mills. Depending on market forces, these
plants have the capacity to shift some production from sugar to ethanol, or vice- versa.
Brazilian government support for ethanol began in 1975 when a presidential
decree established the Brazilian National Alcohol Program (“ Proalcool”). Originally
established mainly as a way to support the Brazilian sugar industry from a collapse
in sugar prices, Proalcool set a production target of 3 billion liters ( some 0.8 billion
gallons) in 1980.21 The second phase of the program, established in 1979 in response
to the OPEC oil embargo, made Proalcool explicitly into an energy policy and further
expanded the production goal to 10.7 billion liters ( 2.8 billion gallons) by 1985.22 In
2006, Brazil produced roughly 16.5 billion liters ( 4.4 billion gallons).
CRS- 8
23 Demetrius, op. cit.; Jose R. Moreira and Jose Goldemberg, “ The Alcohol Program,”
Energy Policy, April 1999, vol. 27, no. 4, pp. 229- 245; Jose Goldemberg, “ Brazilian Alcohol
Program: An Overview,” Energy for Sustainable Development, May 1994, vol. 1, no. 1, pp.
17- 22.
Source: Renewable Fuels Association, Industry Statistics. Accessed September 14, 2007,
at [ http:// www. ethanolrfa. org/ industry/ statistics/].
To promote the goals of the Program, the Brazilian government has employed
various policies through the years. These include requiring Petrobras, the state-owned
oil company, to purchase a set amount of ethanol; tying the pump price of a
liter of ethanol to a percentage of the price of gasoline ( originally 59%, later
increased to 80%); and requiring Brazilian automakers to produce dedicated ethanol
vehicles that could run only on 100% ethanol. 23
Currently, the Brazilian ethanol industry is thriving, and many of the
requirements and policies from Proalcool have been eliminated. However, one key
policy remains: all gasoline sold in Brazil must contain at least 20%- 25% ethanol.
Because of this mandate, as well as a large number of flexible fuel vehicles ( FFVs)
that can run on any blend of ethanol and gasoline, ethanol represents 40% or more
of Brazilian gasoline demand.
Figure 1. Annual Ethanol Production in Brazil and the
United States
CRS- 9
Brazilian Ethanol: A Timeline
1973- 1974 — Arab oil embargo.
1975 — Sugar prices plummet after a rapid expansion in production brought on by
earlier historically high prices.
November 1975 — Proalcool established by presidential decree. The program set a
target of 3 billion liters ( 0.8 billion gallons) of ethanol by 1980, largely blended into
gasohol. To promote the industry, the government required Petrobras, the state- owned
oil company, to purchase ethanol at a guaranteed price and blend it into gasoline.
Brazilian ethanol production less than 1 billion liters per year.
1979 — Second oil shock; annual ethanol production at 3.7 billion liters ( 980 billion
gallons).
July 1979 — Phase 2 of the Proalcool program is established. The production goal was
expanded to 10.7 billion liters ( 2.8 billion gallons) in 1985. To promote this goal,
several new policies were established: ( 1) the installation of100% ethanol pumps ( as
opposed to gasohol) was mandated at fueling stations; ( 2) the price of a liter of ethanol
was pegged at 59% of the per- liter price of gasoline; ( 3) the government provided low-interest
loans to agribusinesses to produce ethanol; and ( 4) the government and the
Brazilian auto industry reached an agreement whereby the auto industry would produce
a majority of new cars and light trucks as dedicated ethanol vehicles.
1980 — Neat ( pure) ethanol sales permitted, sales of pure alcohol vehicles begins.
Annual ethanol production at 5.5 billion liters ( 1.5 billion gallons).
1985- 1995 — Annual ethanol production at roughly 11 billion liters ( 3 billion gallons).
1986 — Alcohol vehicle sales peak at roughly 90% of new light vehicle sales.
1989- 1990 — Rise in ethanol prices, decrease in petroleum prices, and elimination of
some ethanol subsidies lead to a drop in ethanol supply. Alcohol vehicle sales drop
substantially.
1998 — Pure alcohol vehicle sales discontinued.
1999 — Ethanol prices liberalized. Annual ethanol production at roughly 11 billion
liters ( 3 billion gallons).
2003 — Flexible fuel vehicle ( FFV) sales begin.
2006 — Annual ethanol production at 17 billion liters ( 4.5 billion gallons). FFV sales
represent roughly 90% of new vehicle sales by end of year.
Sources: Michael Barzelay, The Politicized Market Economy: Alcohol in Brazil’s Energy
Strategy, Berkeley, 1986; Christoph Berg, World Fuel Ethanol Analysis and Outlook,
Kent, UK, 2004; Christoph Berg, World Ethanol Production 2001, Kent, UK, 2001; F.
Joseph Demetrius, Brazil’s National Alcohol Program: Technology and Development in an
Authoritarian Regime, New York, 1990; Renewable Fuels Association,
[ http:// www. ethanolrfa. org]; Harry Rothman, Rod Greenshields, and Francisco Roillo Calle,
The Alcohol Economy, London, 1983.
CRS- 10
24 Passenger vehicle fuel in Brazil consists mostly of gasoline and ethanol.
25 Stacy C. Davis and Susan W. Diegel, Oak Ridge National Laboratory, Transportation
Energy Data Book: 26th Edition, Oak Ridge, TN, 2007.
The Role of Ethanol and Gasoline in the United States
and Brazil
The United States consumed 5.4 billion gallons of ethanol in 2006, or roughly
4% of U. S. gasoline demand by volume. Nearly all of this fuel was consumed as
gasohol at the 10% level or lower. A much smaller amount was consumed as E85
in FFVs. In contrast, Brazil’s roughly 4 billion gallons of ethanol consumption in
2006 represented roughly half of Brazilian passenger vehicle fuel supply, 24 by
volume. Because ethanol has a lower energy content than gasoline, in terms of
energy, ethanol represents roughly 40% of Brazil’s passenger vehicle fuel supply.
The Brazilian transportation sector is considerably smaller than the U. S.
transportation sector, and diesel fuel plays a much larger role in motor vehicle fuel
demand ( including heavy trucks). While diesel fuel represents roughly a quarter of
total U. S. highway fuel consumption, 25 in Brazil, diesel fuel consumption represents
nearly two- thirds of all motor fuel. Therefore, while ethanol in Brazil displaces
nearly half of all passenger vehicle fuel consumption, it represents a smaller
percentage of total highway fuel consumption — perhaps 20% by volume and 14%
in terms of energy.
Sources: Energy Information Administration, International Energy Annual 2004,
Washington, June 2006; Renewable Fuels Association, Industry Statistics,
[ http:// www. ethanolrfa. org/ industry/ statistics], accessed July 20, 2007.
182
142
5.4
20
8.4
4
Motor Fuel
Gasoline
Ethanol
Brazil
United States
Figure 2. Fuel Consumption in the United States and Brazil ( billion gallons)
CRS- 11
Source: The World Bank, World Development Indicators 2006, April 2006.
Sources: Energy Information Administration, International Energy Annual 2004,
Washington, June 2006; International Energy Agency, World Energy Outlook 2006, Paris,
2006.
482
808
137
170
Passenger Cars
Motor Vehicles
Brazil
United States
Figure 3. Vehicles Per 1,000 People in the United States and Brazil
14%
1.9%
3.0%
2.7%
3.8%
20%
39%
48%
Ethanol as a Percentage
of Total Motor Fuel
Demand ( by Energy
Content)
Ethanol as a Percentage
of Total Motor Fuel
Demand ( by Volume)
Ethanol as a Percentage
of Gasoline Demand ( by
Energy Content)
Ethanol as a Percentage
of Gasoline Demand ( by
Volume)
Brazil
United States
Figure 4. Ethanol as a Share of Fuel Demand in the
United States and Brazil
CRS- 12
26 Ethanol and MTBE have been used in the United States to extend gasoline stocks,
increase the octane rating of gasoline, and to add oxygen to the fuel to meet clean air
standards. For more information on MTBE, see CRS Report RL32787, MTBE in Gasoline:
Clean Air and Drinking Water Issues, by James McCarthy and Mary Tiemann.
27 Renewable Fuels Association, Industry Statistics, available at [ http:// www. ethanolrfa. org/
industry/ statistics/], accessed: July 18, 2007.
28 USITC, U. S. Imports of Fuel Ethanol, by Source, by Month: January 2007 through May
2007.
U. S. Ethanol Imports
Because of such high domestic demand, most Brazilian ethanol is produced for
domestic consumption. However, U. S. imports of Brazilian ethanol have increased
in recent years, especially in times of tight domestic supply. For example, in the
spring of 2006, high U. S. ethanol demand, fueled by the phase- out of MTBE26 ( a
competing gasoline blending component) led to a rapid rise in ethanol blending by
gasoline suppliers that could not be met with domestically produced ethanol. As U. S.
ethanol production capacity is growing rapidly — from roughly 5.5 billion gallons
at the end of 2006, to roughly 6.2 billion gallons in July 2007, and an expected 11 to
12 billion gallons by the end of 200827 — whether it will remain profitable to import
ethanol directly from Brazil is an open question.
Until recently, most Brazilian ethanol was imported into the United States
through Caribbean Basin Initiative ( CBI) countries in order to avoid import duties.
( See section below on “ Import Tariffs and Duties”.) However, when U. S. ethanol
prices are high relative to Brazilian production costs, it may be advantageous to
import Brazilian ethanol directly, regardless of the tariff, as happened in the spring
of 2006. Figure 5 shows U. S. ethanol imports over the past eight years. Import data
through the end of May 2007 suggest that 2007 imports will fall below 2006 levels
but will remain high relative to previous years — perhaps 450 million gallons total. 28
CRS- 13
29 “ Memorandum of Understanding Between the United States and Brazil to Advance
Cooperation on Biofuels,” U. S. Department of State, Office of the Spokesman, March 9,
2007, available at [ http:// www. state. gov/ r/ pa/ prs/ ps/ 2007/ mar/ 81607. htm]; “ Joint Statement
on the Occasion of the Visit by President Luiz Inácio Lula da Silva to Camp David,” White
House Press Release, March 31, 2007, available at [ http:// www. state. gov/ p/ wha/ rls/
prsrl/ 07/ q1/ 82519. htm].
30 “ Advancing Cooperation on Biofuels: U. S.- Brazil Steering Group Meets August 20 in
( continued...)
Sources: U. S. International Trade Commission ( USITC), Interactive Tariff and Trade
DataWeb, at [ http:// dataweb. usitc. gov], accessed March 9, 2006, and USITC, U. S. Imports
of Fuel Ethanol, by Source 1996- 2006, updated April 10, 2007.
U. S.- Brazilian Memorandum of Understanding
on Biofuels
On March 9, 2007, the United States and Brazil signed a Memorandum of
Understanding ( MOU) to promote greater cooperation on ethanol and biofuels in the
Western hemisphere. The agreement involves ( 1) technology- sharing between the
United States and Brazil, ( 2) conducting feasability studies and providing technical
assistance to build domestic biofuels industries in third countries, and ( 3) working
multilaterally to advance the global development of biofuels. The first countries
targeted for U. S.- Brazilian assistance are the Dominican Republic, El Salvador,
Haiti, and St. Kitts and Nevis. 29
Since March 2007, the United States and Brazil have moved forward on all three
facets of the agreement. 30 Specific actions have included the following:
Million Gallons Per Year
0
100
200
300
400
500
600
700
1999 2000 2001 2002 2003 2004 2005 2006
Other Brazil Caribbean Basin
Figure 5. Annual Ethanol Imports to the United States
CRS- 14
30 (... continued)
Brasilia,” U. S. Department of State, Office of the Spokesman, August 22, 2007.
31 IDB report, April 2007.
32 Kojima and Johnson, 2006.
! Bilateral: Several high- level visits have taken place aimed at
boosting bilateral cooperation on biofuels. A team of Brazilian
scientists visited the U. S. Department of Energy and Department of
Agriculture Laboratories in mid- September. A group of U. S.
scientists are scheduled to visit Brazil in November. Officials from
both countries are exploring bilateral professorial and graduate
student exchanges.
! Third- country efforts: The U. S. and Brazilian governments are
working with the Organization of American States ( OAS), IDB, and
the U. N. Foundation ( UNF) to conduct feasibility studies in Haiti,
the Dominican Republic, and El Salvador. The feasibility study on
St. Kitts and Nevis has been completed. Officials from these four
countries visited the United States in August to attend a biofuels
conference.
! Global efforts. The United States and Brazil are working with other
members of the International Biofuels Forum ( IBF) to make biofuels
standards and codes more uniform by the end of 2007. IBF
members include Brazil, the United States, the European Union,
China, India, and South Africa.
Some argue that the U. S.- Brazil agreement could provide the impetus needed
to develop a viable biofuels industry in Latin America, a region with a comparative
advantage in biofuels production. Other observers are less sure. They are concerned
about the huge investment outlays that governments would have to make to ramp up
biofuels production. The IDB estimates that at least $ 200 billion in new investments
would have to be made for biofuels to provide even 5% of the region’s transport
energy by 2020.31 Skeptics question whether countries that lack the type of enabling
environment that Brazil possesses — infrastructure, research and extension services,
technology, educated workforce, and credit market — should lend their support to
biofuels before those items are in place. 32 On the domestic front, some analysts
worry that increasing biofuels cooperation with Brazil and other countries in Latin
America may prompt challenges to existing U. S. trade, energy, and agriculture
policies.
Policy Considerations
Import Tariffs and Duties
Because of lower production costs and/ or government incentives, ethanol prices
in Brazil are generally significantly lower than in the United States. To offset the
CRS- 15
33 Ethanol currently comes from four CBI countries: Costa Rica, Jamaica, El Salvador, and
Trinidad and Tobago. CBI imports represent a significant percentage of U. S. fuel ethanol
imports. For more information on ethanol imports from CBI countries, see CRS Report
RS21930, Ethanol Imports and the Caribbean Basin Initiative, by Brent D. Yacobucci.
34 For more information on drawbacks, see U. S. Customs Service, Drawback: A Refund for
Certain Exports, Washington, February 2002.
35 19 U. S. C. 1313( p).
36 Peter Rhode, “ Senate Finance May Take Up Drawback Loophole As Part Of Energy Bill,”
EnergyWashington Week, April 18, 2007.
U. S. tax incentives that all ethanol ( imported or domestic) receives, most imports are
subject to a 2.5% ad valorem tariff, plus an added duty of $ 0.54 per gallon. This duty
effectively negates the tax incentives for covered imports and has been a significant
barrier to ethanol imports when U. S. domestic prices are low.
However, under certain conditions ethanol imports from Caribbean Basin
Initiative ( CBI) countries are granted tariff/ duty- free status, even if the ethanol was
actually produced in a non- CBI country. In this particular case, the CBI countries
participate only in the final step of the production process — dehydration, after which
the ethanol is shipped to the United States. 33 Up to 7% of the U. S. ethanol market
may be supplied duty- free by ethanol dehydrated in CBI countries.
As shown in Figure 2, until recently, most U. S. ethanol imports came through
the CBI. Whereas previously most imported ethanol imported was produced in
Europe and dehydrated in CBI, now most CBI ethanol is produced in Brazil. As part
of the Dominican Republic- Central American Free Trade Agreement ( CAFTA- DR),
Costa Rica and El Salvador are granted specific allocations within the 7% quota.
Because CBI ethanol is actually produced in countries subject to the duties,
some stakeholders view this treatment of ethanol from the CBI as a “ loophole” to
avoid these duties. Proponents of the CBI provisions argue that the dehydration of
ethanol promotes economic development in CBI countries, even if those countries
are not using local feedstocks.
In addition to the concerns over imports of duty- free ethanol from CBI
countries, there is also growing concern that a large portion of ethanol otherwise
subject to the duties is being imported duty- free through a “ manufacturing
drawback.” 34 If a manufacturer imports an intermediate product then exports the
finished product or a similar product, that manufacturer may be eligible for a refund
( drawback) of up to 99% of the duties paid. There are special provisions for the
production of petroleum derivatives. 35 In the case of fuel ethanol, the imported
ethanol is used as a blending component in gasoline. Jet fuel ( containing no ethanol,
but considered a “ like commodity” to the finished gasoline) is exported to qualify for
the drawback in lieu of finished gasoline containing the originally imported ethanol. 36
Some critics estimate that as much as 75% or more of the duties were eligible for the
drawback in 2006. Therefore, critics question the effectiveness of the ethanol duties
and the CBI exemption.
CRS- 16
Proponents of the domestic ethanol industry argue that foreign ethanol
producers receive benefits and incentives from their home countries, and that U. S.
duties on imported ethanol should be strengthened. Further, they argue, limiting
imports and promoting the domestic industry furthers U. S. national security and
lowers our dependence on energy imports. Opponents of the duties argue that
elimination of the duties would allow us to further diversify our energy supply and
move toward more environmentally sound transportation fuels. Further, they argue
that importing ethanol from Brazil is preferable to importing petroleum from less
stable parts of the world.
On December 20, 2006, President Bush signed the Tax Relief and Health Care
Act of 2006 ( P. L. 109- 432). Among other provisions, the act extended the duty on
imported ethanol through December 31, 2008.
Energy Bill and Farm Bill Considerations
The U. S. Congress is currently considering new energy legislation, as well as
a new Farm Bill. Both pieces of legislation could affect U. S. and foreign biofuels
production.
Energy Bill. The Senate- passed energy bill ( H. R. 6) would expand and extend
the existing Renewable Fuel Standard ( RFS). The RFS currently mandates the use
of 7.5 billion gallons of renewable fuel in gasoline by 2012. The Senate bill would
increase the mandate to 13.2 billion gallons in 2012 and 36 billion gallons in 2022.
Further, by 2022, the bill would mandate the use of 21 billion gallons of “ advanced
biofuels,” defined as “ fuel derived from renewable biomass other than corn starch.”
Such a mandate would mean a significant increase in the role of non- corn- based
ethanol. If enacted, the new RFS could mean a significant increase in demand for
Brazilian sugar- based ethanol, especially if costs remain high for cellulosic ethanol
and other non- corn biofuels.
Farm Bill. The previous farm bill, the Farm Security and Rural Investment Act
of 2002 ( P. L. 107- 171), established an energy title ( Title IX). Among other
provisions, Title IX contained sections to promote the research and development of
new biofuels, as well as to expand the production of existing biofuels. Those
programs expired at the end of FY2006. The Administration’s 2007 proposed farm
bill energy title ( IX) provides $ 1.6 billion in new funding for basic and applied
research, as well as to share the risk associated with developing and commercializing
a new technology through loan and loan guarantee programs. The primary focus of
USDA’s proposed new funding is the development of cellulosic ethanol production.
On July 27, 2007, the House approved its version of the Farm Bill, H. R. 2419.
Among other provisions, the bill proposes a total of $ 3.2 billion in new funding for
Title IX energy provisions over five years, including $ 1.4 billion for production
incentive payments on new biofuels production. A key departure from current farm
bill- related energy provisions is that most new funding is directed away from corn-
CRS- 17
37 For more information, see CRS Report RL34130, Renewable Energy Policy in the 2007
Farm Bill, by Randy Schnepf.
38 This section was drawn from CRS Report RL33928, Ethanol and Biofuels: Agriculture,
Infrastructure, and Market Constraints Related to Expanded Production, by Brent D.
Yacobucci and Randy Schnepf.
39 C. Ford Runge and Benjamin Senauer, “ How Biofuels Could Starve the Poor,” Foreign
Affairs, May/ June 2007.
40 K. T. Arasu, “ Wheat Eclipses Corn as Investors New Darling,” Reuters, September 6,
2007.
41 “ Guatemala: Economic: Inflation: Recent Developments,” Global Insight, August 27.
2007.
starch- based ethanol production and towards cellulosic- based biofuels production or
to new as- yet- undeveloped technologies with some agricultural linkage. 37
Food vs. Fuel Debate
Because most ethanol is produced from food crops ( either corn or sugar), there
is concern that increasing biofuels production could lead to higher food prices. 38 In
the case of corn, most corn in the United States is used for animal feed. Higher feed
costs ultimately lead to higher prices for poultry, hogs, and cattle. The price of corn
is also related to the price of other competing foodstuffs, such as grains and soybeans.
In 2006, the expansion of corn- based ethanol production led to a sharp rise in corn
prices, which some predicted would lead to higher U. S. and world food prices. In
fact, the futures contract for March 2007 corn on the Chicago Board of Trade rose
from $ 2.50 per bushel in September 2006 to a record high of over $ 4.37 per bushel
in February 2007. Some analysts predict that if high oil prices continue, increases in
global biofuels production may push corn prices up by 20% by 2010 and 41% by
2020.39 On the other hand, commodity prices are dependent on many other factors
besides the demand for biofuels crops. Corn prices have fallen slightly in the past
few months since growers began predicting record crop yields for 2007, while wheat
prices have soared because of weather- related production problems in many
countries. 40
Since most U. S. households do not spend a large percentage of their budgets on
food, they may be able to absorb any increases in food prices that result from
increasing biofuels production, at least in the short run. However, that is not likely
to be the case for low- income households in the United States or for households in
Latin America, the poorest of which often spend more than half of their household
incomes on food. In January 2007, Mexico faced widespread strikes and social
unrest as rising corn prices, fueled by the demand for corn- based ethanol, led to a
30% rise in the cost of corn tortillas, a basic dietary staple. Through Latin America,
inflation rates have increased as a result of higher food prices, which have been
attributed to increased demand for production of ethanol and other biofuels. 41
Critics of biofuels argue that unless new technology is developed to produce
biofuels from cellulosic materials, increasing biofuels production will lead to higher
global food prices, which will in turn result in hunger and malnutrition in many
CRS- 18
42 K. T. Arasu, “ Ethanol Boom Won’t Threaten Food Supply,” Reuters, June 4, 2007.
43 Alexander E. Farrell, Richard J. Plevin, Brian T. Turner, Andrew D. Jones, Michael
O’Hare, and Daniel M. Kammen, “ Ethanol Can Contribute to Energy and Environmental
Goals,” Science, January 27, 2006, pp. 506- 508; U. S. Environmental Protection Agency
( EPA), Greenhouse Gas Impacts of Expanded Renewable and Alternative Fuels Use, April
2007.
44 EPA. Op. cit.
developing countries. Ethanol proponents dispute those predictions. They maintain
that the availability of arable land, especially in Latin America, will allow plenty of
space for biofuels production without encroaching upon other crops. In Brazil, for
example, less than 9% of the country’s total planted area is dedicated to sugar. They
further argue that the food- versus- fuel debate may be more applicable in the case of
corn than in the case of sugar, as recent expansion in ethanol production from
sugarcane has not significantly affected global sugar prices. 42
Environmental Concerns
While there are significant potential benefits from biofuels in terms of reduced
petroleum consumption and reduced air pollution, there are also potential
environmental drawbacks. These include the potential for increased greenhouse gas
emissions, higher levels of surface water contamination, and increased pressure on
land and water resources.
Greenhouse Gas Emissions. One of the key environmental concerns over
biofuels is their effect on overall greenhouse gas emissions. Depending on the
production process, biofuels can either lead to a net increase or decrease in
greenhouse gas emissions throughout the fuel cycle relative to petroleum fuels.
Because ethanol contains carbon, combustion of the fuel necessarily results in
emissions of carbon dioxide ( CO 2 ), the primary greenhouse gas. Further, greenhouse
gases are emitted through the production and use of nitrogen- based fertilizers used
in corn production, as well from fuels used in the operation of farm equipment and
vehicles to transport feedstocks and finished products. However, because
photosynthesis ( the process by which plants convert light into chemical energy)
requires absorption of CO 2 , the growth cycle of the feedstock crop can serve, to some
extent, as a “ sink” to absorb some fuel- cycle greenhouse emissions.
Recent studies on energy consumption and greenhouse gas emissions have
concluded that corn- based ethanol results in 13% to 22% lower greenhouse gas
emissions relative to gasoline. 43 Ethanol from other feedstocks can lead to even
lower greenhouse gas emissions. For example, sugar requires far less fertilizer to
produce than corn, and less processing is necessary to prepare the feedstock for
fermentation. Net greenhouse gas emissions from sugarcane- based ethanol could be
as much as 56% lower than gasoline, and cellulosic ethanol could reduce emissions
by 90% relative to gasoline. 44
Ethanol production processes themselves can also lead to air quality concerns.
For example, without proper emissions controls, ethanol plants produce emissions
CRS- 19
45 Jose Moreira. “ Water Use and Impacts Due Ethanol Production in Brazil,” International
Water Management Institute and Food and Agricultural Organization Conference:
Linkages between Energy and Water Management for Agriculture in Developing Countries,
Hyderabad, India, January 29- 30, 2007.
of volatile organic compounds ( hydrocarbons) that can lead to negative health effects
and can contribute to ozone ( smog) formation. Further, burning of sugarcane fields
before manual clearing can increase fuel cycle pollutant and greenhouse gas
emissions. Mechanized harvesting without burning can improve the emissions
profile of sugarcane ethanol, but greater mechanization would likely come at the cost
of fewer jobs for cane cutters.
Because of the favorable emissions profile of ethanol from non- corn feedstocks,
there is growing interest in moving U. S. biofuels consumption away from corn
ethanol to either imported sugarcane ethanol or domestically produced cellulosic
ethanol.
Water Contamination. Another key environmental concern surrounding
ethanol is its effects on water quality. In the United States, corn requires a significant
amount of chemical inputs. Runoff from fertilizers and pesticides finds its way into
streams and other surface waters, potentially leading to algae blooms and other
problems.
In Brazil, a key problem has been the discharge of nutrient- rich waste from
ethanol production — “ vinasse” — directly into streams or indirectly through soil
contamination. Although legislation has been introduced to address this problem, lax
enforcement of environmental standards in Brazil mean that pollution from ethanol
production will likely continue to be a problem. 45
Water Consumption. In addition to concerns over water quality, water
consumption may also become an environmental concern, especially in the United
States. Currently, Brazilian sugar and U. S. corn production do not require large
amounts of water inputs. However, as feedstock production, especially U. S. corn,
expands into drier areas, more water may be needed, putting additional pressure on
already stretched water resources.
Land Use/ Soil Quality. Concerns have also been raised about the effects of
agricultural production for biofuels on land resources. For example, in the United
States, corn has generally been rotated with soybeans to promote soil quality.
However, as corn production for ethanol expands, much of the land that had been in
rotation is shifting away from soybean production. This could lead lower
concentrations of soil nutrients, increasing the need for fertilizers and other chemical
inputs. And while cellulosic biofuels in general appear more sustainable, some
concerns have also been raised about their sustainability, especially if
environmentally sensitive areas ( e. g., Conservation Reserve Program land) are used
for bioenergy production.
In Brazil, concerns focus on protection of habitats in the cerrado ( Brazilian
savanna) and the Amazon rain forest. Expansion of sugarcane planting has led to
CRS- 20
46 Isaias de Carvalho Macedo, editor, Sugar Cane’s Energy, Sao Paulo, September 2005,
pp. 133.
47 Presentation by Alfred Szwarc, Senior Advisor to the São Paulo Sugarcane Association
( UNICA), at the Corporación Andina de Fomento Conference on Trade and Investment in
the Americas, September 5, 2007; “ Issue Paper on Biofuels Development in Latin America
and the Caribbean,” prepared for the IDB, 2006; Luiz Augusto Horta Noguierz,
“ Perspectivas Para las Biocombustibles en América Central,” Incentivos a las Renovables
y Biocombustibles, Alianza en Energía y Ambiente para Centroamérica, El Salvador,
February 2006.
48 For a discussion of these problems, see Worldwatch Institute, June 2006, and Kojima and
Johnson, World Bank, February 2006.
rapid depletion of wooded areas of the cerrado. Further, as ethanol expands into
existing pastureland, cattle- breeding has been displaced into the cerrado and the
Amazon. 46 Increased demand for soybeans ( both for food and as a feedstock for
biodiesel) has added pressure to expand soybean production into the Amazon.
Labor Issues
Some analysts see expanding the region’s biofuels industry as a way to create
jobs and promote rural development in Latin America. In most countries in the
region, biofuels production is a labor- intensive process that creates jobs in
agriculture, manufacturing, and transport. UNICA, the São Paulo Sugarcane
Association, estimates that roughly 1 million direct jobs and 3 million indirect jobs
have been created in Brazil as a result of the country’s biofuels industry. Another
study asserts that some 2,333 jobs are created in Brazil for every 1 million tons of
sugarcane harvested. Most of those jobs are as sugarcane cutters. Ethanol
proponents estimate that some 14,000 jobs could be created in Central America
through increased production of E10 ( 10% ethanol) fuel. Similar forecasts have been
made for other countries and subregions in Latin America and the Caribbean. 47
Analysts agree that biofuels production generates jobs, but some question the
number and quality of those jobs. 48 Skeptics argue that because biofuels production
often displaces other existing agricultural activities, net job gains may be minimal.
They also assert that unless governments make a concerted effort to ensure that
small- scale producers have a role to play in biofuels production, large agribusinesses
will continue to dominate the biofuels industry in Latin America. Finally, most
analysts acknowledge that as biofuels production becomes increasingly mechanized,
a development that brings efficiency and environmental benefits, less agricultural
jobs are going to be generated. As was stated above, there is likely to be a tradeoff
between increased employment and more environmentally benign practices.
Skeptics of using biofuels to promote rural development also question the
quality of most jobs created by the biofuels industry, particularly in countries
producing ethanol from sugarcane, where jobs are often low- paying, hazardous work
as seasonal cane cutters. The Brazilian government has acknowledged that there
CRS- 21
49 “ Brazil Labor Minister Calls Sugarcane Labor ‘ Degrading,’” Dow Jones Commodity
Service, June 11, 2007.
50 Monte Reel, “ U. S. Seeks Partnership with Brazil on Ethanol; Countering Oil- rich
Venezuela is Part of Aim,” Washington Post, February 8, 2007.
51 “ Brazil Gets Tough on Energy,” Latin American Regional Report, April 2007;
“ Venezuela, Brazil at Odds Over Ethanol as Chávez Hosts South American Energy
Summit,” AP, April 16, 2007; Marifeli Perez- Stable, “ Marching to Different Drummers;
Lula, Chavez,” Miami Herald, August 17, 2007.
have been instances of forced labor on some sugarcane properties in Brazil,
particularly in the northeast region of the country. 49
Biofuels and Geo- politics in Latin America
The U. S.- Brazil MOU on biofuels, the agreement is also intended to have a
political effect in the region. Many Bush Administration officials and Members of
Congress note that the new biofuels partnership with Brazil may help improve the
U. S. image in Latin America and diminish the influence of President Chávez in the
region. The United States has increasingly regarded Brazil as a significant power,
especially in its role as a stabilizing force and skillful interlocutor in Latin America.
U. S. officials tend to describe Brazil as an amicable partner governed by a moderate
leftist government and have responded positively to Brazil’s efforts to reassert its
regional leadership, which has recently been challenged by the rise of oil- rich Hugo
Chávez in Venezuela. 50
In recent months, Brazil has increasingly used so- called “ biofuels diplomacy”
as a diplomatic and economic tool to raise its profile in Latin America and
throughout the world. President Chávez, recognizing that increasing biofuels
production and usage in Latin America could diminish his regional influence, quickly
attacked the Brazil- U. S. biofuels agreement, stating that it would raise food prices
and hurt the poor. In early April 2007, despite Chávez’s criticisms of ethanol, one
of his allies, President Correa of Ecuador, signed a biofuels production agreement
with Brazil. Some Members of the Morales government in Bolivia are also
supportive of biofuels production. In mid- April 2007, Chávez was forced to
backtrack on his initial opposition to all biofuels production in the region while
attending South America’s first regional energy summit. Competition between Brazil
and Venezuela for leadership in the region has accelerated in the past few months.
In August 2007, as President Lula took a six- day tour of Mexico, Central America
and the Caribbean to promote biofuels production agreements, President Chávez
visited Argentina, Bolivia, Ecuador and Uruguay, where he signed a series of oil and
gas agreements. 51
Congressional Action
In the past two years, there has been significant congressional interest in issues
related to energy security. Some of that interest has focused on how to ensure that
countries in the Western Hemisphere, which currently supply about half of U. S.
CRS- 22
52 Testimony of Paulo Sotero, Director of the Brazil Institute of the Woodrow Wilson
International Center for Scholars, before the House Western Hemisphere Subcommittee,
September 19, 2007.
imports of crude oil and petroleum products, remain reliable sources of energy for the
United States. Another area of interest has been to promote cooperation among Latin
American countries, which are divided between net energy exporting and importing
nations, to ensure that enough clean, affordable, and reliable energy sources are
exploited to support regional growth and development. Members have cited Brazil
as an example of a country that has successfully reduced its reliance on foreign oil
by using alternative energies. In addition to the importance of following Brazil’s
example in the field of biofuels development, some Members have cited the
importance of U. S. engagement in regional efforts to develop biofuels and other
renewable energies.
On September 19, 2007, the House Western Hemisphere Subcommittee held a
hearing on “ U. S.- Brazil Relations” during which Chairmen Eliot Engel and many of
the witnesses cited biofuels cooperation as a primary example of the expanding
strategic relationship between the United States and Brazil. They discussed how the
U. S.- Brazil MOU on biofuels may encourage both countries to work together to
advance their national, regional, and international interests. Despite this potential for
increasing U. S.- Brazil collaboration on biofuels, one witness warned that this unique
opportunity may be lost if the countries are unable to resolve the underlying
agricultural disputes that divide them, such as current U. S. subsidies and tariffs that
protect corn- based ethanol producers. 52
Legislation
In the 109th Congress, Members were somewhat divided over whether to keep
the current 2.5% ad valorem tariff and added duty of $ 0.54 per gallon on foreign
ethanol imports in place. Legislation was introduced that would have eliminated the
two duties on foreign ethanol: H. R. 5170 ( Shadegg) and S. 2760 ( Feinstein), the
Ethanol Tax Relief Act of 2006. However, in December 2006, Congress voted to
extend the duties on foreign ethanol through December 31, 2008 ( P. L. 109- 432). In
the 110th Congress, S. 1106 ( Thune) would extend those tariffs through 2011, and
H. R. 196 ( Pomeroy) would make the tariffs permanent.
Several legislative initiatives in the 110th Congress would increase hemispheric
cooperation on energy issues, including biofuels development and distribution. S.
193 ( Lugar), the Energy Diplomacy and Security Act of 2007, calls for the
establishment of a regional- based ministerial forum known as the Hemisphere Energy
Cooperation Forum that would, among its many activities, be involved in developing
an Energy Sustainability Initiative to promote the development, distribution, and
commercialization of renewable fuels in the region. The bill also calls for the
establishment of a Hemisphere Energy Industry Group to increase public- private
partnerships, foster private investment, and enable countries to devise energy agendas
on various topics, including the development and deployment of biofuels. The
Senate Foreign Relations Committee reported favorably on the bill on April 12, 2007,
without amendment ( S. Rept. 110- 54).
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Another initiative, S. 1007 ( Lugar), the United States- Brazil Energy Cooperation
Pact of 2007, calls for the same cooperation groups as S. 193, and directs the
Secretary of State to work with Brazil and other Western Hemisphere countries to
develop partnerships to accelerate the development of biofuels production, research,
and infrastructure. The bill was introduced on March 28, 2007, and referred to the
Senate Foreign Relations Committee.
H. Res. 651 ( Engel), introduced on September 19, 2007, recognizes the warm
friendship and expanding relationship that exists between the United States and
Brazil, commends Brazil for reducing its dependency on oil by using alternative
energies, and recognizes the importance of the March 9, 2007, United States- Brazil
Memorandum of Understanding ( MOU) on biofuels cooperation.
Outlook
Rising demand for ethanol and other biofuels has sharpened attention on
whether the United States and Brazil, the leaders in biofuels production, should
increase cooperation, share technology, and work to expand the global biofuels
market. Of the three pillars of the U. S.- Brazil MOU on biofuels, progress on the first
( technology- sharing) and third ( working multilaterally to advance biofuels) pillars are
likely to occur most quickly. In the short to medium term, collaborative research and
development activities may yield the largest potential benefit for both countries,
particularly if they are able to hasten the development of cellulosic ethanol
technology. Producing ethanol from dedicated energy crops and waste products may
allay many of the environmental and food- versus- fuel concerns that are drawbacks
of producing ethanol from food crops like sugar or corn. Both countries also stand
to benefit from working together on the global front to establish consistent ethanol
standards and codes, a crucial step in the process for ethanol to become a globally
traded energy commodity.
While some analysts believe the U. S.- Brazil agreement may be enough to spur
viable biofuels markets in “ third countries” ( pillar two), those efforts may not be
feasible. First, governments may lack the resources or political will to make the
huge investment outlays necessary to develop their biofuels industries. Second, many
countries lack the arable land necessary to develop biofuels without encroaching on
traditional agricultural lands. A third concern with increasing sugar- based biofuels
production is that the sugar industries of many countries in the Caribbean ( including
the Dominican Republic) are struggling because of high labor costs and efficiency
problems. Fourth, as previously mentioned, there are serious labor and
environmental concerns about rapidly increasing biofuels production.
In the next few months, results from U. S.- Brazil feasibility studies for Haiti, the
Dominican Republic, and El Salvador are expected to be completed. The St. Kitts
study has already determined that although producing biofuels for transport would
not be feasible there, bio- electricity could be generated for domestic use. The results
of the other feasibility studies and the willingness of the governments of each of
those countries to embrace biofuels development are likely to affect the selection of
a second round of countries to receive U. S.- Brazil technical assistance. While U. S.
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officials are eager to expand third- country initiatives into South America, Brazilian
officials have reportedly been reluctant to give the United States a foothold into its
sphere of influence.
While some Members of Congress have been supportive of energy cooperation
efforts like the U. S.- Brazil MOU, others might not support any initiatives that they
feel will adversely affect U. S. corn- based ethanol producers. Indeed, the U. S.- Brazil
MOU does not address two key issues that many Brazilians feel are significant
obstacles to expanding bilateral and regional biofuels cooperation, namely the current
subsidies and tariffs that protect U. S. corn- based ethanol producers. Since many
Members strongly favor extending the current subsidy programs for corn producers
and tariffs on foreign ethanol, these issues may be obstacles to maintaining expanded
U. S.- Brazil biofuels cooperation. In addition, Members who feel that Brazil’s
positions on agricultural trade during the failed Free Trade Area of the Americas
( FTAA) and in the World Trade Organization ( WTO) negotiations have adversely
affected U. S. interests may also be opposed to the MOU on biofuels. On the other
hand, some may see energy cooperation as an issue on which a positive U. S.- Brazil
agenda can be based, presenting a unique opportunity to overcome past trade
disputes.