When Energy Policy and Sustainability Collide – Ohio Ag Net
By Guil Signorini, Department of Horticulture and Crop Science, Ohio State University
Brazil offers one of the most exciting clean energy success stories. Due to a favorable landscape, an abundance of rivers and natural dams, about 65% of the electricity consumed in the country comes from large-scale hydroelectric power stations. But it was thanks to an innovative policy reform in 1995 that renewable energy producers were allowed to trade electricity directly with end consumers. Fast forward, estimates suggest that 9.5% of the electricity consumed today comes from biomass, the second largest source in Brazil’s electrical matrix. Biomass electricity generated from agricultural products is used to light about one-tenth of the nation’s homes, farms and businesses.
The Brazilian fuel sector is equally clean. Almost all gas stations sell ethanol, gasoline and diesel. Most passenger cars and motorcycles have flex-fuel engines that can run on gasoline, ethanol, or any mix between the two fuels. The choice is at the discretion of the consumer, who often makes the decision based on engine efficiency and prices at the station. Gasoline fuel is pre-blended by refiners to follow federal regulations. While gasoline fuel contains 27% ethanol in its original formulation, diesel fuel contains approximately 10% biodiesel. Based on 2020 data extracted from the National Fuel Agency (ANP, in Portuguese), we estimate that around 26% of vehicle fuel used in the country comes from renewable sources. Agriculture is once again behind the scenes to support one of the most carbon neutral energy sectors in the world. Sugarcane is the crop that fuels the ethanol industry, and soybean oil is the main input for around 60% of the biodiesel produced in Brazil. The International Energy Agency (IEA) estimates that renewable energy accounts for around 45% of Brazil’s total energy demand.
But the renewable energy policy arena is not a conflict-free zone. At the end of December 2021, the National Energy Policy Council (CNPE, in Portuguese) issued a decision to regulate the amount of biodiesel in diesel fuel made available to consumers at 10%. The decision goes against the original biodiesel program enacted in 2005, which set minimum requirements for blending biodiesel with petroleum-derived diesel. The program set the mix ratio at 11% in 2019 with annual increases of 1% until 2023, when the mix ratio is expected to reach 15%. CNPE’s seemingly arbitrary decision to keep the mix ratio at 3% below the amount projected for 2022 flooded the media in Brazil, not least because the decision came a few weeks after the United Nations Climate Change Conference ( COP26) in November.
However, it is important to look at the situation from several angles. Of course, biodiesel players are not happy with this decision because it limits demand and can turn solid investments into unrealizable projects. In turn, the CNPE defends its position by blaming COVID-19 and the resulting supply chain disruption. The Council also mentions that the measure aims to reduce pressure on diesel prices. The CNPE’s two justifications are adequate, while the biodiesel advocates’ complaints are equally credible.
The indirect effect of the COVID pandemic on soybean oil, a key input for biodiesel production, caused a price increase of 39% in 2022 compared to January 2021, and a 76% increase compared to as of January 2020, using historical data from CME Chicago. The current CME Chicago price for a pound of soybean oil is $0.59 compared to $0.33 two years ago. Assuming the price base is stable from January 2020 to January 2022, our analysis indicates that setting the blend ratio at 13% would force diesel fuel prices to increase by 2.1% compared to maintaining the ratio at 10%. . Our analysis considered that petroleum-derived diesel prices had increased by 8%, as communicated by Petrobras on January 11, 2021. In light of these events, biodiesel advocacy groups have requested a veto from President Jair Bolsonaro and brought popular actions against the CNPE measure.
From the federal government’s perspective, the president is unlikely to reverse the CNPE’s decision. In fact, the country’s trade balance should benefit in a “post” pandemic period of high uncertainty. Brazil is a natural exporter of agricultural products, including soybean oil. The amount of oil that would otherwise be used for biodiesel production will find its destination abroad, likely to be traded at current international prices to bolster Brazil’s exports. Financial resources resulting from international trade will help the country address some of the macroeconomic challenges caused by the pandemic.
Curiously, a similar action was taken by the US Environmental Protection Agency (EPA) regarding biofuel blending requirements for US refiners in 2020 and 2021. The Agency reduced biofuel mandates by approximately 15% over those years, with an aggressive plan to increase the mix. ratio in 2022. With this measure, US policymakers ended up releasing large amounts of corn (feedstock for conventional ethanol) and soybeans (feedstock for biodiesel) that were traded when feedstock prices were very high. On the other hand, the mandate may have sounded to some like a lack of government commitment to the environment. As set out in the Energy Independence and Security Act (EISA) of 2007, US renewable fuels targets are expected to be back on track in 2022, except for the unrealistic target set for cellulosic ethanol.
Policymakers in both countries must have reviewed the questions we think about after learning about and observing these policy decisions: How much does it cost to reduce carbon emissions and substitute renewable energy for fossil fuels? When is it justified to set aside strong sustainability plans? These are undoubtedly difficult questions to answer. I can only imagine a day in the life of a decision maker in charge of these calls.