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On Ethanol Subsidies

by Joel Velasco on Apr 15, 2010

Today I addressed ludicrous claims by the corn ethanol advocacy group Growth Energy about the Brazilian ethanol industry. People love to criticize subsidies as all bad. That is not necessarily the case. The problem is when the subsidy spigot is not turned off after its done its job.

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This week’s Biofuels Digest has focused on the ongoing debate about the benefits (or not) of continuing biofuels subsidies to ethanol.

As I had told a blogger (Robert Rapier at the Energy Collective) last week, “People love to criticize subsidies as all bad. That is not necessarily the case. Alexander Hamilton made a compelling case for subsidies for nascent industries in 1790. The problem is when the subsidy spigot is not turned off after its done its job.”

So, to reaffirm this position I responded to ludicrous claims by the corn ethanol advocacy group Growth Energy about the Brazilian ethanol industry. Apparently, I was in good company since Biofuels Digest bundled my rebuttal with others and titled it – “Does she or doesn’t she?” US, Brazilian readers, UNICA say Brazil doesn’t subsidize ethanol, slam Growth Energy.

Here’s what I submitted to Biofuels Digest:

 

CLAIM: “Brazil’s ethanol program, Proalcool, stimulates and adjusts both supply and demand for Brazilian sugarcane ethanol through central coordination. It has a substantial set-aside in its rural credit program for sugarcane producers that substantially subsidizes mill debt.”

FACT: Wrong. ProAlcool does not exist anymore. Brazil’s sugarcane ethanol industry has operated without government subsidies and without price, supply, or demand controls for well over a decade. ProAlcool began in the late 1970s during the end of Brazil’s military regime and as a result of the oil crisis. Brazil was over 80% dependent on foreign oil imports but did not have the foreign exchange (i.e., dollars) to import the needed oil. ProAlcool did help the industry but, above all, the country’s consumers as various economists have analyzed. Annual ethanol production reached 2.7 billion gallons by 1987, when the government began to dismantle ProAlcool. As Brazil’s government returned to democratic rule, with a new Constitution (1988), a democratically elected president (1990), followed by economic deregulation (1994), Brazil’s ethanol industry transitioned completely to a market-based system.  The very last vestige of government interference in the marketplace – price controls hydrous ethanol – officially ended in February 1999. (See timeline further below.)

ProAlcool exposed the limitations created by government subsidies and support to grow a competitive biofuels industry. In fact, as ethanol consumption shows, Brazil only experienced sustained growth in ethanol production with the introduction of flex-fuel cars in 2003. These vehicles put consumers in the driver’s seat, allowing them to choose the most competitive fuel at the pump. Today’s Brazilian ethanol production is close to 7 billion gallons per year, a threefold increase from the ProAlcool years thanks to market competition, not controls.

BRAZILIAN ETHANOL AND SUGAR PRODUCTION

Brazilian Sugar & Ethanol Production (1975-2009)

Key Dates in U.S. & Brazil Ethanol History
The flag of Brazil

1975

In response to oil crisis, Brazil's ProAlcool created though invigorated in 1978.

The Flag of the United States of America

1978

U.S. creates a 40¢/gal incentive for ethanol use as an exemption from the fuel-excise taxes

The Flag of the United States of America

1980

U.S. imposes a tariff of imported ethanol and a 40¢/gal blender’s credit extended to 1992

The Flag of the United States of America

1984

U.S. increases incentives and tariff to 60¢/gal.

The flag of Brazil

1985

Brazil transitions from military rule with a civilian president

The flag of Brazil

1987

Brazilian government cuts agricultural subsidies and quickly begins to dismantle ProAlcool

The flag of Brazil

1988

Brazil’s new constitution limits role of state in economic activities.

The flag of Brazil

1989

Fall of Soviet Union, leads to major realignment of sugar market, aids Brazil’s sugar export

The Flag of the United States of America

The flag of Brazil

1990

Brazil’s first democratically elected president takes office and immediately closes Sugar & Ethanol  Agency (IAA). U.S. reduces incentive/tariff to 54¢/gal, creates 10¢/gal small producer’s incentive, extends programs until 2000.

The flag of Brazil

1994

Brazil’s hyperinflation brought under control and economic liberalization takes hold.

The flag of Brazil

1997

Brazilian government eliminates Petrobras monopoly

The Flag of the United States of America

1998

U.S. extends incentives/tariff until 2007, but reduces incentive to 51¢/gal over several years.

The flag of Brazil

1999

ProAlcool effectively over as last price controls end in Brazil

The flag of Brazil

2000

Brazilian industry contracts as it adjust to reality of market-based rules.

The flag of Brazil

2003

Flex-fuel vehicles begin to be sold in Brazil and industry returns to growth

The Flag of the United States of America

2005

U.S. replaces excise tax exemption into current Volumetric Ethanol Excise Tax Credit (VEETC) at 51¢/gal. Renewable Fuel Standard (RFS) created mandating use of 7.5 BGY of ethanol by 2012.

The Flag of the United States of America

2006

U.S. extends VEETC/tariff until end of 2008; MTBE phase out leads to boom in ethanol demand in US

The Flag of the United States of America

2007

RFS expanded to reach 36 BGY by 2022, with 15 BGY for corn ethanol and 21 BGY for advanced renewable fuels. EPA only finalizes regulations by 2010 but volume mandates set in law.

The Flag of the United States of America

2008

U.S. extends tariff at 54¢/gal but reduces VEETC to 45¢/gal. Both to expire on Dec 31, 2010.

The flag of Brazil

2009

With 90% of new cars sold as Flex, ethanol consumption surpasses that of gasoline in Brazil.

 

CLAIM: The entire distribution system, including storage facilities, pipelines and retail blender pumps, was built using 100 percent Brazilian government funds.”

FACT: Wrong again. The state-owned oil company, Petrobras, did build most of the fuel distribution infrastructure – be it for gasoline, diesel or ethanol – in Brazil while they enjoyed a monopoly, which officially ended on 1997. However, the storage facilities and retail stations were built by the private sector, not government funds. Nearly all ethanol storage facilities are owned and operated by privately-held companies, including ethanol mills, fuel distributors and retail stations producers.

Incidentally, Brazil does not have “blender pumps” since all fuel stations have a gasoline (E20-25) pumps as well as a pure ethanol (E100 Hydrous) pumps. Many stations carry diesel fuel and compressed natural gas (CNG). With more than 10 million flex fuel vehicles on the road (about 40% of fleet) and 1.8 million vehicles capable of operating with CNG in addition, consumers chose the fuel to buy based on price, desired vehicle performance, and environmental merits.

CLAIM: Price guarantees are set by the Brazilian federal government.

FACT: No. Since the late 1990s, the government has not exercised any control over ethanol prices. As noted above, government interference ended in the late-1980s and, with the end of Petrobras’ monopoly over the distribution of ethanol in 1997, any hint of ethanol price controls was dropped.

CLAIM: Crop inventory is controlled by Brazilian government.

FACT: The Brazilian government does not control crop inventory nor does it control sugar or ethanol inventories.  In fact, unlike corn, there is no inventory of sugarcane since it must be processed within 24 hours of harvesting in order to get the high sucrose yields. The government and industry do compile statistics on the industry, which is publicly available. Such data gathering is very similar to what is done in the U.S. by the Department of Agriculture as well as the newly proposed EPA Renewable Fuel Standard (RFS).

CLAIM: Ethanol purchased for use in taxis is tax exempt. Discounts for fleet purchases of flex fuel vehicles in Brazil are mandated.

FACT: There is no exemption from sales or other fuel-specific taxes for taxis. In Brazil, all taxis are exempt from paying certain federal taxes when purchasing a new vehicle, regardless of whether the car is flex fuel or not. There is no mandate or fleet discounts on the purchase of flex-fuel vehicles in Brazil. Like Europe, Brazil taxes all smaller vehicles (engines up to 1,000 cc) at a lower rate of 7% while larger engines (over 3,000 cc) are taxed at 25%. For the larger engines, the higher tax rate is reduced by 2%-7% if the vehicle is flex fuel. As noted, nearly all light vehicle cars sold today are flex fuel.

CLAIM: Yes, Brazilian sugarcane ethanol enjoys generous subsidies by the Brazilian government.

FACT: Not true based on answers above. In fact, the very opposite of the current case in the United States today. According to the U.S. Congress’ Joint Committee on Taxation, a one year renewal of the $0.45 per gallon subsidy (VEETC) would cost the U.S. Treasury about $5 billion. The U.S. Government Accountability Office (GAO) calculated that by the year 2000 – when U.S. ethanol production had reached 1.6 billion gallons – the total cost of the subsidies to corn ethanol had surpassed $11 billion. A more recent and comprehensive look at U.S. subsidies to biofuels claims that the U.S. may well be subsidizing ethanol at over $70 billion per year. There’s nothing wrong with subsidies for a nascent industry, the issue is when to turn off the spigot.

 

As the late Senator Moynihan often reminded us, “each of us is entitled to his own opinion, but not to his own facts.”

copyright 2010 Brazilian Sugarcane Industry Association