BRAZIL, US GIVE BIOFUELS A BOOST

The US and Brazil -- the world's two top ethanol producers -- on 9 March agreed to advance cooperation on the research and development of biofuels.

The agreement described biofuels as a potential "transformative force in the region to diversify energy supplies, bolster economic growth, advance social agendas, and improve the environment." The two countries did not, however, agree on any changes to the substantial tariffs that Brazilian ethanol producers currently face in the US market.

This bilateral initiative to boost cooperation on biofuels followed in the heels of the launch of an International Biofuels Forum to help develop a global biofuels market, spearheaded by Brazil and the US. The Forum also includes China, India, South Africa and the EU, which all are large potential consumers and producers.

Brazil, US bilateral cooperation

On the sidelines of US President George W. Bush's five-nation Latin American tour, US Secretary of State Condoleezza Rice and Brazilian Foreign Relations Minister Celso Amorim signed a memorandum of understanding to boost cooperation between the two countries at the bilateral, regional and global levels to promote the development of new biofuel technologies, stimulate private sector investment in biofuels, and elaborate uniform standards for green fuels.

Together, the two countries account for a total of more than 70 percent of global ethanol production. While only an estimated 10 percent of global production currently is internationally traded, this trade is expected to expand. Brazil remains the world's top exporter of ethanol, although US ethanol production surpasses that of Brazil.

At the bilateral level, the two countries intend to advance the research and development of next generation biofuels technologies based on materials such as wood chips and switch grass. Presently, most biofuels produced in both countries are so-called first generation ones made using food crops. In addition, the agreement seeks to promote transfer of technology to other countries wanting to produce the fuel, starting with countries in Central America and the Caribbean.
"If we fund projects to produce biodiesel and ethanol in poorer countries, and then the richer countries buy biodiesel that's produced there, then we'll see that investments put into those countries have produced results, and even more important, generated jobs," Brazilian President Luiz Inacio Lula da Silva said at a press conference after the deal was signed.

US' controversial ethanol tariffs to remain

Brazilian sugarcane-based ethanol is cheaper to produce than corn-based ethanol made in the US, as well as more efficient in terms of both energy and greenhouse gas emissions. However, Brazilian exporters face a 54 cent per gallon tariff barrier to the US market, in addition to a 2.5 percent ad valorem duty. The US government provides a subsidy of 51 cents for each gallon of ethanol mixed with gasoline that is effectively restricted to domestic producers because of the tariff. Washington also heavily subsidises the domestic production of corn.

The deal signed in São Paulo did not address either the tariffs or the subsidies. Rather, the agreement mentions that issues related to domestic trade or tariffs should be raised in other fora. While Lula has complained about the tariffs as unfair, Bush told a press conference that they would remain in place. He explained that the law imposing the tariffs would expire in 2009, and that the US Congress would consider it then. The tariffs were first introduced in 1980, and have been repeatedly renewed since with some fluctuations in value.

In Washington, Senator Charles Grassley, a Republican from Iowa, expressed satisfaction that Bush and Lula had reached only a narrow agreement, as broader cooperation might have harmed US ethanol producers.

Biofuels technology exports to grow?

With domestic demand for ethanol growing both in Brazil and the US, some commentators have stressed that the immediate priority is to satisfy the domestic markets. However, Brazilian and US business groups see commercial opportunities in supplying advanced equipment to other countries, such as those in the Caribbean and Central America, as they become larger producers.

The US allows Caribbean nations and countries part of the Central American Free Trade Agreement to export home-grown ethanol to the US free of duties. In addition, under the Caribbean Basin Initiative -- an initiative established to promote development in the region by providing preferential market access into the US -- Caribbean countries can import partly processed ethanol from third countries including Brazil. They can then process it before re-exportation to the US, in quantities amounting to a maximum of seven percent of US ethanol consumption. It is estimated that in 2006, the US imported about 600 million gallons of ethanol, of which about 200 million gallons came indirectly from Brazil through the Caribbean.

Under the São Paulo agreement, these countries would benefit from technical assistance in the biofuels sector from Brazil and the US.

Brazil-US initiative flanked by global measures

At the global level, the US and Brazil announced the creation of an International Biofuels Forum to help develop a global biofuels market together with China, India, South Africa and the EU, which all are large potential consumers and producers.

Launched at the Preparatory Committee for the UN Commission for Sustainable Development (CSD) on 2 March, the Forum aims to develop global standards to help turn ethanol into an internationally traded commodity, find ways to open markets, and encourage investment in the industry. Developing technical standards to define quality levels for ethanol is considered a first step to turn it into a commodity that could be traded like oil. According to Brazilian environment minister Antonio Simoes, the International Biofuels Forum is "a mechanism to structure the dialogue among the biggest producers and consumers of biofuels interested in promoting the creation of an international market for those products."

ICTSD reporting; "Les producteurs de biocarburants jettent les bases d'un marché mondial," LE MONDE, 2 March 2007; "U.S. and Brazil Seek to Promote Ethanol in West," THE NEW YORK TIMES, 3 March 2007; "U.S., Brazil Launch Biofuels Forum," THE ASSOCIATED PRESS, 4 March 2007; "US, Brazil sign ethanol deal," ABC NEWS ONLINE, 10 March 2007; "Bush to sign biofuels pact in Brazil," THE ASSOCIATED PRESS, 9 March 2007; "U.S. and Brazil Sign Biofuels Cooperation Accord," ENVIRONMENT NEWS SERVICE 9 March 2007.