"Does She or Doesn't She?" US, Brazilian readers, UNICA say Brazil does not subsidize ethanol, slam Growth Energy
Today, April 15th represents “Tax Day” in the United States and appropriately, a war of words over the ethanol tariff and ethanol subsidies has erupted between Growth Energy, UNICA and a number of Digest readers in Brazil and the US.
The controversy, which was featured yesterday in “Circling the wagons, the firing squads and the arguments: ethanol wars explode in print, TV” highlighted the ad campaigns that debuted this week from UNICA and Growth Energy, focusing on ethanol tariff issues as well as ethanol tax credits in the US, which are up for renewal this year.
Chris Thorne, a spokesman for Growth Energy, responding to yesterday’s article, emphasized that the Growth Energy campaign was in development for months and only coincidentally debuted the same week as the UNICA campaign.
“Growth Energy’s national ad campaign has been in production for months,” he said. Whatever Unica had planned to shape perception in DC was not the focus of Growth Energy’s broader initiative on behalf of domestic ethanol’s benefits. Our effort at Growth Energy is to make the comparison between domestic ethanol and imported oil. Each one of the six Growth Energy ads makes a comparison to oil, highlighting domestic ethanol’s positives: it creates US jobs, strengthens American economic and national security, and it is cleaner than conventional gasoline.”
Does Brazilian sugarcane ethanol actually enjoy generous subsidies from the Brazilian government?
Last week, Thorne wrote in comments published in the Digest that “Yes, Brazilian sugarcane ethanol enjoys generous subsidies by the Brazilian government;” his detailed charges drew fire from a variety of commentators and readers last week, and prompted an official response from UNICA yesterday. A selection is published today in this Digest article, with the full response downloadable here.
“UNICA Sets the Record Straight on Growth Energy’s Claim on Sugarcane Ethanol”
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.
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.
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 a 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.
Key Dates in US & Brazilian ethanol history (source: UNICA)
Commentary from the US
US-based Digest reader Edward Moran, of Inforan, added: “The Brazilian National Alcohol Program (ProAlcool) adopted in 1975 was the largest fossil fuel substitution program in the world. The program ceased to exist in the early 90’s – almost 20 years ago, so to use the ProAlcool as an example for government subsidy today is an insult to common sense.”
“The main goals of ProAlcool were to introduce into the market a mixture of gasoline and anhydrous ethanol and to provide incentives for the development of vehicles that were fueled exclusively with hydrated ethanol. ProAlcool created the necessary conditions for the independent sugar and ethanol industry to become, three decades later, one of the most modern in the world, having achieved significant results from both environmental and economic perspectives.
“In other words, the Proalcool program was only associated with the “Demand” side of the market and had nothing to do with the “Supply” side of the market. It first helped creating the demand for ethanol (for automotive applications) and later stimulated the demand for ethanol. The ProAlcool had stimulated the development of know-how at producing ethanol efficiently as a way to offset its (Brazil’s) dependence on foreign oil markets.
“On the other hand, the supply side of the equation was always (since the sugar and ethanol industry was created in the 30’s of the previous century) in the hands of powerful family owned sugar cane farms such as the Ometto, Biagi and Junqueira families. These families and their ancestors are still part of Brazil’s largest sugar cane ethanol producing groups such as Cosan S. A. and Santelisa Vale. These large family owned groups have never received any subsidies from the Brazilian government and in recent years, when they needed access to more capital, they received investments / partnered with multinational oil companies or global commodity trading companies or even gone public in the Bovespa (The Sao Paulo stock Exchange) or NYSE stock exchanges.
“Moving down the value chain into retail distribution, most of it (but not all) is controlled by the Brazilian government through its fully controlled oil giant, Petrobras that has, by far, the largest gas retail distribution network in the country. The Petrobras logistics of storage facilities, pipelines and blending containers were built with government money to support Petrobras core oil business operations of refining and distributing fossil oil products (such as gasoline) and not to provide any subsidy to the fully independent and private Ethanol producing industry.
“The claim of that “Price guarantees are set by the Brazilian federal government” came from Mr. Thorne own imagination and not from fact based research.
“There is no mandate in Brazil to purchase flex fuel vehicles and I have not heard of any discount offered for doing so. As a matter of fact, all car assembly lines in Brazil (including Ford, GM, Toyota, Volkswagen, Fiat, Honda and others) moved, a few years ago, to produce, almost exclusively, cars with flex fuel engine since the cost of producing a car with flex fuel engine is approximately US$30.- more than making the car with conventional engine.
“This strategy leaves the freedom of choice in the hands of the consumer to decide what type of gasoline to put in his gas tank depending on the momentary market prices (Flex fuel engines takes any combination of gasoline and ethanol). Prices of gasoline which is E25 in Brazil and Ethanol (E100) are set by free market supply and demand rules and not by any government control or mandate. There is significant price variation between retail prices in ethanol producing states vs. retail prices in non ethanol producing states and also between prices during the sugar cane harvesting season / Ethanol production season vs. prices during offseason – all retail gas prices are driven by pure market forces of supply and demand.
“Finally, I would like to mention that not all Americans are fouled by the wrong information that you and your colleagues provide in this and other forums. On the contrary, there are several intelligent and prominent North American investors and entrepreneurs who invest in Brazilian Ethanol operations and several North American emerging biofuel technology companies that sign joint ventures with Brazilian ethanol producers for the future benefit of consumers in both countries and worldwide.”
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