Public policies and transportation fuel markets in brazil and u s
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Public policies and Transportation Fuel Markets in Brazil and U.S. Hayri Önal University of Illinois at Urbana-Champaign Hector M. Nuñez Department of Economics. Centro de Investigación y Docencia Económicas (CIDE), México. Developments in Brazil and US Ethanol Industry. RFS2. RFS1.

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Public policies and Transportation Fuel Markets in Brazil and U.S.

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Public policies and transportation fuel markets in brazil and u s

Public policies and Transportation Fuel Markets in Brazil and U.S.

Hayri Önal

University of Illinois at Urbana-Champaign

Hector M. Nuñez

Department of Economics. Centro de Investigación y Docencia Económicas (CIDE), México

Lemann Dialogue, Nov.8 2013


Developments in brazil and us ethanol industry

Developments in Brazil and US Ethanol Industry

RFS2

RFS1

Industry deregulation

Pro-Alcool

EDV

MTBE Banned

FFV era

Lemann Dialogue, Nov.8 2013


Fuel ethanol production

Fuel Ethanol Production

Lemann Dialogue, Nov.8 2013


Trends in fuel and sugar prices

Trends in Fuel and Sugar Prices

Lemann Dialogue, Nov.8 2013


Light duty vehicle fleet size projections for brazil

Light Duty Vehicle Fleet Size Projections for Brazil

Lemann Dialogue, Nov.8 2013


Rfs biofuel blending mandates bgy 2008 2022

RFS Biofuel Blending Mandates(BGY, 2008-2022)

Lemann Dialogue, Nov.8 2013


Where u s is now

Where U.S. is Now

  • Corn ethanol production tripled from 14.7 BL in 2005 to about 53.2 BL in 2011. Current capacity is 55.6 BL, near the maximum capacity envisioned by the RFS.

  • Future biorefineries must produce advanced and cellulosic biofuels to meet the RFS targets.

    • Cellulosic ethanol and Sugarcane ethanol are advanced biofuel, with 60% and 90% GHG emission reduction. Currently, in US, the only other advanced biofuel is biodiesel produced from soybean oil. Cellulosic ethanol production at commercial scale has not been realized yet.

    • This leaves sugarcane ethanol as the only other economical alternative for meeting the advanced biofuels demand in US.

Lemann Dialogue, Nov.8 2013


Policy interventions in u s and brazil

Policy Interventions in U.S. and Brazil

  • In U.S.:

  • blending mandates, biofuel production subsidies, import tariffs, ad valorem tax, and import quotas. Subsidies, tariff and trade restrictions are eliminated in Dec. 2011.

  • In Brazil:

  • Ethanol blending mandate within 18%-25% range, the rate was reduced from 25% to 20% in 2011 and 2012, recently raised back to 25%.

  • Tax rates applied to gasoline and ethanol are often modified to make E100 competitive with gasohol.

  • Tax rate for pure gasoline is >100%, for E100 and anhydrous ethanol it is <40%

  • PETROBRAS regulates the refinery price of gasoline. During the past 5 years, price was almost fixed not to expose Brazilian consumers to world price volatility.

Lemann Dialogue, Nov.8 2013


Ethanol blending ratio in brazil

Ethanol Blending Ratio in Brazil

Lemann Dialogue, Nov.8 2013


Brazil sugarcane production and allocation between uses

Brazil Sugarcane Production and Allocation Between Uses

Lemann Dialogue, Nov.8 2013


Ethanol exports by brazil and u s

Ethanol Exports by Brazil and U.S.

Sources: EIA (2013) and UNICA (2013)

Lemann Dialogue, Nov.8 2013


Policy research issues

Policy Research Issues

  • World Biofuel demand is growing along with the food demand, production resources are limited

  • Already a significant amount of land is allocated to the production of biofuelfeedstocks in Brazil (~8 million ha) and US (~16 million ha).

  • Feasibility of meeting the demand for renewable transportation fuels is a challenge

  • It is argued frequently that improving the efficiency of land use in Brazil can be a solution, particularly by intensifying the use of pasturelands for beef cattle production

Lemann Dialogue, Nov.8 2013


Potential for land use changes in brazil

Potential for Land Use Changes in Brazil

Annual Crops >48 Million Ha

Pastures >166 Million Ha

Lemann Dialogue, Nov.8 2013


Pasture conversion

Pasture Conversion

Intensification

Conversion to cropland

Feed

Lemann Dialogue, Nov.8 2013


Modeling methodology

Modeling Methodology

We developed a large scale spatially explicit economic simulation model for both Brazil and US incorporating the domestic production and consumption in both countries and trade between them in a price endogenous framework

  • Explicit demand functions for food and transportation (miles driven by different vehicles categories), blending restrictions

  • 295 production regions in U.S., 137 production regions in Brazil

  • 15 annual crops, 8 livestock categories, two dedicated perennial energy crops and crop residues in U.S.

  • 8 crops and sugarcane in Brazil, sugarcane expansion limited to agro-ecological zones

  • A detailed fuel transportation component in Brazil (pipelines)

Lemann Dialogue, Nov.8 2013


2022 scenarios for us

2022 Scenarios for US

  • Business-As-Usual (BAU): Benchmark Scenario

  • Scenario 1: Mandates, US Import barriers and subsidies – Policy until Dec. 2011

  • Scenario 2: US mandates only

Lemann Dialogue, Nov.8 2013


Simulated ethanol production trade

Simulated Ethanol Production & Trade

Lemann Dialogue, Nov.8 2013


Simulated livestock intensification

Simulated Livestock Intensification

17-21 million heads under a semi-intensive system

Lemann Dialogue, Nov.8 2013


Expansion in sugarcane area

Expansion in Sugarcane Area

All-Inclusive

(+1.2Million Ha)

BAU

(9Million Ha)

Mandates-only

(+3.4 Million Ha)

Lemann Dialogue, Nov.8 2013


New croplands intensified pasture lands

New Croplands & Intensified Pasture Lands

All-Inclusive

New: 8.4Million Ha

Intensified: 12.8Million Ha

New SCane: 1.9Million Ha

Intensified Pastures

BAU

New: 5.2Million Ha

Intensified: 13Million Ha

New SCane: 0.6Million Ha

Mandates-only

New: 9.5Million Ha

Intensified: 14.9Million Ha

New SCane: 4.0Million Ha

Lemann Dialogue, Nov.8 2013


Introduction of ethanol pipelines

Introduction of Ethanol Pipelines

Lemann Dialogue, Nov.8 2013


Simulated effects on ethanol market

Simulated Effects on Ethanol Market

Lemann Dialogue, Nov.8 2013


Simulated effects on sugarcane area

Simulated Effects on Sugarcane Area

No pipelines

(10.26Million Ha)

Pipelines

(12.35Million Ha)

Lemann Dialogue, Nov.8 2013


Conclusions i

Conclusions - I

  • There is considerable potential for increasing biofuel production in Brazil to meet the domestic and export demand.

  • This can be done by improving the productivity on pasture lands and intensifying the beef cattle production systems.

  • Most of the intensified pastures and beef cattle operations would be in the Center West.

  • Introduction of the pipelines would increase the sugarcane production in those regions traversed by the pipelines

Lemann Dialogue, Nov.8 2013


Fuel policy changes in brazil

Fuel Policy Changes in Brazil

Simulation scenarios:

  • Base case (baseline 2007).

  • Sugar exports increase by 44% and sugarcane yield decreases by 9%.

  • Same as scenario 2 + 7.5% cut on gasoline tax rates (from R$0.23/liter to R$0.19)

    All three scenarios are run under blending rates ranging from 15% to 25%.

Lemann Dialogue, Nov.8 2013


Distance driven

Distance Driven

A

B

D

C

Lemann Dialogue, Nov.8 2013


Welfare effects b

Welfare Effects (B $)

A

B

B

A

Lemann Dialogue, Nov.8 2013


Public policies and transportation fuel markets in brazil and u s

Gasohol by CV

Gasohol by FFV

E100 by FFV

Fuel Consumption by

Vehicle Categories (Blt)

Lemann Dialogue, Nov.8 2013


Total ghg emissions

Total GHG emissions

Baseline Scenario-1 Scenario-2

Lemann Dialogue, Nov.8 2013


Conclusions ii

Conclusions - II

  • Lowering the blending rate temporarily to cope with a short supply of ethanol may be a sound policy in the short run, but if continued it is not a good policy for consumers and producers.

  • Lowering the tax rate on gasoline may reduce some of the adverse effect on consumers, but it is a harmful policy for the environment.

  • A sound policy would be to invest in agriculture (livestock intensification) and infrastructure development (e.g. transportation pipelines connecting new sugarcane expansion areas in Serrado and center-west to the main demand areas in southeast).

  • Agricultural land and pasture land are considered as the only restrictive productive resources here. Another crucial input is irrigation water which may be a restrictive factor for expansion of sugarcane production in center-west and northeast. Work in this direction is currently under way.

Lemann Dialogue, Nov.8 2013


Public policies and transportation fuel markets in brazil and u s

THANK YOU!

Lemann Dialogue, Nov.8 2013


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