When energy policy and sustainability clash

By Guil Signorini, Department of Horticulture and Crop Science, The Ohio State University

Guil Signorini

Brazil offers one of the most exciting cases of success when it comes to clean energy. Due to a favorable landscape, an abundance of rivers, and natural dams, approximately 65% of the electricity consumed in the country comes from large-scale hydropower plants. But it was through innovative policy reform in 1995 that renewable energy producers were authorized to trade electricity directly with final consumers. Fast forward, estimations suggest that 9.5% of the electricity consumed today comes from biomass, the second most important source in Brazil’s electricity matrix. Biomass-based electric generated by agricultural products is used for lighting approximately one-tenth of the country’s houses, farms, and businesses.

The Brazilian fuel sector is just as clean. Nearly all fuel stations sell ethanol, gasoline, and diesel. Most passenger cars and motorcycles are equipped with flex-fuel engines that can take gasoline, ethanol, or any blend between the two fuels. The choice is at the consumer’s discretion, who often makes the decision based on the engine efficiency and prices at the station. The gasoline fuel is pre-blended by the refiners to follow Federal regulations. While the gasoline fuel contains 27% ethanol in its original formulation, the diesel fuel contains approximately 10% biodiesel. Based on 2020 data retrieved from the National Fuel Agency (ANP, in Portuguese), we estimate that about 26% of the vehicle fuel used in the country comes from renewable sources. Agriculture is once again behind the scenes sustaining one of the most carbon-neutral energy sectors in the world. Sugarcane is the crop nurturing the ethanol industry, and soybean oil is the key input for approximately 60% of the biodiesel produced in Brazil. The International Energy Agency (IEA) estimates that renewables account for about 45% of the total energy demand in Brazil.

But the renewable policy arena is not a clash-free zone. Late in December 2021, the National Energy Policy Council (CNPE, in Portuguese) released a decision to regulate at 10% the amount of biodiesel in the diesel fuel available to consumers. 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 blending ratio at 11% in 2019 with 1% annual increases until 2023, when the blending ratio should reach 15%. The seemingly arbitrary CNPE decision to maintain the blending ratio 3% below the planned amount for 2022 flooded the media in Brazil, especially because the decision came a few weeks after the United Nations Climate Change Conference (COP26) in November.

It is important, however, to examine the situation from multiple angles. Of course, biodiesel stakeholders are unhappy with the decision as it constrains the demand and may turn solid investments into unfeasible plans. In its turn, CNPE defends its position by blaming COVID-19 and the resulting supply chain disruption. The Council also mentions that the measure attempts to lessen the pressure on diesel fuel prices. Both justifications from CNPE are adequate, while the complaints from biodiesel advocates are also credible.

The indirect effect of the COVID pandemic on soybean oil, a key input for biodiesel production, caused a 39% price increase in 2022 versus January 2021, and a 76% increase versus January 2020, using CME Chicago historical data. The current CME Chicago price for one pound of soybean oil is $0.59 against $0.33 two years ago. Assuming that the price basis is stable from January 2020 to January 2022, our analysis indicates that setting the blending ratio at 13% would force diesel fuel prices 2.1% up when compared to maintaining the ratio at 10%. Our analysis considered that petroleum-derived diesel prices increased 8%, as communicated by Petrobras on January 11, 2021. In light of these occurrences, biodiesel advocacy groups have requested a veto from President Jair Bolsonaro and filed popular actions against the CNPE measure.

From the Federal government’s perspective, it is unlikely that the President will overrule the CNPE decision. In fact, the country’s commercial balance is likely to benefit from it in a “post” pandemic time of high uncertainty. Brazil is a natural exporter of ag commodities, including soybean oil. The amount of oil that would be employed for biodiesel production otherwise will find its destination overseas, likely to be traded at current international prices to strengthen Brazil’s exports. The resulting financial resources from international trade will help the country address part of the macroeconomic challenges caused by the pandemic.

Curiously enough, a similar measure was taken by the U.S. Environmental Protection Agency (EPA) regarding biofuel blending requirements for U.S. refiners in 2020 and 2021. The Agency reduced biofuel mandates by approximately 15% in those years, with an aggressive plan to increase the blending ratio in 2022. With the measure, American policymakers ended up freeing large amounts of corn (feedstock for conventional ethanol) and soybeans (primary feedstock for biodiesel) that were traded when the commodity prices were sky-high. On the other hand, the mandate may have sounded for some as a lack of the government’s commitment to the environment. As defined in the Energy Independence and Security Act (EISA) of 2007, the U.S. renewable fuel targets should be back on track in 2022, except for the unrealistic goal determined for cellulosic ethanol.

Policymakers of both countries must have gone through the questions we find ourselves thinking about after learning and watching these policy decisions: How much does it cost to reduce carbon fuel emissions and substitute renewables for fossil fuels? When is it justifiable to set sound sustainability plans aside? These are undoubtedly difficult questions to answer. I can only imagine one day in the life of a policymaker in charge of these calls.

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