Biofuels Under Scrutiny

Fuelled by concerns over climate change and energy security, as well as rapidly increasing commercial interest, emerging patterns in biofuel production and trade are generating both international co-operation and growing unease over trade terms.

On 9 March, an agreement to advance co-operation on research and development of biofuels between the US and Brazil – the world’s two top ethanol producers – made headlines the world over.

The agreement, signed on the sidelines of President Bush’s five-nation Latin American tour, described biofuels as a potential “transformative force in the region to diversify energy supplies, bolster economic growth, advance social agendas, and improve the environment.”

At the bilateral level, the two countries intend to advance research and development of next generation biofuel technologies based on materials such as wood chips and switch grass. Presently, biofuels produced in both countries are made using food crops: sugarcane in Brazil and corn in the US. In addition, the agreement seeks to stimulate private sector investment in biofuels, as well as to promote technology transfer to other nations wishing to enter the biofuels market, starting with countries in Central America and the Caribbean.

At the global level, the signatories promised to seek to expand the development of a global market in biofuels by developing uniform standards and codes that will standardise the definition of ethanol, so that it can be traded on global markets the same way as other commodities like oil. A week earlier, 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.

The US-Brazil agreement leaves aside the controversial issue of US tariffs on ethanol imports. 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 (at current price levels, this fluctuates from 3-4 cents per gallon). The deal signed in São Paulo did not address either the tariffs or US corn subsidies.

While Brazilian media quickly dubbed the initiative as an ‘OPEC for ethanol’, officials from both sides refuted allegations that their intention was to set up a price-fixing cartel. Instead, it seems that the main thrust of the deal is the spread of commercially valuable biofuel production technologies. For instance, just a week later Brazil and Indonesia signed an agreement under which Brazil is to provide Indonesia with technical help to produce ethanol from sugarcane. Indonesia is trying to reduce its reliance on petroleum while revitalising its agricultural sector.