This policy brief is the last of three companion pieces commissioned by Oxford Analytica. The first piece, explainded the legislation. The second, focused on the impact of the California legislation on Canadian oil sand’s exports to the US. This piece looks at the impact the legislation might have on sugar-cane ethanol imports into California.
SUBJECT: Prospects for Brazilian ethanol exports to the United States.
SIGNIFICANCE: The recent California Air Resources Board’s Low Carbon Fuel Standard is likely to open the way to Brazilian exports of ethanol — something the United States has hitherto sought to avoid.
ANALYSIS: The recent resolution by the California Air Resources Board (CARB), incorporating a lifecycle assessment — including indirect land use — for all fuels into Low Carbon Fuel Standard (LCFS) legislation, attempts to establish a scientific methodology to assess emissions for a range of fuels including biofuels. The measure may, unintentionally, provide an incentive for increased imports of Brazilian ethanol, until now subject to tariff barriers in the United. Although ethanol output in the United States is rising, Brazil remains the world’s largest and most efficient producer:
- In 2007 the United States and Brazil signed a Memorandum of Understanding (MOU) to promote greater cooperation on ethanol and other biofuels in the Western Hemisphere.
- However, both countries realised that domestic protectionist forces would limit the expansion of Brazilian biofuels in the US market, and much of the MOU was dedicated to the study of potential expansion of biofuels in third markets, particularly in Central America and the Caribbean.
- The agreements also sought to provide a framework for collaboration on advanced ethanol technology development. To date, although limited collaboration between scientists has taken place in regards to lifecycle analysis of biofuels, broader exchange and joint work on advance ethanol technology development has proven a challenge.
Ethanol option. It is understandable that at the onset of drafting both the federal Energy Independence and Security Act of 2007 (EISA) and the California LCFS, there was much hope pinned on the future of ethanol, both domestic corn-based and cellulosic ethanol. In the span of a decade, US corn ethanol production shot up from 1.4 billion gallons (bll/g) in 1998 to 9.0 bll/g in 2008. However, the impact of the increase in corn production on other agriculture commodities as well as on food prices led many to question corn ethanol’s contribution to climate change mitigation.
These concerns prompted further analysis, which showed that lifecycle emissions from corn ethanol, particularly the product from the early Midwestern plants, were comparable to those of hydrocarbons. This shortcoming was noted in the EISA when it established that all bio-refineries built after 2007 had to reduce their life cycle greenhouse gas emissions relative to gasoline by specific fractions — 20% for corn ethanol, 60% for cellulosic ethanol and 50% for other advance biofuels — if they wanted to qualify as low-carbon fuel producers. Still, political expediency forced the federal legislators’ hand and the EISA grandfathered the use of 15 bll/g of corn ethanol. California did not take this approach.
Cellulosic ethanol. The compliance option all legislation is counting on is the timely development of cellulosic ethanol:
- In spite of billions poured into research and development of this product, the technology to deliver commercial capacity in line with expectations has been slow in coming. The most optimistic scenarios foresee commercial cellulosic production only in five years (2014), and then, at considerable cost in terms of plant infrastructure and feedstock collection and transportation.
- The question of how the EISA mandate of 21 bll/g of advance low carbon fuels can be met by 2022, which would imply a ramping up of production from zero to at least 15 bll/g (assuming other technologies would also deliver advance low-carbon fuels) in eight years looms large in experts’ minds.
It is not far-fetched to assume that if the California LCFS was in place, compliance with its mandated 10% emissions reduction from 2010 levels by 2020 would imply that by that date, the state would consume all available cellulosic ethanol production in the United States.
Brazilian alternative. In contrast to either corn-based ethanol or the yet-to-be-delivered cellulosic product, using the worst case scenario, Brazilian sugar cane ethanol emissions of 73.4 grams of carbon dioxide (CO2) equivalent per mega-Joule (g/MJ) are the lowest of all other liquid fuel options. Moreover, the case for sugar cane ethanol is likely to be even stronger. The Brazilian Sugarcane Industry Association (UNICA) is engaged with CARB in reviewing the Indirect Land Use (ILU) assessment associated with Brazilian sugar cane-based ethanol to incorporate the advances made/ These include mechanical harvest, increased use of bagasse in co-generation, productivity of biofuels per acre of land, water use, low carbon agriculture practices that improve carbon sequestration in soil, and the creation of protein and electricity co-products. All of these are expected to deliver another pathway well below the current emissions value of 46g/MJ of ILU:
- Even using the existing Brazilian sugar cane ethanol pathway, compliance with the LCFS can be delivered by substituting the 10% percent corn ethanol currently being blended into California gasoline with Brazilian sugar cane ethanol. Given California’s 15 bll/g of gasoline consumption per year, this outcome implies a potential market of 1.5 bll/g for Brazilian producers.
- This market might be substantially larger if current impediments to the increase of ethanol in gasoline blends are eased. To date, gasoline blends in the US market are restricted to a maximum of 10%. However, higher percentage ethanol blends could be delivered with minor adjustments to the existing infrastructure network. For instance, Brazilian transportation, infrastructure and vehicle fleet operate on gasoline blends of 20-25% ethanol.
The issue in the United States is that vehicle manufacturers deem their warranty void if blends of over 10% are used. Consequently, it is a question of liability. Given the new financial reality of the auto industry, where governments have invested significant amounts, it is plausible to assume that a resolution to this issue is much easier to achieve now than previously.
California consumption. In 2008 Brazil produced approximately 7.1 bll/g and exported 1.26 bll/g. Conservative projections for 2015 put production at 12.4 bll/g and exports at 3.2 bll/g. These estimates imply that California could potentially consume most of the Brazilian ethanol available for export. While the prospect might be enticing, UNICA is quick to point out that ethanol needs to be planned for, planted, harvested, processed and shipped. Unless US importers are ready to commit, Brazilian producers are unlikely to repeat past mistakes of counting on export markets, oversupplying, and driving prices down. This time around, UNICA expects production growth to follow domestic demand growth. Recent spikes in global sugar prices, brought about by lower than expected production in India, give further credence to UNICA’s warnings. If California importers do not decide early and contract production, the cost of compliance with the LCFS will rise
CONCLUSION: Although the United States has imposed tariffs to keep Brazilian ethanol out of its domestic market — at least while it allows for its own ethanol industry to develop — the LCFS may turn over an entire portion of that market to Brazil, undoubtedly an unintended turn of events. Moreover, if California producers fail to contract Brazilian ethanol in advance, it is possible that even at top prices, product might not be available for delivery to California.