Brazil jumps into debate over proposed RFS backtrack

Source: Amanda Peterka, E&E reporter • Posted: Wednesday, November 20, 2013

It’s not only domestic biofuels producers that are upset with the Obama administration’s proposed rollback of biofuel targets for next year.

Brazilian sugar cane ethanol producers are warning that the reduced targets, proposed Friday largely in response to oil industry concerns, could upset efforts to reduce greenhouse gas emissions as well as create tension between Brazil and the United States. They say the proposed lower target for advanced biofuels, which do not use corn starch as an input, is especially concerning.

“Slashing the 2014 target for advanced biofuels would be a huge step backwards from the Obama administration’s goal of decreasing greenhouse gases and improving energy security,” said Leticia Phillips, North American representative for the Brazilian Sugarcane Industry Association (UNICA).

Brazil’s entrance into the conversation over next year’s proposed renewable fuel standard targets highlights a sometimes overlooked consequence of the U.S. biofuel policy: the ethanol trade between the United States and Brazil, and Brazilian sugar cane ethanol’s relationship to U.S. biodiesel production.

Under the RFS, U.S. EPA each year sets targets for overall renewable fuel and advanced biofuel. A subset of the advanced category is cellulosic biofuels, or those made from plant-based materials like agricultural residues, perennial grasses and municipal solid waste.

The agency over the past several years has lowered the cellulosic target by at least 95 percent compared with the levels that were written into the RFS in 2007 to reflect a slower-than-expected takeoff in cellulosic technologies. EPA has not, however, lowered the overall advanced target, leaving a shortfall that it says can be filled by either domestic biodiesel made from soybean oil, animal fats and used cooking grease — or sugar cane ethanol imports from Brazil.

This year, biodiesel producers are on track to hit 1.7 billion gallons of production, well over their RFS level of 1.28 billion gallons. Because biodiesel is given more credit than other fuels in the renewable fuel standard — a single gallon of biodiesel is worth 1.5 fuel credits — biodiesel’s expected production this year is equivalent to 2.55 billion gallons under the RFS.

Brazilian imports, meanwhile, are expected to reach about 400 million gallons this year, according to UNICA, more than enough to help hit the full advanced biofuel target of 2.75 billion gallons.

Historically, imports of ethanol to the United States from Brazil have been highly variable depending on the size of the nation’s sugar cane crop, Brazilian demand for ethanol and the capacity of U.S. producers to export their corn ethanol. According to EPA, the average import level for the last 10 years has been 223 million gallons a year. The highest level was in 2006, when Brazilian producers exported 560 million gallons to the United States.

The import of Brazilian sugar cane ethanol has taken heat from some conventional corn ethanol producers and members of Congress, who argue that the United States shouldn’t be relying on foreign ethanol to meet its own biofuels goals. The import of Brazilian sugar cane ethanol also has contributed to the “ethanol shuffle,” the situation where U.S. producers export their product to Brazil to make up for the sugar cane ethanol that’s being imported to the United States.

Critics have called for lowering the advanced biofuel target to close the gap that must be filled each year by Brazilian imports.

In 2014, EPA has proposed to do just that — on Friday, it said it would lower the advanced biofuel target from this year’s level of 2.75 billion gallons to about 2.2 billion gallons. The target would also keep the biodiesel target level at 1.28 billion gallons.

EPA estimates that, under the proposal, Brazilian producers will export 300 million to 800 million gallons of ethanol to the United States next year.

Neither the U.S. biodiesel industry nor Brazilian ethanol producers are happy.

Biodiesel producers, which are on Capitol Hill this week to press their case, say the target will not let the industry grow to its full potential and warn that biodiesel producers may close their doors in response, especially if a key tax credit is allowed to expire.

“The Obama administration has said consistently for five years that it wants to boost domestic production of advanced biofuels,” said Anne Steckel, vice president of federal affairs for the National Biodiesel Board. “Clearly, the most practical way to do that today is to increase the RFS standard for biodiesel.”

UNICA says advanced producers, including Brazilian sugar cane ethanol producers, have more than enough product to meet the target of 3.75 billion gallons that the 2007 Energy Independence and Security Act laid out for the standard next year.

The association is warning that the proposal will negatively affect California, which today relies on one-fourth of total Brazilian imports for its low-carbon fuel standard. Under California’s regulations, sugar cane ethanol releases less emissions than corn-based ethanol.

“The citizens of California, the drivers of California, may end up paying the biggest bill of all,” Joel Velasco, adviser on the board of UNICA, said in an interview before the proposed rule was released Friday.

UNICA’s other message to EPA, and one that it expressed to the Office of Management and Budget before the rule was released, is that reducing the overall advanced biofuel bucket and minimizing the contribution that Brazilian producers make to the U.S. biofuel supply will lead to greater greenhouse gas emissions for the United States because it will mean greater use of petroleum-based fuels

EPA has determined that the production and import of Brazilian sugar cane ethanol reduces greenhouse gas emissions by more than 50 percent compared with the production of petroleum-based fuels. Biodiesel carries that same greenhouse gas emissions reduction

According to EPA’s regulations, corn-based ethanol is required to reduce greenhouse gas emissions by only 20 percent

“I don’t understand how EPA, how they can square this proposed rule with their drive to reduce emissions,” said Velasco, who is also senior vice president of Amyris Inc., a California biotechnology company. “At the end of the day, they’re opting to consume more fossil fuels and presumably more conventional fuels than they would otherwise if they actually used otherwise reasonable discretion.

“EPA will be in the position of defending policy that increases emissions,” he added.

More corn exports to Brazil?

Brazilian sugar cane ethanol producers are worried about more than just smaller room for imports to the United States. UNICA says it’s also concerned that EPA’s proposed ethanol target would spur greater exports of U.S. corn ethanol to Brazil.

Aside from proposing lower advanced biofuel targets next year, EPA has also proposed to lower the conventional corn ethanol mandate from an expected 14.4 billion gallons to 13.01 billion gallons.

Corn ethanol producers, though, have enough capacity to produce between 14.5 billion and 15 billion gallons of ethanol next year. UNICA worries that the lower target will leave U.S. producers shopping for overseas markets for their product and that a flood of U.S. ethanol into Brazil could undermine the country’s own industry — especially if corn in the United States remains relatively cheap in the $4-a-bushel range, compared with the $7-$8 ranges seen during last year’s drought.

“We welcome competition, but you are creating a whole imbalance by drastically reducing the demand here and by having corn so cheap that people will not stop producing,” Phillips said in an interview. “People will continue producing as much as they are and will throw their product in markets like ours. This is a trade concern for sure that Brazil will raise if it happens this way.”

In late September, before rumors began circulating that EPA would significantly lower its biofuel targets for next year, the U.S. Renewable Fuels Association, the Advanced Biofuels Association and UNICA organized a trade mission to Brazil to build trade opportunities between U.S. and Brazilian producers.

But instead of expanded trade, U.S. corn ethanol producers say the real impact of EPA’s proposal will be shuttered plants and lost jobs in the United States. They don’t expect to export much to either Brazil or the European Union, which earlier this year set an anti-dumping tariff against U.S. ethanol imports.

“There might be a few of them capable of exporting to Brazil, but Brazil is in a pretty well-balanced situation right now in terms of supply and demand,” said Javier Garoz Neira, CEO of Abengoa Bioenergy, an ethanol company with a strong presence in both the United States and Brazil. “[There’s] a pretty strong industry serving well the needs of the country. So there is not that easy. You will not see 1 [billion] to 1.5 billion gallons of excess being exported out of the United States.”

Brazilian and U.S. producers say they have the same overall goal — to persuade EPA to increase all the biofuel targets for next year.

“I think everybody wants EPA to exercise its flexibility that they have in order to ensure that the RFS is working,” Velasco said. “What we don’t want is for EPA to use such flexibility that it will actually break the back of the industry and break the back of the RFS.”