Thoughts on Brazil’s Temporary Tariff-Rate Quota for Ethanol

FROM THE APRIL ISSUE: Leticia Phillips of UNICA offers details on the rationale behind Brazil's limit on ethanol imports.
By Leticia Phillips | March 20, 2018

As the world’s largest ethanol producers, the U.S. and Brazil enjoy the benefits of trading biofuels. Our two countries have worked together for many years to build a global biofuels market that provides clean, affordable and sustainable solutions to our planet’s growing energy needs.

That’s why many observers were surprised last year when Brazil imposed a limit on duty free ethanol imports. With the tariff-rate quota (TRQ) policy in place since September, let’s take a closer look at this temporary solution to what UNICA hopes will be a temporary problem.

The Context
China and Europe recently closed their biofuel markets, making Brazil the only major market that was open to receive excess ethanol supplies. Because of this domino effect, ethanol imports to Brazil skyrocketed in 2017. Brazil received triple the amount of foreign ethanol last year than it did in 2016 and five times more than 2015 imports.

Long term, UNICA wants to address this challenge by removing trade barriers and working with other international leaders to expand free trade of biofuels. But in the short term, Brazil’s government needed to act for two reasons:

• Environmental: Brazil intends to fulfill its commitments made under the 2015 Paris Climate Agreement and had to safeguard against displacing lower-carbon fuels with higher-carbon fuels.

• Economic: The Brazilian sugarcane sector generates nearly 1 million direct jobs and is still recovering from a crippling financial crisis during which approximately 20 percent of sugarcane mills closed.

A Fair Compromise
As Brazilian officials mulled options for how best to respond, UNICA worked to moderate extreme positions and produce a fair compromise. We advocated—and the Brazilian government adopted—a temporary response that still allows a large volume of duty-free exports into Brazil.

Up to 158.5 million gallons of foreign ethanol can still enter Brazil annually without paying any import tax. For two years starting last September, volumes above that amount will pay a 20 percent tax. But there is no limit on the total volume of foreign ethanol that can be exported to Brazil.

The annual duty-free limit of 158.5 million gallons equals Brazil’s average annual ethanol imports from 2014 to 2016. In practice, the TRQ maintains what was the status quo before the 2017 spike, while protecting Brazil’s environment and economy from such an unwelcome surge generated by other closed markets. UNICA views this temporary response as a reasonable compromise that moderates what would have been harsher alternatives, such as imposing a 20 percent import tax on all ethanol as allowed by Mercosur policy.

The duty-free limit resets quarterly, and so far, the TRQ system appears to be working as intended. During the first three months under the new policy (September to November 2017), Brazil imported the maximum 39.6 million gallons allowed to enter duty free each quarter. An additional 26.7 million gallons also entered the country during that time, with a 20 percent import tax.

What’s Next
UNICA remains committed to removing trade barriers and working together with other biofuel leaders toward our ultimate goal of a global market for clean, renewable fuels. For starters, we will continue to collaborate with our allies and competitors on opening Asian markets, which should generate billions of gallons of new demand.

Opening the closed U.S. market for sugar also would help. While our American friends tend to view sugar and ethanol policy as unrelated issues, the lack of open trading partners for sugar directly pressures sugarcane ethanol producers in Brazil, especially those in the northeast. This region is economically underdeveloped but politically influential in the capital city of Brasilia. Producers in the northeast were some of the loudest voices calling for a tariff on imported ethanol and would most directly benefit from access to larger sugar quotas on the international market. 

Finally, our organization is optimistic that RenovaBio—a new program in Brazil modeled on both the U.S. Renewable Fuel Standard and California’s Low Carbon Fuel Standard—will be a game changer. By providing more predictability for investors and incentives for technological innovation, RenovaBio should stabilize Brazil’s sugarcane sector and benefit global biofuels players.

Author: Leticia Phillips
North American Representative
Brazilian Sugarcane Industry Association, UNICA