The Future of U.S.-Brazil Energy Relations: An Opportunity for Change, or More of the Same?

– The U.S.-Brazil 2007 Memo of Understanding to advance cooperation on biofuels: what was established and how can it be improved?
– The U.S. 54 cent tariff on Brazil’s ethanol product continues to prevent a true partnership
– Obama’s potential Inter-American energy plan: will Brazil be able to work with it?
– Suggestions for how Obama should demand tough tradeoffs in his regional energy proposals.

On January 26, President Barack Obama spoke with Brazilian President Luiz Inacio Lula da Silva regarding global trade and energy policy. The 25-minute phone call between Lula and Obama was constructive, according to a Lula aide, as Obama pledged to work with Brazil on biofuels and advance international trade talks to jump-start the ailing global economy. On the campaign trail, Obama pledged to reduce carbon emissions by 80 percent by 2050, revive the Kyoto Protocol, reduce dependence on foreign oil, and develop and implement clean energy technologies. In regards to Brazil and Latin America more broadly, Obama proposed an “energy partnership of the Americas” in a May 2008 campaign speech, which would help advance his lofty goals.

More recently, during Secretary of State Hillary Clinton’s confirmation hearings, she reiterated the idea as a regional priority. In her opening statement, Clinton emphasized, “We are looking forward to working on many issues during the Summit of the Americas in April and taking up the President-Elect’s call for a new energy partnership of the Americas built around shared technology and new investments in renewable energy.” Thus, Obama’s renewable energy priority may create an important economic opportunity for Brazil.

In March of 2007, a bilateral relationship between Brazil and the U.S. was loosely established through a Memorandum of Understanding (MOU). The prospects of the U.S. improving this energy relationship with Brazil are hopeful as the Obama administration has vowed to change its foreign and energy policy. Yet, the Energy Alliance of the Americas proposal is currently taking a back seat as the Obama administration is exclusively focused on the current economic crisis. In order to move the U.S.-Brazil energy partnership forward, negotiators from Brasília and Washington must understand the limitations of the MOU, the U.S. tariff on ethanol imports, and the current worldwide mood resulting from the financial crisis.

Bush and Lula’s MOU
The U.S. and Brazil produce 75 percent of the world’s ethanol. In order to exert more energy influence and “spread the benefits of ethanol” throughout the region, Presidents Bush and Lula issued a joint MOU in March of 2007 which featured multiple bilateral initiatives to increase ethanol and biofuels production and consumption throughout the developing world. Its framework is guided by three basic principles. First, the MOU promotes research and development cooperation between Brazil and the U.S. Both countries have used existing mechanisms to allow ethanol experts to exchange research and discuss new technologies. Second, the agreement obligates Brazil and the U.S. to work with select countries to conduct feasibility studies and provide technical assistance regarding sugarcane cultivation and ethanol refinery projects. According to the Editor-in-Chief of Matter Network, John Gartner, Brasília and Washington have been working together to assist Colombia, Haiti, the Dominican Republic and El Salvador in sugarcane processing projects; as of March 2008, they had committed funding to 8 of 30 proposed projects in various Latin American nations. The third and final component of the accord is to establish global standards and codes of production and distribution of biofuels by means of the International Biofuels Forum (a multilateral UN project that includes China, India, South Africa, and the EU). This is crucial for the regulation of the global ethanol market and other related clean energy technologies.

Initially, the agreement had a quick impact as investment was stimulated in Brazil, the Caribbean and Peru. For instance, the London based firm Infinity and AOL investors, Vinod Khosla and Steve Case, invested a total of $310 million in separate Brazilian ethanol companies, according to the Director of BrazilWorks, Mark S. Langevin. Many Caribbean Basin Initiative (CBI) countries also saw increased investment as necessary to produce and refine Brazilian ethanol. As Lauren Etter and Joel Millman noted in the Wall Street Journal, the CBI countries are not subject to the tariff on ethanol exports to the U.S. Thus, Brazilian ethanol can still cheaply make its way into the U.S. through a middle nation.

Peru also recently gained free ethanol access into the U.S. market, under the terms of the Peru-U.S. free trade agreement which went into effect this month. According to Dana Ford of Reuters, eight ethanol companies have invested $480 million to develop cultivation, production, and distillation of ethanol in Peru. Moreover, Brazilian companies are negotiating with approximately 10 Peruvian landowners, according to Miguel Vega, president of the Peru-Brazil Chamber of Commerce. Vega asserted that the Brazilian companies were less concerned about buying land than providing technology and entering joint-venture agreements in order to export to U.S. and Asian markets. As a result of these new investments, business interests in Brazil, Peru, the Caribbean and the U.S. are becoming more interconnected through the new developments.

A year after the accord was established, a number of steering committee participants met at the Washington International Renewable Energy Conference to evaluate the progress of the different initiatives within the MOU. The participants agreed that steps towards an international framework for standards of production and distribution of ethanol were being undertaken via the International Biofuels Forum. However, it was also acknowledged that bilateral action in the Caribbean and Central America to encourage cultivation, production, and refining of sugarcane ethanol did not progress as quickly as was hoped, although the aforementioned investments were in place. Marcos Jank, President of UNICA, a Brazilian ethanol producer association, agreed that more needed to be done. During the Washington International Renewable Energy Conference, Jank emphasized the need to incorporate the private sector in bilateral developments in Peru and the CBI countries to promote collaboration to further develop biofuels.

The 54 Cent Tariff
The MOU avoided the tension around the farm bill’s steep 54 cent per gallon import tariff on Brazilian ethanol, which is decidedly less expensive and less environmentally destructive than its U.S. corn counterpart. Consequently, the U.S. continues to maintain its implicit subsidies for corn and sugarcane, much to the delight of its corn agribusinesses and ethanol producers. The tax on Brazilian ethanol allows the fragile domestic corn ethanol market to have an unfair competitive advantage over sugarcane-based ethanol within the U.S. market. This controversial issue prevents any substantial bilateral action beyond the framework of the somewhat flimsy MOU.

Obama and Lula have expressed quite differing opinions on the matter of the tariff. Obama has said he is opposed to reducing or eliminating the tariff. In light of the debate on the tariff in early 2007, Obama claimed on the Senate floor, “As it relates to our country’s drive toward energy independence, it does not serve our national and economic security to replace imported oil with Brazilian ethanol.” Lula, on the other hand, maintains that the U.S. farm bill subsidies prevent Brazil and other developing nations from playing an appropriate role in the global economy.

Under the Bush administration, Lula generally had been more critical of U.S. energy and environmental policies. For example, he argued that the U.S. should use corn to feed humans instead of cars as the global food crisis began affecting millions of people. Furthermore, Lula criticized Bush for his failure to sign on to the Kyoto Protocol. If Obama fulfills his goals in reducing carbon emissions and reviving the Kyoto Protocol, it will likely be necessary to supplement the U.S. domestic corn ethanol with imports from Brazil. If this was the case, he would have “to reduce, for a certain volume of exports, the tariff currently imposed on Brazilian ethanol,” as Emerging Energy News cites Andre Nassar of ICONE (Institute for International Trade Negotiations).

Implications from the Global Financial Crisis
Near the end of 2008, the global financial crisis caused oil prices to drop dramatically; as a result, the U.S. ethanol industry was harpooned as the Brazilian sugarcane industry remained, for the most part, resilient. In the U.S., the 54 cent tariff was worthless in protecting the fragile industry from the global shift in crude oil prices. Thus, as oil prices fell, the deficiencies of corn ethanol were increasingly exposed. According to a United Press International article from November 2008, many US ethanol producers struggled to break even and some were forced into bankruptcy. Accordingly, the largest U.S. ethanol producer, VeraSun Energy, filed for bankruptcy protection. A number of ethanol-related expansion projects have been stalled or terminated as a result of the slowdown.

Conversely, Brazilian ethanol has mainly remained competitive even as crude oil prices dropped to below $60 per barrel. At $50 per barrel, it was still cheaper to buy and produce than when fossil fuels hit their lowest level, according to Tarcilo Rodrigues, director of the sugarcane mill Bioagencia. Moreover, the environmental benefits of sugarcane ethanol and international Kyoto mandates should sustain a small demand for sugarcane ethanol in Europe and Asia, in spite of the global downswing. Although Brazil’s ethanol is not competitive in the U.S. due to the protectionist measures, the sugarcane-ethanol industry will remain resilient primarily due to Brazil’s huge and growing domestic market of 185 million people. Plinio Nastari, an authority on Brazilian sugar and ethanol, told Reuters that although Brazilian ethanol exports are likely to fall slightly, the domestic market is expected to increase its demand for ethanol by 2.1 billion liters in 2009-2010. It seems that the Brazil’s ethanol industry’s limited dependency on the U.S. and the global market will help it weather the storm in the coming year.

Obama’s Potential Regional Energy Plan
During his campaign for the presidency, Obama proposed an “energy partnership of the Americas.” Andres Oppenheimer of the Miami Herald interviewed sources within Obama’s transition team regarding this potential plan and how it differs from the Bush-Lula MOU. They indicated four major differences between Obama’s plan and the MOU. First, the Obama plan would have more force than the MOU; it “would become U.S. law and a regional treaty, which means that it would include U.S. funding for feasibility studies and concrete projects and would have a broader geographic and political scope,” according to Oppenheimer. Second, the plan would also shift U.S. foreign policy towards finding regional solutions to fight global warming while making the U.S. more energy independent. An integrated policy will also help other Latin American nations involved become less dependent on foreign oil. Regional cooperation would also signal a shift away from focusing primarily on bilateral trade agreements and anti-drug policies. Third, Obama’s plan would institutionalize a U.S. relationship with Brazil, which up until now is only established through the MOU. A regional treaty could also establish a regional institution for constructive regional dialogue on energy and climate change. Finally, the plan is expected to adopt a number of initiatives from the $59 million ”Western Hemisphere Energy Compact” bill that will likely be reintroduced by Senators Dick Lugar (R-Ill.) and Chris Dodd (D-Conn.) prior to the April Summit of the Americas, according to Oppenheimer. This bill would designate U.S. funding for regional oil or ethanol reserves, and it could assist in regional development projects, such as the construction of natural gas pipelines that would benefit Argentina and Chile.

Obama’s plan, however, does not take into consideration the fact that Brazil already has begun infrastructural processes and energy integration projects within South American regional institutions, such as the Union of South American Nations, (UNASUR), the Initiative for Infrastructure Integration of South America (IIRSA), and the South American Energy Ring. According to a February 10, 2009 editorial by Oppenheimer in the Hartford Courant, Brazil may already be opposed to the idea of an inter-American energy alliance, especially if it excludes Venezuela and Cuba. Moreover, Brazil wants to embark on global alternative fuel projects that extend beyond the Western Hemisphere. Brazilian Ambassador Antonio Patriota told Oppenheimer, “We are not necessarily focusing on an inter-American format.” Patriota also noted that Brazil is already working on regional integration of infrastructure and energy initiatives.

The Prospects for Change
Obama will have to face difficult tradeoffs as he begins to work with Brazil’s Lula on a regional energy alliance. The two will have a chance to nurture their new relationship as they meet in Washington next month and twice in April at the Summit of the Americas in Trinidad and the G-20 Summit in London. Lula will assuredly continue to push for an elimination of the 54 cent tariff. As Langevin notes, there is also increasing pressure within the U.S. to reduce or do away with the tariff. For instance the National Cattlemen’s Beef Association is lobbying to eliminate the import tariff, because the corn feed for their beef would become cheaper with less demand for corn ethanol. The U.S. Chamber of Commerce also has recently advanced the notion that the 54 cent tariff should be lowered as gas prices begin to creep up again. As these developments indicate, American consumers and commercial industries will continue to seek alternatives in order to secure cheap fuel.

Some of his critics suggest Obama should also consider seizing the moment to set out on a bold alternative route. If Obama were to cut the tariff in half, or phase the tariff towards a reduced rate over a number of years, Brazil, the Caribbean Basin nations, as well as American consumers would benefit. Whereas a complete elimination of the tariff (although probably not politically viable) would be harmful to CBI and CAFTA nations that are developing infant ethanol industries, these nations would still have an incentive to develop their domestic ethanol with a 50% tariff cut. This would allow them to be able to remain competitive with Brazil. Similarly, while the US domestic ethanol industry would be faced with increased competition from a reduced tariff, Brazil’s domestic market would serve to protect the U.S. ethanol industry by eating up most of the demand for Brazil’s ethanol production. The Obama administration will have to carefully navigate through private and popular interests if it truly wants to forge a new inter-American energy alliance.

The MOU between Bush and Lula to advance cooperation on biofuels was an important beginning to energy relations between Washington and Brasília. It served to encourage Brazil and the U.S. to coordinate in order to develop third countries’ industries; these developing nations will potentially benefit from clean energy investments through increased jobs and a decreased dependence on oil imports. It also utilizes the output of Brazil’s private and the public sector, and the U.S. to develop a regional infrastructure for trading clean fuels. Obama would be wise to build upon the MOU by creating a U.S. clean energy law that envisages bilateral cooperation with Brazil. Furthermore, he should be thinking about working with all of Latin America to develop a regional treaty regarding clean energy. If he is willing to include Venezuela and Cuba in discussion of the treaty, this will give Latin America a clear signal that Washington truly wants to be a leader in clean energy policies that transcend age old foreign policy stalemates. With gasoline at exceptionally low prices, the political and economic pressure for clean fuel from the U.S. public and private sectors may, unfortunately, diminish. Likewise, the current stimulus package and financial bailouts will strain the public funds which would be available for a broad new hemispheric initiative, but if Obama is serious about long-term U.S. energy interests and global environmental concerns, he must be prepared to act prudently and boldly.