Brazil’s Restrictive Laws on Biodiesel Are Turning Investors to Europe

Biodiesel plant in the Brazilian Northeast Biofuels are in the news and Brazil is consequently taking center stage. As Lula flirts with both Bush and his fellow South American leaders the debate rages on as to the rights and wrongs of the position of this country in the market.

It is clear though, that as global demand rises, biofuels are here to stay and accordingly practical debate should not center on its pros and cons but more importantly on how it can be developed in the most sustainable manner possible.

Biofuels in Brazil are not solely restricted to the much publicized ethanol but biodiesel is also an emerging energy resource growing rapidly in stature.

Vast agricultural regions in this South American giant are being turned over to rapeseed, castor oil plants and sunflower, rather than sugar cane, in pursuit of the production of this environmentally friendly diesel and the government is shaping the process through various incentives. It appears though that, through his policy making, Lula has been caught in two minds.

The President himself and members of his left wing workers party are regularly heard singling biodiesel out as important for the future of Brazil both in terms of a clean energy fuel source and economic significance for this developing nation.

In 2005 the Brazilian Mines and Energy Department established an obligatory 5% biodiesel mix in all diesel used in the country to be achieved within eight years. In a similar way to its alcohol brother, biodiesel is also viewed as an attractive trade product with the country seen as a global supplier with potential for significant exportation.

Lula has presented biodiesel as the savior of the rural poor and has attempted to shape the market accordingly. The "Selo de combustível social" (Social fuel stamp) is awarded to fuel producers who gather a significant percentage of their raw product from non-mechanized family farm sources. Producers with a 50% intake from these small-scale production units receive significant tax breaks.

Government figures suggest the market is developing well and the expectation of the Ministry of Agricultural development is that before December of 2007 Brazil will be in a position to produce 1 billion liters per year. This, according to coordinators of the biodiesel programme, will reach the government aim of involving 200,000 small rural family producers in the process.

These statistics are significant and the incentives created have undoubtedly succeeded in enhancing the Brazilian drive towards biodiesel production. The question is whether these figures represent the true capacity of a country the size of Brazil.

Significant investors have been turned away from the market by the limitations generated through the new social fuel stamp ruling. This legislation coupled with the fact that the Brazilian National Petroleum Agency (ANP) has legally bought biodiesel back under its full control (all processed fuel must pass through Petrobras), means that in some capacities the market has been restricted.

The result is that fuel produced from small-scale units working within the government incentives is available at a much lower price for Petrobras and it is not feasible for large scale projects to profitably compete with this.

The restrictive laws have turned Brazilian investment eyes towards potential export markets and the EU with its 5.75% biofuel target is an obvious first port of call.

Many projects are now focused on producing raw vegetable oil in Brazil from a variety of sources and transporting the product to Europe for processing therefore negating the Petrobras ruling and in the process taking potential jobs, infrastructure and investment for Brazil with it.

It is easy to understand Lula’s attempts to protect the rural poor but it is also clear that his party must work hard to strike a balance between this aim whilst not to losing out on the significant employment and direct investment opportunities available through this market.

Through the biodiesel industry Brazil faces the old age question of how best to take advantage of its resources whilst leading itself on the correct path of development.

Tim Cowman is a founding member of the Brazilian Environmental Project Consultancy – Biostudio Environmental Services (www.biostudio.com.br/ambiental) which offers services for gringos looking to enter into the Brazilian biofuel and Carbon credits market. E-mail: ambiental@biostudio.com.br.

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