A review of Brazilian biodiesel experiences

Abstract

This article investigates the history of proposals to use vegetable oils as fuel in Brazil beginning in the 1920s up to the current National Program for Biodiesel Production and Use – PNPB. The characteristics of vegetable oils markets and of the oil products market, as well as the incentive mechanisms formulated for biodiesel implementation, are analyzed. Although the research focuses on the Brazilian experience, initiatives of biodiesel insertion, or those already implemented in countries with significant oilseeds production are also studied. The results allow concluding that attempts to make biodiesel production viable confront several barriers. Comparative analysis revealed that vegetable oil world prices tend to be higher than the equivalent fossil oils. In Brazil, the initiative in the 1970s lacked political alliances to overcome the difficulties imposed by market conditions such as those that benefited the National Alcohol Program –Proalcool. In the resumption of the 2000s with PNPB, despite intense articulation and institutional incentives, arising from the limited scale of production of the feedstock from incentived family farming and from the nature of markets of vegetable oils, as food or fuel, and of fossil oils, especially regarding the respective regulating prices. The incentives provided by the PNPB seem insufficient for vegetable oils to prefer the energy market instead of benefiting from higher surplus in alternative food markets.

Introduction

Biofuels have been gradually introduced into the fuels market due to high price or reduced supply of crude oil. During the 1990s the biofuels were inserted due to environmental concerns on climate change caused by increased greenhouse gas emissions mainly from fossil fuels. So in the United States the “Clean Air Act Amendments”, the Reformulated Gasoline Program “RFG Program” and the “Energy Policy Act” (EPACT) encouraged the use of alternative fuels. In the European Union the biofuels insertion was stimulated since the Common Agricultural Policy – CAP.

In the 2000s the blending mandates with biofuels proliferated as a global strategy to increase income and provide food security for farmers and rural workers in several Latin American countries (IFPRI, 2007): Argentina (Law 26.093/2006); Chile (Decree 11/2008); Equador (Decree 2332/2004); Peru (Law 28054/2003); Uruguay (Law 18.195/2007); Costa Rica (Decree 31087/2003); Guatemala (Decree 52/2003) and Colombia (Program of Biogasoline – Law 693/2001, Program of Biodiesel – Law 939/2004). Paraguay started the alcohol program in 1999 (Decree No. 2162/1999) and in 2005 the production of biofuels was considered of national interest (Law 2748/2005).

Biofuels have also acted as buffers in the agricultural commodities market. In Brazil, alcohol fuel production began in 1920 to regulate the production of sugar and reduce imports of gasoline. The sugarcane quotas intended for the production of anhydrous alcohol were variable according to the international sugar market circumstances. After National Alcohol Program – Proálcool, fuel alcohol began to be used in hydrated form and incentives were geared to enable the production not only in the sugar market, but also in the oil products market.

In Brazil, the idea of what is now known as biodiesel was introduced after World War I when a survey was conducted on the supply of vegetable oils and proposals were made for their use as fuel. In the 1940s during World War II, there were attempts to produce biodiesel through tests with pure and blended oils with alcohol. In the late 1970s amid the second oil shock, Production of Vegetable Oils for Energy Purposes -Proóleo was created, but it was never fully implemented and failed as opposed to other parallel initiatives, such as successful Proalcool.

In 2004, a new proposal for the production of biofuel was introduced through the National Program for Biodiesel Production and Use – PNPB. Despite the incentives proposed in the program, biodiesel production has not been consistent. The main guiding principle of the program was social inclusion and regional development through policy incentives for the production of biodiesel from oilseeds derived from family farming. However, soybean and cattle tallow, which are Brazilian agribusiness byproducts, are the main feedstock used in the production of biofuels.

Some authors analyzed the development of PNPB and the availability of raw materials. Cremonez et al. [97] detailed the current status of the program with emphasis on raw materials used and the prospects of use such as bikerosene and aviation biofuel. Bergmann et al. [98] analyzed the feedstock for biodiesel production including the soybeans but mainly the alternatives feedstock. It also provided a short review on the deployment of biodiesel in Brazil. The relationship among agricultural commodities, petroleum and biofuels sparked an interest in 2008 because of an increase of commodity prices and some authors studied these links, with different interpretations, among others, [24], [25], [26]. The last study of Biodieselbr journal reviewed the successes and failures of PNPB after 10 years of its implementation [102].

The objective of this study was to identify, first, the viability of the deployment of biodiesel according to the behavior of world markets of vegetable oils and petroleum. Second is to show the barriers to the production of biodiesel in Brazil by analyzing the various initiatives from the 1920s up to the current PNPB. Characteristics of vegetable oils markets, oil products markets and incentive programs for biodiesel production were reviewed. Concepts such as regulating price, market price, surplus and rent were borrowed from the theory of rent on natural resources, to provide an understanding on the behavior of the relationship of these markets.

The document is divided into three sections. Section 1 shows an analysis of the viability of biofuels in relation to the oil and agricultural commodities markets. It presents the deployment of ethanol in the markets of oil products and sugar in Brazil and the situation of biodiesel in countries with significant production of vegetable oils. In Section 2, the trials and studies for the deployment of biodiesel in Brazil between the 1920s and the 2000s are reviewed. Section 3 assesses the PNPB incentive mechanisms formulated for family farming benefit and for biodiesel gaining access to a share in the Brazilian fuel market. As the feedstock accounts for approximately 80% of the biodiesel production costs, a review of feedstock available is carried out in each period.

The viability of a fuel can be observed through the ability to self-reproduce within its reference market, i.e. its production is sustainable under the prevailing conditions. Biodiesel reproduction is linked to the behavior of vegetable oil and diesel markets. Historically, the price of vegetable oils has been higher than the price of petroleum and diesel, even considering both, the international and domestic diesel retail prices (Graph 1). While the price of vegetable oil remains higher than that of diesel, the producer of vegetable oil will, off course, be better off by selling the product in the food market instead the energy market. Moreover, the deployment of biodiesel in the oil products market will be a result of pricing policy and incentives mechanisms which contribute to the reduction of biodiesel production costs and formation of lower prices than the diesel prices, its closest competitor, which has lower production costs and higher heating value. Under normal market conditions, without subsidies and without incentives, biodiesel is viable only if the market price corrected by the heating value is equal or lower than the diesel market price and higher than the vegetable oils market price. Thus the producer of vegetable oils can obtain surplus¹ or land rent ² by selling products in the energy market or in the agricultural commodities market.

The market price³ of natural resources is regulated by the individual cost of production of the resources produced in the worst conditions but still needed to meet demand [11], [12]. According to the cost and reserve structures in the world market of liquid fuels, the price of coal-to-liquid (CTL) works as the regulating price of this market [14]. In 2010, the demand of the transport sector was primarily supplied with 2195 Mtoe petroleum [15] and to a lesser extent with 90 Mtoe natural gas [15], 45.45 Mtoe biofuels [15], [16] and 24.5 Mtoe electricity [15]. The current proven coal reserves amount to 860,938 million tons [4], which is equivalent to 415,833 Mtoe⁴ and to replace the consumption of liquid fuels, 4544 million tons of coal would be required, which would be equivalent to reserves capable of meeting the demand for liquid fuels for 90 years. Thus, the only available alternative to fully replace oil products under current resources and technology conditions would be liquid coal products. However, a CTL barrel is estimated to cost 80–100 dollars [17]; hence, it constitutes a reference for the pricing of oil products under the special conditions when oil production is controlled by a monopoly or an oligopoly such as the operative compound formed by OPEC plus Russia.

The viability condition was created for ethanol fuel in Brazil. The rents from the production of ethanol and/or sugar were achieved after decades of government intervention through incentives in all segments of the chain. The Sugar and Alcohol Institute – IAA, created in 1933, was a critical institution in this process because it had the power to regulate the production of sugarcane sugar and ethanol . This established quotes and plans for fuel use alcohol, the pricing for purchase and sale of ethanol and gave financial assistance to plants owners.

Incentives have been applied according to the behavior of the oil products market and conjunctures of the international sugar market since the beginning of ethanol fuel production in the 1920s until 2002 when the prices throughout the chain of production and marketing of fuels and alcohol were completely deregulated [5], [10]. Thus there were advances in the productive structure of the sugar–alcohol sector and lowering of costs for ethanol production with reasonable energy balance. The production and use of alcohol fuel became a viable option coexisting with the sugar and gasoline market.

In the 1940s, World War II and a decrease in the supply of petroleum products stimulated the production of ethanol production. Quotas were established on sugar production and fixed future prices were not only for residual ethanol⁵ but also for ethanol produced directly from sugarcane and other feedstock [5]. One of the issues discussed at the time was fixing the price of ethanol, which the IAA associated with compensating prices rather than with parity in relation to the sugar price [6]. However, increasing or decreasing of ethanol production until the 1970s only occurred by the fluctuations in the sugar price. According to [7], price of parity was one of the key measures that stimulated sugarcane producers to produce sugar and/or ethanol. The first legislation that fixed alcohol price on parity with sugar price was in 1942 [48]. Before starting the Proalcool the prices of anhydrous ethanol had been defined for both the producer and distributor. Anhydrous ethanol fuel was purchased by the IAA at the parity unit price based on the ratio of 44 l of anhydrous ethanol fuel per 60 kg bag of standard crystal sugar. The price of a liter of fuel ethanol paid to the producer by the IAA was equivalent to 11/15 the price of a kilogram of standard crystal sugar [8].

The Proalcool was launched in 1975 in a juncture of low sugar prices in the international market, high petroleum prices and idle capacity of ethanol–sugar plants. The governmental support and institutional framework that was created in advance for the sugar–alcohol sector allowed the fabrication of ethanol-powered cars and significant increment of ethanol fuel manufacturing from 2800 million l to 11000 million l between 1978 and 1985 [9]. Between 1978 and 1980, sugar prices had increased by 366%; however, demand for alcohol cars, and therefore for fuel alcohol, was created. Oil prices increased 263% (nominal value) and contributed to justify the Proalcool. Despite the high prices in the international sugar market, the production of sugarcane balanced between production and exports of sugar and the production of alcohol. The subsequent alcohol supply crisis in the 1990s⁶ caused ethanol to be imported, and a period of stagnation began, which was overcome only by the introduction of flex-fuel vehicles in 2003.

In Brazil, under current conditions, ethanol prices are regulated by gasoline prices. Gasoline has a higher price than that of ethanol in the oil products market, even though its cost structure is lower than ethanol. The gasoline price to the consumer has been higher in relation to the price of hydrous ethanol for the consumer since 1980 when hydrous ethanol was implemented as fuel [13]. The difference is based on the 70% relationship of thermodynamic efficiency difference between the two fuels⁷. If this ratio is not in sight, or there are attractive prices in the international sugar market, or during the period between harvest when supply decreases and ethanol prices rise, the government intervenes yet, and among others measures, alters the percentage of blend and favors the creation of stocks. In the recent years dismantling the taxes on gasoline was affecting the alcohol prices and sugar–alcohol sector.⁸

For 2014, the biodiesel world production is projected to be led by the United States, followed by Indonesia, and thirdly, Brazil (Table 1). Germany has decreased the amount produced since 2010 and Argentina since 2012. Countries with high production of vegetable oils, especially palm oil, such as Malaysia, produced small quantities of biodiesel, and despite the offer of preferred raw material export it and/or use it as food. Indonesia increased biodiesel production since 2013, in response to new national biofuel policies. Table 1 shows the characteristics pertaining to main oil seed crops used for biodiesel production in each chosen country. It would be important to check the price of diesel at the refinery, because the diesel prices presented correspond to the retail market.

In the United States, the gasoline began to blend with ethanol in the early 90s after the “Clean Air Act Amendments” and Gasoline Program Reformulated “RFG Program”. Until 2004, Methyl tert-Butyl Ether (MTBE) was the oxygenate most widely used. Due to effects on health and the environment the “Environmental Protection Agency” (EPA) promoted its replacement by bioethanol [23] In 1992, the “Energy Policy Act” (EPACT) encouraged the use of alternative fuels. The EPACT was renovated in 2005 and a Renewable Fuels Standard (RFS1) was created through which it was designed that in 2006, 2.78% of gasoline consumed in the US would have to be blended with renewable fuel. The Environmental Protection Agency (EPA) finalized the RFS1 requirement in April 2007 and through the Energy Independence and Security Act (EISA) included the Renewable Fuel Standard (RFS2) which increased the required volumes of renewable fuel to 140 billion l by 2022 [23,99].

United States was the first global alcohol producer in 2013 (51 billion l ) and the first biodiesel producer. Most of the biodiesel is from soybean oil (Table 1). The Environmental Protection Agency -EPA- propused for 2013 the volume of 5 billion liters of biomass-based diesel to be used in annual percentage under the Renewable Fuel Standard Program for years after 2012 [113]. Of the 5 billion l, 2.3 billion l  could be soybean-based, 1.17 billion l corn-based and 1.48 billion l waste oil-based [113]. The United States is the world׳s soybean greatest producer with 32%, followed by Brazil with 28% (Table 1). Some variables to obtain biodiesel rent were already identified such as dependency of soybean oil price, of petroleum price and of federal and state subsidies provided to the industry [92]. Through the Renewable Fuel Standard –RFS – and tax incentives, the market price of biodiesel could be lower than that of diesel [93]. Currently, biodiesel prices are higher than diesel price (Table 1).

Biodiesel production in Argentina continued to increase since 2007, reaching a peak in 2011 (2.5 MmT) and remaining stagnant since 2012. In 2013, Argentina ranked fifth in the global biodiesel production and by 2014 it is estimated to remain in this position (Table 1). Some measures such as antidumping policies applied by European Union and the subsequent exclusion by Spain of Argentine biofuel plants for sale in that country influenced the fall in biodiesel production. Taxes with the Argentine government fixed exports were also decisive. During 2013 and until June 2014, the Biodiesel industry had high export duties. In July 2014 the low was confirmed at the aliquot of export tax: it went from 21.75% to 11.07% approximately. Argentina exports much of the biodiesel produced. Of the 2.78 billion l in 2012, 60% was exported.⁹ Argentina exports much of the biodiesel produced. The option is to seek the best rents between biodiesel exports or soybean oil exports. The fraction for biodiesel in the domestic market is to supply the blend of 7% with gasoil (diesel). Table 1 shows the export prices of Argentine biodiesel and soybean oil in February 2014. In this situation, the choice would be the export of soybean oil.

In the European Union, especially in the German program, the incentives provided a reduction of cost such that biodiesel could access the market with regulation price set by diesel. In 1990, the Common Agricultural Policy – CAP began implementing incentives for biofuel production; since then, farmers of EU countries have been encouraged to plant oilseeds, and the produced biofuels have had lower tax rates. In 2003, two guidelines for biofuel production were established: promotion and taxation. Both emerged from the Green Paper: towards a European Strategy for Energy Supply, which was published in 2000. This document indicates that the European Union was producing less energy than it was consuming, and an import dependency of 70% was predicted for 2030 [18]. According to the First Directive (Directive 2003/30/EC), the percentage of renewable fuels blended into fossil fuels in 2005 should be 2%, regardless of whether they were pure biofuels or ethyl tert-butyl ether (ETBE), and the blend should increase to 5.75% by late 2010 [18]. In 2009, a policy was adopted to achieve 20% renewable energy by 2020, with biofuels representing 50% of this percentage, although half of this percentage should come from second-generation renewable fuels [19].

After releasing the guidelines, Europe has increased its consumption of biodiesel, especially in Germany. The incentives have included tax exemptions and increasing taxes on diesel. Starting in 1999, the ecological tax reform (Ökosteuerreform) established a tax on petroleum products to encourage the use of alternative and more economical fuels [20]. In the early years of reform, both gasoline and diesel had increases of €ct 3067/l per year. Prior to 2004, the German tax law on oil products (Mineralölsteuergesetz) only imposed taxes on gasoline and diesel, with pure biofuels being exempt from any taxes [20]. Starting in 2004, a new law (MinöStG) was enacted that considered blended fuels, including ETBE and MTBE blends [20]. The 5.75% target set for 2010 was achieved in 2006 [21].

After several years of growth in biofuel consumption, this decreased. This was partly a result of the reduction in tax exemptions that were motivated by concerns over the emission of greenhouse gases that could be related to the production of biofuels and the increased food prices recorded in 2008 [22]. In addition, recent imports of palm oil that were destined for food purposes were used in the production of biodiesel, and an evaluation of this repurposing resulted in a decrease of the targets. However, the measures taken since the beginning of the programs that set biodiesel price lower than diesel price, but higher than the price of rapeseed oil, allow the production of biodiesel continue to be viable (Table 1).

The European production of biodiesel from rapeseed has experienced rapid growth, which has been discussed not only in terms of changes in land use in major oil palm-producing countries, such as Malaysia and Indonesia, but also in terms of the connection that was created between the markets of vegetable oils [31]. Canola currently accounts for 15% of vegetable oils world production, after soybean oil (28.6%) and palm oil (33.2%). The major producers are the EU-27, China, Canada and India [32]. An increase in the demand of one oil leads to an increase in the production of another; for example, although the demand for biodiesel was mainly supplied by canola oil, the import of feedstock such as soybean oil and palm oil has been increasing in the European Union since 2006.

Malaysia is the second largest palm oil producer after Indonesia and meets the domestic demand for oil, fat and exports (Table 1). The country supplies 36% of the palm oil world demand (50 Mmt) and it is the second largest exporter (Table 1). In Malaysia, biodiesel was included in the list of products/activities that are encouraged under the Promotion of Investment Act 1986. Malaysia government announced the introduction of the National Biofuel Policy in 2005 [96]. The biofuels׳ policy goal is to increase demand for the domestic feed stock, palm oil. Biodiesel production is low compared to other oil producers (Table 1). The 10% blends proposed for 2014 were postponed because of the expected increase in prices for palm oil which in March 2014 reached US$ 800/t [114]. This added to oil price decline and deficiencies in infrastructure for biodiesel distribution, thereby making biodiesel production in Malaysia unattractive. In 2012, B5 was only available in limited regions of central Malaysia [115]. In 2007/2008 due to the increased crude palm oil prices and subsidized retail petroleum diesel in the domestic market, some investors suspended the plan of biodiesel production to avoid losses [96]. Diesel prices are subsidized and B5 are priced equivalently. As a result, retailers tend to refrain from B5 blends [96]. The palm oil consumption for biodiesel would be about 320,000 t or 1.7% of the total produced [115].

The biodiesel industry in Indonesia grew rapidly. After occupying the fifth place in biodiesel production in 2010, the forecasts for 2014 indicate it will occupy the second place after the United States (Table 1). This is the result of ambitious mandates contained in Regulation No. 25/2013 of Indonesian Ministry of Energy and Mineral Resources (MEMR) [103]. The plan seeks to diversify domestic biodiesel consumption beyond the transportation sector to include industry and electrical sector. Indonesia was a petroleum exporter and the interest in biofuels there has been from 2006 with the National Security Act. The transport sector will consume 28 billion l in 2015 and is expected to be replaced 10% by biodiesel [103]. The fuels are subsidized fuel and biodiesel production costs are the lowest compared to other countries (Table 1).

The relationship between the oil products sector and biofuels is reciprocal and double. Oil products are used in tractors and machines that participate in the simultaneous production processes of commodities and fertilizers, and the prices of diesel and gasoline are based on a price that sets a trend toward the eventual use of agricultural products in biofuel production [23]. Regarding the supply chain of some agricultural commodities, the biofuel option depends on the amount of surplus obtained by biodiesel producers or the rent earned by the owners of feedstock that are used to produce biodiesel.

The relationship between agricultural commodities, oil and biofuel has been analyzed by different authors, who have reached different results. For example: the co-integration method was used to analyze the co-movement between petroleum prices and certain agricultural commodities and it was observed that the relationship among prices is a dynamic concept that can be altered as a result of economic or political changes [24]. For instance, biofuel policies may regulate the relationship between the corn and petroleum market in the long run depending on the threshold reached by petroleum prices [24]. Kristoufek et al. [25] analyzed the prices of biodiesel and ethanol in relation to agricultural commodities and fuels before and after the 2007–2008 crisis period. In the pre-crisis period, they found that biofuels were weakly linked with the chosen commodities; however, this situation changed considerably in the crisis and post-crisis periods when ethanol prices became highly tied to corn, wheat and soybean prices in the short term and more strongly in the medium term [25]. Furthermore, the correlation of biodiesel prices with the rest of the system is weak in the short term but becomes more strongly and steadily tied to fuel and food commodity prices in the medium term [25]. Tilmisina et al. [26] analyzed the impact of petroleum prices on the expansion of biofuel and food in 2020 based on 2009 prices. The authors came to the conclusion that changes in the price of petroleum affect the food markets more than the insertion of biofuels markets, and the latter could undergo a major expansion with a rise in oil prices, which would cause incentives and mandates in several countries [26]. Rathmann et al. [27] developed indicators with arguments for and against the production of liquid biofuels and their impact on land use, and they found that liquid biofuels do not have a significant impact on land use, although they influenced food prices, but were not a determining factor in the modification of price trends. Kliauga et al. [28] argued that the policies implemented in the United States and Brazil affected the prices of ethanol for other countries, and policies implemented in Europe on biodiesel affected the biodiesel prices in other countries. In [29], it was seen biofuel policy can have a large impact on corn prices, and although this was not the historical behavior, they stressed that the transfer of corn to the ethanol industry was the bridge between oil prices and ethanol supply. Rajcaniova et al. [30] used the co-integration method with the weekly price series for the main producers of biofuels, i.e., the European Union, United States and Brazil, to show that biofuel prices in countries that produce biofuels determined biofuel prices in other countries.

To provide a complement to previous analyses and with the objective of understanding the relationship between these markets, the Granger method¹⁰ was used to identify the causality between series of vegetable oil, crude oil and diesel prices for the period 1960–2012. Soybean oil, palm oil, sunflower oil, cottonseed oil prices (current dollars per ton) and the series of oil prices (current dollars per barrel) were used. A causal relationship between oil and vegetable oils was identified, however the price of oil causes increases or decreases in the price of vegetable oils, but the price of vegetable oils does not cause oil prices to increase or decrease (Appendice A1). This allows us to infer that there are times of adjustment between the new context created and the decision taken, since the mechanisms of communication between these two types of commodities are not immediate. In addition, a causal relationship was found between different vegetable oils, especially between palm oil and canola oil and between palm oil and soybean oil (Appendice A1). Generally, the prices of canola oil and palm oil affect the prices of other oils.