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Q&A: The Senselessness of Tax-Free Oil and Subsidised Ethanol

Interview with Marcos Sawaya Jank

RIO DE JANEIRO, Nov 29 2007 (IPS) - Protectionist measures for renewable fuels are unacceptable while trade in polluting and costly fossil fuels is completely free, says Marcos Sawaya Jank, president of an organisation representing the most competitive producers of sugar and ethanol in the world, in this interview with Mario Osava.

Jank is the president of the Sugar Cane Industry Union (UNICA) of the Brazilian state of Sao Paulo, which advocates the creation of a free international market for biofuels as soon as possible.

An agronomist with a doctorate in economics, Jank founded the Institute for International Trade Negotiations (ICONE) in 2003, and was its head for four years. ICONE advises the Brazilian government and agribusiness on agricultural trade issues.

As head of UNICA since June, he faces the challenge of promoting renewable energy, the newest "big thing" in agribusiness, which will involve efforts to topple barriers such as prohibitive subsidies and tariffs, especially put in place by the United States.

IPS: What sense do subsidies granted by the United States to its maize ethanol producers make, given the present high price of oil, and the negotiations in the World Trade Organisation (WTO) to reduce agricultural protectionism? MARCOS JANK: We are against subsidies because we don’t think biofuels need this type of incentive to grow. It makes no sense to subsidise maize, or rather ethanol, when the price of oil is as high as it is.

A tightly protected market for renewable fuels is unacceptable, when the market for fossil fuels is completely free. That’s why we’re fighting for a successful conclusion to the Doha Round (of WTO trade negotiations), and for respect for the rules of the multilateral trade system.

IPS: Can the U.S. ethanol subsidies be challenged at the WTO? MJ: That’s a strategic decision that is up to the Brazilian government, and the final decision of the WTO would be based on predetermined limits for subsidies, as happened with the "sugar panel" (which condemned European subsidies for sugar exports in 2005).

We must remember, however, that challenging things just for the sake of doing so doesn’t solve the underlying problem. That’s why UNICA is developing a strategy to stimulate sustainable production and consumption of ethanol in the greatest possible number of countries, by supporting mandatory mechanisms for blending ethanol with gasoline, and defining universal product standards.

We also emphasise the comparative advantages in terms of productivity, cost and energy and environmental balance of ethanol from sugar cane over that made from other commodities. That’s why Brazilian ethanol is competitive and will be able to expand in spite of subsidies granted in other countries.

IPS: Doesn’t including ethanol among environmental assets, as Brazil wishes, justify subsidies, although it would eliminate import tariffs? MJ: In the first place, the idea of negotiating environmental goods in the WTO is aimed at freeing up trade, that is, to eliminate import duties. What has been agreed so far is to draw up a list of products regarded as environmental assets, and in Brazil, ethanol would be a natural candidate for that list.

There are policies to stimulate demand, like mandatory blends, and tax exemptions to make ethanol more competitive in relation to gasoline. We don’t regard such policies as subsidies, but as necessary incentives to build up a market.

From the supply side, the prevailing policies distort the market, especially when they attempt to protect domestic producers from international competition.

In this case, we can classify as subsidies all those tariffs imposed on imported products, which prevent foreigners’ access to the demand that is being generated.

Subsidies also include financial incentives exclusively aimed at domestic producers to enhance their competitiveness against foreign producers, such as cheap credit for investment, credit guarantees, etcetera, and direct subsidies for the commodity which is not necessarily going to be used for ethanol. In the United States, for instance, maize is heavily subsidised, whether it is used for fuel alcohol or for other purposes.

If an agreement is reached on environmental goods, and tariffs are eliminated on them, the problems of exclusive financial incentives or direct subsidies remain, but at least foreign producers would have access to markets in countries that are stimulating demand, and it would help to lower the overall level of subsidies.

The ideal situation would be to do away with all kinds of subsidies, to encourage the sustainable growth of production and consumption of ethanol in the greatest number of countries.

IPS: Is the U.S. policy of supporting maize ethanol so as to increase supply five-fold by 2017 sustainable, given the reactions to increased food prices, rising food insecurity in the world, and the low energy efficiency of maize? MJ: The United States is well aware that the ethanol market must grow in a sustainable fashion, as it is doing in Brazil. President George W. Bush’s proposal and the draft law being considered by Congress both limit maize alcohol production to 15 billion gallons a year, which is twice what is produced at present, and most analysts regard it as a goal that is achievable without any major negative impact.

Beyond that, demand will be met by "advanced biofuels," such as ethanol from cellulose and sugar cane. The U.S. is investing billions of dollars in research and development of these new methods of production, because it is aware of the limitations of maize.

With respect to food insecurity, the letter that UNICA and other institutions wrote to the United Nations secretary general (denying that ethanol is a cause) is worth reading. In brief, as Nobel Economics Prize-winner Amartya Sen proved 10 years ago, hunger is not a result of insufficient food production, but of extremely low incomes and unemployment, which limit people’s access to food.

IPS: How much will the U.S. subsidies discourage production of ethanol from sugar cane in Central America and the Caribbean, even though the countries in these regions have free trade treaties or import duty exemptions in the United States? MJ: These regions have great potential for producing sugar cane and other crops. That’s why the memorandum of understanding between Brazil and the United States says that our governments will work together to identify the best methods and crops, to make the most of that potential.

IPS: What strategic reasons could there be for so much protection to be afforded to U.S. ethanol, particularly against Brazilian competition, if the U.S. is trying to reduce its dependence on Middle East oil? MJ: The United States wants domestic production of biofuels as a means of reducing its dependence on oil, but it also wants to promote rural development in the Midwest region. Although I disagree with the level of protectionism they are applying, I can understand it from the point of view of their domestic policy.

Our role and interest is to expand the scope of biofuels around the world. Our specific goal is to make ethanol a world commodity. Together, we can increase production sustainably and cooperate to expand market opportunities and the acceptability of biofuels.

IPS: Doesn’t protectionism as applied to ethanol weaken the U.S. and European positions at the WTO? MJ: Yes, in fact the tariff of 54 cents of a dollar per gallon, plus the 2.5 percent tax on the value, imposed on ethanol imported into the United States are hair-raising. The world press is being very helpful by showing the irrational nature of this protectionism, in contrast to the free trade in oil all over the world.

But reducing tariffs without increasing ethanol demand, that is, without reducing oil consumption, leads nowhere. UNICA is acting to stimulate sustainable growth in production and consumption of ethanol in many countries, supporting compulsory addition of ethanol to gasoline and universal product standards.

IPS: Doesn’t this protectionism belie the U.S. attempt to blame Brazil for the failure of the Free Trade Area of the Americas (FTAA)? MJ: Both sides are to blame, but it’s water under the bridge. Brazil needs to make faster progress with regional and bilateral negotiations, especially with the United States and the European Union, which are unfortunately bogged down, in contrast with the huge network of agreements spreading across the world between the major developed countries and emerging economies.