energy and policy developments

The U.S. created the latest ‘Renewable Fuel Standard’ (RFS2) in 2007, which requires blending increased-minimum biofuel volumes into petroleum motor fuels annually.  The EPA is responsible to administrate and establish annual RFS2 biofuel blending targets for conventional biofuel (corn ethanol) and advanced biofuels.  Advanced biofuels include biodiesel, cellulosic ethanol and ‘other’ biofuels, such as sugarcane ethanol.  Sugarcane ethanol is not normally produced within the U.S. and must be imported primarily from Brazil.

To be certified as an advanced biofuel the ‘full-lifecycle’ carbon emissions must be 50% less than the displaced petroleum’s emissions.  ‘Full-lifecycle’ carbon emissions normally include the fossil fuels consumed during the biomass cultivation-through-biofuel production-transportation-and-consumption in motor vehicles.  Biofuel ‘full-lifecycle’ energy & carbon balances are commonly called ‘cultivation-to-wheel’ (CTW) balances.  The ‘full-lifecycle’ carbon emissions of Brazil sugarcane ethanol, however, can be more complex than basic CTW fossil fuels consumption balances.  Added ‘full-lifecycle’ complexities include ethanol export’s (Brazil to U.S.) transportation fuels consumption, Brazil’s recent year’s domestic ethanol supply shortages and their need for ethanol and petroleum imports to meet domestic fuels demand.  These factors can make determining sugarcane ethanol’s (direct & indirect) ‘full-lifecycle’ carbon emissions significantly more complex.  Based on these more comprehensive and increased complexities of supplying and exporting sugarcane ethanol to the U.S., what are the possible impacts on overall ‘net’ sugarcane ethanol carbon emissions?

Brazil’s Recent Ethanol Supply-Demand History – Brazil is the World’s second largest ethanol producer following the U.S. and the primary supplier of ethanol imports to the U.S. and Europe.   Since the EPA certified Brazil sugarcane ethanol as an advanced biofuel in 2010 the U.S. has imported about 800 million gallons (Mgal.).  While this 800 Mgal. volume only represents a small fraction of total Brazil ethanol production it does represent a very significant volume compared to declines in total Brazil domestic ethanol consumption in recent years.

In 2013 Brazil began experiencing the worst drought in 50 years.  The drought has continued into 2014, and is projected to cause major hydropower electricity generation shortages and reduced agriculture production.  Sugarcane production is also projected to decline due to the drought.  Fortunately an excess of sugarcane from last year has apparently minimized the impact on Brazil ethanol production, which is projected to decrease only slightly 2013-14.

Similar to the U.S., Brazil implemented gasoline ethanol blending standards beginning in the 1970’s in order to reduce their domestic demand for petroleum.  Required blend standards increased from E-10 (10% ethanol + 90% petroleum gasoline) up to E-25 in 2007.  Unfortunately the combination of the recent World-Brazil economic recessions and severe droughts resulted in Brazil not achieving their E-25 target due to chronic domestic ethanol supply shortages.  These factors made it necessary for Brazil to reduce their blend targets down to E-18 in 2011.  Even though Brazil recently announced reestablishing the E-25 target their ongoing drought and recent increases of domestic demand for gasoline motor fuels continue to be major barriers to actually achieving E-25 domestic blend levels.

Despite Brazil’s chronic domestic ethanol shortages they still exported 242 Mgal. of sugarcane ethanol to the U.S. in 2013.  To help meet their domestic demand-supply shortages Brazil has also imported ethanol from several North and South America Countries.  During 2013 Brazil imported 47 Mgal. of ethanol from the U.S.  Despite these and other countries’ ethanol imports, Brazil has yet to meet its E-25 gasoline standards for most domestic consumption in recent years.  This being the case, why would Brazil continue exporting ethanol to the U.S. during a period of ongoing drought and known shortages of domestic ethanol supply?

Economic Incentives for Brazil Ethanol Exports to the U.S. – The EPA developed the latest RFS2 annual biofuel blend standards last year.  Refer to Table 1 of a recent TEC post.  Due to the E-10 ‘blend wall’ the EPA reduced the conventional corn ethanol blend target from 13.8 to 13.0 billion gallons (Bgal.). The ‘other’ advanced biofuel, which includes primarily sugarcane ethanol imports, was also reduced to 0.9 Bgal.

To comply with annual RFS2 biofuel blending standards, petroleum motor fuels Producers or Refiners and Blenders must purchase the biofuels and/or associated ‘Renewable Identification Numbers’ (RIN) certificates.  The RINS’s must be submitted to the EPA as proof of annual RFS2 compliance.  The advanced ethanol biofuel RIN’s market values recently averaged about $0.70 per gallon during 2013.  The obvious economic incentive for Brazil to export 242 Mgal. of sugarcane ethanol to the U.S. in 2013 was to collect-sell RIN’s valued up to about $170 million.  This total 2013 Brazil import RIN bill was paid for directly by U.S. gasoline Producers/Blenders and indirectly by U.S. gasoline Consumers.

U.S. Impacts from Brazil Sugarcane Ethanol Imports – The primary justification for the EPA certifying Brazil sugarcane ethanol as an advance biofuel is to reduce U.S. carbon emissions by at least 50% of the petroleum gasoline displaced.  Refer to the past TEC post for further details.  The estimated carbon emission reduction is supposed to be based on the ‘full-lifecycle’ energy/carbon balance.  As previously described, the ‘full-lifecycle’ sugarcane ethanol CTW balance should include the added transportation to the U.S.  In addition the CTW balance should include changes to Brazil’s domestic ethanol/gasoline motor fuels consumption and mix affected by their exports to the U.S.  The problem statement for exports to the U.S. becomes: with the obvious shortage of Brazil ethanol supply availability to meet domestic demand in recent years and need for ethanol imports from the U.S. to help meet their domestic ethanol demand, are the U.S./World total or ‘net’ carbon emissions actually being reduced by the 50% minimum level required by the EISA advanced biofuel certification?

As previously discussed, the U.S. imported 242 Mgal. and exported 47 Mgal., for ‘net’ ethanol imports of 195 Mgal. in 2013.  Based on the average ‘full-lifecycle’ CTW carbon emission reductions for advanced biofuel imports (50%) minus conventional biofuel exports (20%), the U.S. ‘net’ (imports-exports) carbon emissions should have been reduced by about 645,000 metric tons (MT) in 2013.  The estimated $170 million RIN’s cost for 2013 is equivalent to about $260/MT of carbon; a carbon credit cost extremely expensive compared to average EU and California carbon credit market prices of about $10-12/MT during 2013.

However, the actual carbon emission reduction benefits may be significantly less than EPA certification estimates.  The Brazil economy has been growing at fairly positive rates (on average) in recent years.  As a result their consumption of liquid fuels has also increased by over 1.8 Bgal. during 2012-13.  A very large percentage of 2012-13 increased liquid fuels consumption was due to petroleum gasoline demand.  During recent years Brazil ethanol consumption and production (refer to EIA data: Ethanol” section, ‘Brazil Ethanol Production – 2002-2012’ graph) have both actually declined.  Based on these factors Brazil has apparently been required to increase their imports of petroleum liquid fuels in order to meet their growing domestic demand.

To help meet Brazil’s shortages in domestic gasoline motor fuels supply, they have significantly increased petroleum imports from countries such as the U.S. in recent years.  U.S. petroleum imports to Brazil included 133 Mgal. of unfinished gasoline blend stocks plus 80 Mgal. of finished gasoline, for a total gasoline imports of 213 Mgal. in 2013.  This is equivalent to over 300 Mgal. of sugarcane ethanol consumption that could be displaced by increased petroleum gasoline imports (constant heat content basis).  Needless to say, these U.S. petroleum gasoline exports to Brazil would more than offset all the total carbon emission reductions of the 242 Mgal. U.S. sugarcane ethanol imports in 2013.  In other words, Brazil has essentially replaced all their ethanol exports to the U.S. with imports of U.S. petroleum gasoline in order to supply their domestic demand for total ethanol-gasoline motor fuels during 2013.

The substituting Brazil domestic ethanol demand with U.S. petroleum gasoline imports should require adjusting Brazil’s sugarcane ethanol ‘full lifecycle’ CTW carbon emissions accordingly.  The bottom line result is the U.S. has paid Brazil up to $170 million in 2013 for ethanol advanced biofuels and RIN’s with overall ‘net’ full lifecycle energy/carbon balances that resulted in actually increasing World net-total carbon emissions!

In Conclusion – When Congress created the RFS2, under the ‘Energy Independence and Security Act’ (EISA) of 2007, they envisioned advanced biofuels production would significantly reduce U.S. energy imports and carbon emissions.  Nowhere in the EISA 2007 legislation did Congress include certifying advanced biofuels that had ‘full-lifecycle’ or ‘net’ carbon emissions greater than 50% of the petroleum fuel displaced.  This includes Brazil’s replacing sugarcane ethanol exports to the U.S. and their domestic ethanol shortages with increased petroleum gasoline consumption.  Certifying advanced biofuel imports should include the direct and indirect CTW ‘full-lifecycle’ carbon emissions to ensure U.S. and World ‘net’ carbon emissions are actually reduced by the EISA required minimum 50% level.  U.S. gasoline Producers/Blenders and ultimately Consumers should not be forced to pay $100’s million per year for RIN’s that do not reduce actual World ‘net’ carbon emissions by required levels.  Recent sugarcane ethanol imports appear to be another classic example of ‘carbon leakage’, where a Developed Country (U.S.) pays a Developing Country (Brazil) for taking actions to reduce World carbon emissions and actually realize little or no benefit.  What do you think?