Brazil’s Biodiesel Production and Use Program (PNPB) is a near perfect reflection of the country’s push for energy security and economic growth. The program is an initiative of President Luis Inácio Lula da Silva’s government (2003-2010) to integrate a drive for energy security in the electricity generation and transportation fuel sectors with sustainable rural development. It incorporates both large-scale agribusiness and family farms across the entire span of this continent-sized nation. In many ways the PNPB represents the reconciliation, if not harmonization, of divergent economic and environmental interests, both private and governmental, into a comprehensive national public policy that has already paid measurable dividends to all Brazilians. Yet, Brazil’s recent discovery of massive offshore hydrocarbon reserves, known as pre-salt reserves, raises a question. Will the nation continue to invest in biodiesel production given its new found capacity to produce all of its diesel from the pre-salt reserves? This article provides an analysis of the PNPB and suggests that this national policy provides sufficient economic, environmental, and social incentives to insure its preservation and even expansion in the years to come.
Betting on Biodiesel
Brazil has always been keen on biodiesel, but it was President Lula who made the first national bet on this renewable fuel. Brazilians were experimenting with vegetable oils as fuels as early as the 1920s. In the 1950s several Brazilian research institutes, including the Ministry of Agriculture’s Institute for Oil Research, began systematically testing ouricuri oil (Syagrus coronata), castor bean oil (Ricinus communis), and cottonseed oil (Gossipium spp) as possible biomass alternatives (Inter-American Institute for Cooperation on Agriculture). However, it was not until the 1970s that policymakers focused on the production of biodiesel as an important substitution strategy to lessen the national dependence on petroleum and its derivatives, including diesel.
In 1980 the Plan to Produce Vegetable Oils for Energy Use (Proóleo) was created by the National Council on Energy to foster research that could test the viability of producing and using vegetable oils in natura for diesel cycle engines. In 1985 the private sector firm Proerg in the state of Ceará obtained the first patent for biodiesel. In that same year, the Industrial Secretariat of the Ministry of Industry and Commerce launched the National Program for Energy from Vegetable Oil (OVEG). However, the drop in world oil prices in the mid 1980s challenged the commercial viability of the nascent biodiesel sector and eventually forced the government to abandon its biodiesel policies and programs. This initial experience demonstrated Brazil’s interest and possible comparative advantages in biodiesel production, but also revealed that a simple import substitution strategy would not be sufficient to overcome the global market constraints imposed by cheap oil.
President Lula entered office in 2003 determined to push Brazil forward with a mix of economic and social policies, including a government led effort to pump up biofuel production to achieve transportation fuel security in the midst of rising energy prices (Langevin 2008, Langevin 2010). At the time, Brazil imported approximately 16.3 % of its diesel consumption at an annual cost of $1.2 billion (Caderno NAE 2004:12). The government established an inter-ministerial working group to study policy options. It issued a report to the Executive Inter-Ministerial Council, which would by 2004 endorse a fully fledged effort to bet big on biodiesel. By the end of that year President Lula launched the PNPB in concert with Dilma Rousseff, then Minister of Mines and Energy and now President-Elect. According to then Minister Rousseff, the biodiesel policy challenge required an integrated set of policies and programs framed around coordinated production of a diverse set of vegetable oils in accord with regional variations in climate and soil conditions for viable and sustainable cultivation, guarantees of quality and supply for consumers, and competitive pricing in relation to petroleum diesel (Rousseff 2004). The timing could not have been better. World petroleum prices were surging by 2004 just as the government’s attention turned toward improving Brazil’s trade balance by ramping up exports and curbing petroleum product imports. In late 2004 the Lula government launched a comprehensive and fully integrated policy and regulatory framework that guaranteed biodiesel’s commercial viability while weaving its production chain throughout all five regions of the nation and among both large and family-based producers of vegetable oils and animal fats.
The PNPB was developed to be much more than an import substitution program. Rather, the program sought to rapidly expand biodiesel production and use by instituting a targeted set of fiscal incentives, financing, and blend ratio mandates. First, the PNPB mapped out a national production chain by region and cultivation to focus efforts on improving productivity and lowering costs in the long run. Rousseff outlined this strategy during the official launch of the biodiesel program. Each of Brazil’s five regions would be incorporated into a national plan, and each region would feature a different set of vegetable oil production. As Table 1 indicates, soy, cotton, and sunflower crops were planned as the major sources of vegetable oils for biodiesel production in both the South and Southeast while the Northeast would focus on palm oil along with castor beans. The North would focus on palm oil along with soy and the Center-west region, home to most of Brazil’s soy cultivation and biodiesel production, would focus on soy, cotton, and castor beans.
Table 1: Planned Vegetable Oil Sources for Biodiesel Production by Region/PNBP 2004
|Region||Vegetable Oil Source|
|South||Soy, Cottonseed, Sunflower seed|
|Southeast||Soy, Cottonseed, Sunflower seed|
|Northeast||Palm, Castor Bean|
|Center-west||Soy, Cottonseed, Castor Bean|
Source: Rousseff (2004) “Biodiesel: O Novo Combustível do Brasil. O Programa Nacional de Produção e Uso de Biodiesel.”
This variation of cropping by region was framed by soil and climate conditions, and it was driven by the economic, political and social imperatives of incorporating family farms and small producers into the production of biodiesel while also expanding cultivation of palm oil, the most efficient biomass for biodiesel production in Brazil. Texeira de Andrade and Miccolis (2010) summarize existing research to conclude that palm oil, either for export or for use as biomass for biodiesel production and diesel substitution, makes a measurable contribution to a positive trade balance, contributes to an overall renewable energy portfolio, reduces greenhouse gas emissions, and retains capacity for carbon sequestration at over 35 tons of carbon per hectare. Indeed, the most important and driving factor is excellent yields coupled with the low production costs of palm oil as a biomass for biodiesel production, the only vegetable oil capable of competing head on with petroleum based diesel in Brazil. Recognizing palm oil’s comparative advantages, the PNPB encouraged expansion of its cultivation to improve the long term viability of Brazilian biodiesel, incorporating family farms, cooperatives, and small producers into the production chain throughout the North and Northeast.
One of the PNPB’s goals was social inclusion. This outcome was to be achieved by compelling biodiesel producers to buy vegetable oils from family farms and small producers. The Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) was made responsible for organizing national sales of biodiesel to distributors through auctions of which participating sellers must offer legally established ratios of biodiesel made from family farm produced vegetable oil or animal fats and certified with the Social Fuel Seal. This insures that biodiesel refiners encourage and contract with family farms as an essential producer of vegetable oils in the biodiesel production chain. As part of the PNPB, Law # 11.097 was enacted in 2005 to regulate biodiesel production, encourage the cultivation of vegetable oils in tandem with the National Program for the Improvement of Family Agriculture (known by its Brazilian acronym PRONAF), and guarantee a market for the family farms through the establishment of the Social Fuel Seal. The social fuel seal mandates by region the required portion of family farm produced vegetable oil for biodiesel production. Initially the law required that 50 % of all biodiesel produced in the Northeast and semi-arid regions be made from vegetable oils cultivated by family farms, 30 % for the South and Southeast regions, and 10% from the North and Center-west regions.
Yet, as César and Batalha (2010) point out,
The initial mandatory raw material purchase quote of 50% from the family farms… to obtain the ‘social fuel seal’ prevented the success of the projects in the northeast and semi-arid regions of Brazil. In most cases the fiscal incentives associated with the social fuel seal were not worth the efforts of the biodiesel producer companies...
Hence, the social fuel seal’s first impact was to concentrate production around concentrated cultivations of soy in the Center-west where the family farm quota of 10% was the lowest. However, in 2009 the Brazilian government enacted new family farm produced vegetable oil quotas for obtaining the social fuel seal, reversing the distorting effects of the initial requirements. Today, 15% of family farm produced biomass is required for the North and Center-west regions and only 30% for the Northeast, semi-arid, South, and Southeast regions. The PNPB continues to feature the social fuel seal, but the family farm produced quotas of vegetable oil have been lowered to encourage greater investment in those regions, such as the North and Northeast, where palm oil production is highly incentivized by federal fiscal policies and favorable financing, and where more family farms would benefit from direct participation in the biodiesel production chain.
In addition to the social fuel seal, the PNPB offers a tax incentive framework that encourages the production of vegetable oil for biodiesel and the integration of family farms into regional production poles to advance the policy goal of social inclusion. When the PNPB was rolled out in late 2004 alongside Presidential Decree # 5.297, tax rates were adjusted to favor specific regions, cultivations, and family farms. Family farms that produced palm and castor bean oil for biodiesel production in the North, Northeast, and semi-arid regions were exempted from major federal taxation, while the federal tax obligation of intensive, agribusiness production in these specific regions was reduced by 32%. With the exception of the total exemption of palm and castor bean oil in the North, Northeast, and Semi-arid regions, federal taxation of family farm production of vegetable oils for biodiesel production was reduced by 68% across the nation. The strategy behind these tax cuts was threefold: 1) stimulate biodiesel production in the North and Northeast; 2) incorporate family farms into the production chain; and 3) rapidly increase the use of palm and castor bean oil into the national production chain. In addition to these fiscal incentives, Brazil’s National Economic and Social Development Bank (known as the BNDES) introduced a special financing program, the Financial and Investment Support Program for Biodiesel, offering up to 90% financing for projects obtaining the social fuel seal and 80% for any biodiesel related project, including cultivation of vegetable oils, warehousing, logistics, capital goods acquisition, and the commercialization of by-products from the biodiesel production process. Coupling fiscal incentives with special BNDES financing established the conditions necessary to rapidly increase production of biodiesel in Brazil, but it was the PNPB’s blend mandate that guaranteed a national market for years to come.
Getting to B5 and beyond
The PNPB established a graduated blend mandate schedule that guarantees a growing national market for production. The mandate sought to quickly incorporate biodiesel production into a two percentage- point mix with all diesel sold in Brazil, and then to gradually increase the biodiesel blend ratio. Initially the PNPB established benchmarks for production in two phases, the B2 and the B5 phases. The B2 phase, from 2005 to 2008, would feature 16 biodiesel production plants refining up to 840 million liters of biodiesel. The B5 phase, from 2008 to 2010, planned to increase the number of refineries to 43 and to produce 2.2 billion liters. During the first five years of the program, national biodiesel production has risen steadily, from approximately 70 million liters in 2005 to over 2.35 billion liters by 2010. Table 2 reports the production capacity and number of refineries by state. The state of Mato Grosso, the largest producer of soy in Brazil, reports the largest production capacity with over one billion liters of potential production from 23 refineries. This state’s capacity is followed by the states of Rio Grande do Sul in the South and São Paulo in the Southeast. According to the Brazil Oilseeds Annual Report for 2010, three quarters of all Brazilian biodiesel is produced from soybean oil, followed by animal fats and cottonseed oil, with palm and castor bean oil contributing the smallest portions. The 2010 soybean crop in Brazil is larger than expected and capable of boosting national production levels in the coming year. Yet, the disproportionate use of soybean oil for biodiesel production, largely concentrated in the Center-west, also reveals that the planned increase in production of biodiesel from palm oil has not met PNPB objectives. Goes, Araújo and Marra (2010) forecast that production trends will make Brazil the second largest producer of biodiesel in the world, next to Germany and superseding the United States, after the B5 blend mandate takes a measurable effect on investment and production.
Table 2: Number of Biodiesel Refineries per State and Production Capacity
|State||Refineries||Production Capacity (Thousand liters/yr)|
|Mato Grosso do Sul||2||14,760|
|Rio de Janeiro||1||21,600|
| Rondonia ||2||22,320|
|Rio Grande do Sul||4||863,038|
Source: ANP and the Brazil Oilseeds Annual Report, 2010
The government blend mandate guarantees the commercial viability of Brazilian biodiesel relative to world petroleum prices through the redistribution of costs to consumers and taxpayers. The PNPB holds out the possibility that national biodiesel production might one day compete with petroleum based diesel on a production cost basis.
Before the PNPB was implemented in 2005, the Brazilian government’s successive research efforts in the 1970s and 1980s demonstrated that biodiesel was a superior lubricant and fuel to diesel made from petroleum. The OVEG Program featured over a million kilometers of road testing and led researchers to conclude that biodiesel as a fuel could be used without significant modifications to diesel motors. Second, biodiesel was found to be a high quality lubricant for diesel motors, offering better performance as a lubricant for fuel injectors and pumps than the petroleum derivative. In these ways biodiesel stands out as a better transportation fuel option when it can be produced on a national scale (with efforts to reduce production costs) with a superior energy balance compared to petroleum derivatives.
The PNPB was largely aimed at transforming the transportation sector, but it also included a policy directive to increase the supply of locally produced fuel for isolated electricity generation in the Amazon region. According to Texeira de Andrade and Miccolis (2010:12),
The Amazon is home to the most isolated power generation systems on the planet, which rely heavily on diesel-powered generators or LNG [liquefied natural gas] thermoelectric plants. These isolated systems currently encompass roughly 1.4 million consumers throughout the states of Acre, Amazonas, Amapá, Rondônia, Roraima, and some municipalities in the states of Pará and Mato Grosso… These power generation systems are predominantly thermal (81%) and rely heavily on petroleum diesel and fuel oil.
These isolated power plants require diesel to be shipped at long distances through the Amazon and its tributaries, or by air cargo, at great cost. In response, the PNPB planned to boost biodiesel production in the North (Amazon) region to guarantee supplies and eventually lower costs of diesel and electricity to a growing regional population.
The PNPB also promised greater energy security for the nation, as well as the Amazon population, in an effort to improve the country’s trade balance. The PNPB estimated that during Phase B2 the country would save some $160 million dollars by lessening diesel imports. With the B5 blend mandate enacted in 2010, it is likely that Brazil can save hundreds of millions of dollars in import costs by producing its own biodiesel and substituting an increasing share of imports. Petrobras, Brazil's state-controlled energy company, reported that diesel imports declined by 43% between 2008 and 2009 due to increased national production of diesel, including biodiesel. Goes, Araújo and Marra (2010) report that in 2009 biodiesel production substituted 1.1 billion liters of diesel imports, saving nearly a billion dollars from the trade ledger.
Of course, Brazil’s recently discovered pre-salt hydrocarbon reserves could rapidly increase national petroleum-based diesel production in the coming decades (see Langevin 2010). The improved trade balance achieved by producing biodiesel at home are strong incentives to continue with the PNPB despite the potential of the pre-salt reserves.
Already the PNPB has delivered impressive environmental benefits. The substitution of petroleum based diesel with biodiesel in Brazil reduces greenhouse gas emissions with the exception of nitrous oxide. Studies indicate that biodiesel substitution reduces carbon emissions 40% to 60% depending on the biomass and refining method (Caderno NAE 2004:31). Although the B5 blend mandate does not offer substantial reductions of emissions, it does play a modest role in Brazil’s broader mitigation campaign in both the transportation and energy sectors. Taken together, Brazil’s biodiesel program, coupled with the rapid expansion of sugarcane based ethanol, promises to deepen the country’s commitment to renewable energy (Langevin 2009.) The PNPB is an important element in Brazil’s voluntary commitments to reduce carbon emissions as pronounced by President Lula at last year’s UNFCCC Fifteenth Conference of the Parties or COP15. Although the PNPB is a modest effort to mitigate carbon emissions, it represents a distinctively Brazilian model of development that attempts to reconcile national development goals with global governance. In this way the PNPB deserves special attention by policymakers around the world.
In five short years the PNPB has proven successful as a national policy framework that overcomes a number of economic, environmental, and social challenges through an integrated set of policies and programs directed in large measure by the Ministry of Mines and Energy. The PNPB has achieved its production goals, largely in compliance with the social fuel seal, and has guaranteed a stable supply to meet the demand generated by the B5 mandate. The program has created new private sector opportunities, stimulated job creation, advanced research and development, contributed to a favorable trade balance, and incorporated a growing legion of family farms and small producers of vegetable oils into the national production chain at a modest cost to taxpayers and consumers. Indeed, the biodiesel program demonstrates the Brazilian government’s capacity to coordinate policies that redirect resources and transform production and consumption across both the private and public sectors and within a broad set of government ministries and agencies.
However, the complete success of the PNPB requires additional efforts to expand sustainable palm oil production and incorporate greater numbers of family farms and small producers who labor at the margins of this production chain. Without a doubt, President–Elect Dilma Rousseff was an early and key advocate of biodiesel, but it is not certain whether her advocacy will continue after she assumes the Brazilian presidency in 2011, especially given the pre-salt reserves and their promise to eliminate any need to import diesel in the coming decades. However, if her administration demonstrates a strong interest in social inclusion, which is likely given her Workers’ Party commitment to this policy principle throughout the eight years of government under President Lula, then Rousseff may choose to reform the PNPB in order to focus on sustainable palm oil production in the North and Northeast through policies and programs that reach the poorest farmers and communities. Without such a policy commitment, Brazilian biodiesel may not be able to survive the politics of cheap diesel from Brazil’s pre-salt hydrocarbon treasures.
Mark S. Langevin, Ph.D. is Director of BrazilWorks (www.BrazilWorks.org), Associate Researcher at the Centro Universitário de Brasília (UniCEUB), adjunct Associate Professor of Government and Politics at the University of Maryland-University College, and regular contributor to the Inter-American Dialogue’s Latin American Advisor