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Since December last year the closing of the EU-Mercosur trade negotiations has continually seemed tantalizingly just around the corner, but certain obstacles have proved stubborn in rearing their heads, stretching out the talks until the middle of 2018. Hope has sprung eternal, and it would be tempting to invest in the negotiation round starting on 9 July the ambitions of all parties to finally arrive at the end game of a full and final agreement between the trading blocs. And not a moment too soon, if we consider that talks have been ongoing, on and off, already for some 20 years…
However, what has been left for what is hopefully the end game is not just minor details but also some critically important demands of the Mercosur countries, including improved market access for sugar and ethanol. Particularly for Brazil the importance of these products cannot be overestimated. The sector supports more than 1m jobs, the industry is highly competitive and the country invests a lot on technological development in the bio-economy.
With its tough negotiation strategy the EU has managed to marginalize these key elements until the 11th hour. In that way the EU has ensured that its offensive interests are largely satisfied before it has to make concessions. This has proved successful in securing far-reaching market opening from the Mercosur bloc. This may now make it easier for the EU to sell in the further concessions now needed to secure a deal to its own constituents – in particular the European agricultural lobby.
If this has been the EU’s strategy, it’s a risky one. With so many dossiers of the negotiations completed, Mercosur’s main remaining leverage is to walk away from a deal altogether if it doesn’t feel an adequate quid pro quo. While everyone wants a deal, Mercosur has also been clear that it won’t accept a bad deal, and that risk is very real. Mercosur negotiators need to secure clear wins on issues of fundamental importance to them if a deal is to be secured. The Brazilian negotiator has made this perfectly clear in the past, unambiguously stating that he cannot come home without a deal that also includes significant movement on sugar and ethanol.
What the EU has offered on sugar so far is completely unacceptable. A €98/tonne tariff within a quota of 100,000 tonnes is a nonsense. It will not lead to any improved market access, because it distorts the market for Brazilian producers. The tariff is set far too high for Brazilian producers to be able to compete with their European counterparts in EU markets. Even if a tariff similar to the one offered to Mexico was proposed, it would be simply considered as a non-offer.
In view of the many concessions the Mercosur countries have made to the EU – including market access for cars and industrial goods as well as the protection of hundreds of geographical indications for its agricultural industry – it is high time that the EU make some significant concessions itself if it’s serious about securing a trade deal that is workable for both parties.
As MEP Salafranca has said, free trade agreements are also about securing peace and development. But the EU’s instinctive reaction is to close the door to its trading partners that are highly competitive – which is worryingly reminiscent of the decidedly protectionist practices of the US that is causing a global tariff war.
In these troubled times when the entire rules-based trading system is at risk, securing this deal is about much more than mere market access. It is about the EU sending an unambiguous signal that it really cares about and believes in a fair and free trade deal that will be a tide that raises all boats – not just European ones. This is now crunch time in these lengthy negotiations: the balls is clearly in the EU’s court to get a deal over the line and it needs to step up to its responsibilities.
Driving bioenergy in transport – consensus at the UNICA Forum
Géraldine Kutas — posted 25/06/2018
The UNICA Forum has once again proved its standing as one of the most important events on bioenergy and transport. More than 600 people attended this year’s edition in São Paulo on 18 June 2018. Participants included eight candidates in Brazil’s Presidential race as they gear up for the elections on 18 October 2018. The discussions covered issues ranging from trade distortions to biofuels but the core topic was RenovaBio, Brazil’s flagship programme in the fight against climate change.
Only last week the Brazilian government approved the target of 10.1% reduction in transport emissions by 2028, and RenovaBio is a key element to reaching that target. Consequently, this new mechanism was on top of everybody’s mind at the UNICA Forum and it was encouraging to see the eight presidential candidates support the initiative and praise thetechnology neutrality that will enable the market to choose the best-performing technologies. Some of the candidates even want to go beyond RenovaBio. With RenovaBio Brazil is leading in the decarbonisation of transport through a carbon trading scheme. To keep this leadership position, it is important that the programme be fully and well implemented.
Transport emissions reductions is not a new territory for Brazil. Thanks to its flex-fuel cars and the use of sugarcane ethanol Brazil reduced its carbon emissions in the transport sector by more than 400 million tonnes in 13 years, that’s almost five times the performance of the EU. This enthusiasm for vehicles combining two low-carbon technologies – renewable electricity and ethanol – was another theme of the event, of which the exhibition of Toyota’s first hybrid-flex vehicle was certainly a highlight. Built on the Prius platform, the car can run on 100% electricity, 100% ethanol or any mix of the two, minimising CO2emissions.
Throughout the debate candidates overcame political differences ahead of October’s presidential elections and found common ground on the economic and social importance of the Brazilian sugarcane sector. This is not surprising, as it provides direct employment to more than 800,000 people and generates revenues equivalent to 2% of the country’s GDP, while contributing to the positive trade balance. Similarly, participants agreed on sugarcane’s role as a key instrument towards a low-carbon economy. Despite the economic crisis, the share of Brazils’ renewables has increased and the panel recognised the role of first- and second-generation ethanol, bioelectricity and biogas in this achievement.
Trade distorting measures recently adopted by countries including China, India and Pakistan have had significant impact on Brazil, which exports two-thirds of its sugar production. At the same time, Brazil is watching closely how Thailand and the EU are reforming their sugar sector. The candidates tackled these issues in an informed way, demonstrating their grasp of the gravity of the potential impact. With an eye on domestic issues, they also debated the optimum level of administrative intervention from government, and how this affects predictability around the future energy mix. This, along with discussion of the cost of capital, hit at the key point of ensuring continued investment in Brazil’s bio-economy. As one of the country’s greatest economic strengths, the bio-economy can mitigate climate change while promoting energy security.
The UNICA Forum showed that the bio-economy will continue to be a priority for Brazil far after the presidential elections, whoever the winner.
Biofuels in the Renewable Energy Directive – the final call
Géraldine Kutas — posted 16/05/2018
On 17 May representatives of the European Parliament, member states and the European Commission will meet to negotiate the provisions on biofuels in the Renewables Directive (RED II).
This might be the last chance to find a compromise that ensures the future of a technology that is critical to reduce carbon emissions in transport. The European Parliament and member states have improved on the initial proposal by the European Commission, but more needs to be done.
Let’s start with the good news. The Parliament and Council have included a renewables target for transport. Transport accounts for about 25% of total EU greenhouse gas (GHG) emissions and is one of the few sectors that has increased emissions over the last 25 years. An ambitious target is therefore necessary to seriously tackle emissions in this sector. The respective 12% and 14% targets proposed by Parliament and Council might not be ambitious enough but are steps in the right direction.
The attempt by the European Commission to cut the cap of crop-based biofuels to 3.8% would have provoked the end of a technology in Europe that until now is the only one that has had some real impact on limiting GHG emissions in road transport. By effectively killing the industry, the 3.8% target would also have destroyed any hope of ever scaling up production of next-generation biofuels. That cap needs to be maintained at 7%.
But the Council’s proposal of allowing member states to reduce their renewable targets in transport and individually set lower caps on plant-based biofuels is wrongheaded. It will fragment the market and fundamentally undermine the decarbonisation of transport in Europe. In addition, the proposal for multiple counting for certain alternative fuels is also a very bad idea. This is just an accounting ruse that would drastically reduce the ambitions and effectiveness of REDII. A better way to incentivise alternative fuels that need extra support would be through appropriate targets.
The Bulgarian presidency’s attempt to bridge the gulf between the European Parliament and Council is to be commended, but unfortunately the wording will satisfy no-one, as it is extremely vague and creates massive uncertainty. Suggesting that member states be allowed to set lower limits for biofuels that lead to deforestation or use of land with high carbon stock if they also set lower limits for biofuels that can be considered close substitutes is vague in the extreme. Without a clear definition of what is meant by close substitute, this will create uncertainty for investors and importers.
In the proposed compromise, biofuels with a low ILUC risk would be excluded from the lower limits EU members would be allowed to set. But no clear definition and criteria of what is a low ILUC risk biofuel exit and developing such definition proves extremely difficult. It would require reliable and transparent ILUC assessments that until now have been absent. According to the GLOBIOM study which is based on data that are 8 years old, Brazilian sugarcane, for example, is among the crop-based feedstocks with the lowest ILUC emissions, but there are no clear criteria to understand whether this would be considered a low-ILUC feedstock. Clearly, carbon saving potential is the only reasonable criteria for the sustainability of biofuels.
The idea of basing the lower limits for biofuels on European Commission bioenergy sustainability reports is simply wrong. What is the legitimacy of the EU to assess foreign nation’s fight against deforestation? Such an approach would represent a dangerous infringement upon the governance and sovereignty of independent nations by the EU. Any such an assessment should be based on one of the many existing certification schemes that are respected by industry and third countries alike, and recognized by the European Commission.
Brazilian sugarcane ethanol has proven unambiguously the massive contribution that certain biofuels can make in the fight against climate change. In 13 years Brazil reduced its carbon emissions in the transport sector by more than 400 million tonnes thanks to bioethanol, that’s almost five times the performance of the EU.
Thursday 17 May will be a tough day for the negotiators who still have a lot of work to do to achieve a workable solution. This is their last chance to get it right.
* Article originally published in the online version of The Parliament Magazine
Free, fair and open trade – only if it suits?
Géraldine Kutas — posted 03/05/2018
The EU has the opportunity to close two major trade deals in 2018: with Mexico, on which it just reached political agreement; and with the Mercosur trading block, where an agreement lies tantalizingly within reach. The EU’s recent success in closing major trade agreements, such as with Canada and Japan, has been seen as a clear indication of its commitment to free, fair and open trade.
An agreement with Mexico and Mercosur would certainly be a good outcome for Europe, but whether this makes the EU an advocate of “fair and free” trade is moot. As always, it is in the politically-sensitive issue of Europe’s agriculture sector where the EU often comes undone in its mantra of fair and free trade, faced with the reality of actually opening its agricultural market up to competition.
Sugar and ethanol are a case in point: with Mexico, the EU has agreed a quota on ethanol of 25,000 tonnes phased in over five years, equaling around 33m litres. This is just 0.5% of the EU’s production of 6.5bn litres in 2016. The EU has offered Mexico a quota of 30,000 tonnes of unrefined sugar, with a tariff of €49 per tonne phased in over three years. Again, this is only a fraction of the EU’s sugar production, estimated at 20m tonnes in 2017-18, and a tariff of €49/tonne will make it impossible for Mexican sugar to compete with the European sweetener in the EU market. So in reality the deal actually provides no market access at all for Mexican sugar.
In the EU-Mercosur negotiations a similar picture is emerging. The EU’s offers so far have been far from acceptable for Mercosur. The EU has offered a €98/tonnetariff within a quota of 100,000 tonnes. Only if the tariff were reduced to level the competitive field (another EU mantra) would the offer be fair.
It was clear from the outset that getting a reasonable deal on sugar and ethanol was among the key issues for Mercosur. As the Brazilian chief negotiator has said, he cannot come home without an offer on these two products on the table. The Mercosur agricultural sector has always supported the deal but this support cannot be taken for granted if the deal does not provide for real market access.
The deal will provide long-term benefits for Mercosur such as the better integration into global supply chains and improved efficiency and competitiveness. However, in order to sell the deal at home the bloc needs short-term gains in sectors that generate jobs. That is why access to the EU agricultural market would be so important.
An EU-Mercosur deal will greatly improve market access for European added-value products and services, and will give European businesses a first-mover advantage in a market of some 250m consumers. It will protect geographic indication for hundreds of European agricultural products and ensure high sustainability standards. These are major achievements.
For Mercosur the main economic interest lies in agricultural exports. If the EU is not prepared to allow a level playing field in this, Mercosur could well walk away from a deal. In that case it’s not only European businesses that would lose. The EU’s credibility of promoting free and fair trade would be seriously undermined, as it would be clear that its appetite for free and fair trade goes only so far as its vested interests are not impacted.
Thoughts on Brazil’s Temporary Tariff-Rate Quota for Ethanol
Leticia Phillips — posted 03/04/2018
As the world’s largest ethanol producers, the U.S. and Brazil enjoy the benefits of trading biofuels. Our two countries have worked together for many years to build a global biofuels market that provides clean, affordable and sustainable solutions to our planet’s growing energy needs.
That’s why many observers were surprised last year when Brazil imposed a limit on duty free ethanol imports. With the tariff-rate quota (TRQ) policy in place since September, let’s take a closer look at this temporary solution to what UNICA hopes will be a temporary problem.
The Context
China and Europe recently closed their biofuel markets, making Brazil the only major market that was open to receive excess ethanol supplies. Because of this domino effect, ethanol imports to Brazil skyrocketed in 2017. Brazil received triple the amount of foreign ethanol last year than it did in 2016 and five times more than 2015 imports.
Long term, UNICA wants to address this challenge by removing trade barriers and working with other international leaders to expand free trade of biofuels. But in the short term, Brazil’s government needed to act for two reasons:
• Environmental: Brazil intends to fulfill its commitments made under the 2015 Paris Climate Agreement and had to safeguard against displacing lower-carbon fuels with higher-carbon fuels.
• Economic: The Brazilian sugarcane sector generates nearly 1 million direct jobs and is still recovering from a crippling financial crisis during which approximately 20 percent of sugarcane mills closed.
A Fair Compromise
As Brazilian officials mulled options for how best to respond, UNICA worked to moderate extreme positions and produce a fair compromise. We advocated—and the Brazilian government adopted—a temporary response that still allows a large volume of duty-free exports into Brazil.
Up to 158.5 million gallons of foreign ethanol can still enter Brazil annually without paying any import tax. For two years starting last September, volumes above that amount will pay a 20 percent tax. But there is no limit on the total volume of foreign ethanol that can be exported to Brazil.
The annual duty-free limit of 158.5 million gallons equals Brazil’s average annual ethanol imports from 2014 to 2016. In practice, the TRQ maintains what was the status quo before the 2017 spike, while protecting Brazil’s environment and economy from such an unwelcome surge generated by other closed markets. UNICA views this temporary response as a reasonable compromise that moderates what would have been harsher alternatives, such as imposing a 20 percent import tax on all ethanol as allowed by Mercosur policy.
The duty-free limit resets quarterly, and so far, the TRQ system appears to be working as intended. During the first three months under the new policy (September to November 2017), Brazil imported the maximum 39.6 million gallons allowed to enter duty free each quarter. An additional 26.7 million gallons also entered the country during that time, with a 20 percent import tax.
What’s Next
UNICA remains committed to removing trade barriers and working together with other biofuel leaders toward our ultimate goal of a global market for clean, renewable fuels. For starters, we will continue to collaborate with our allies and competitors on opening Asian markets, which should generate billions of gallons of new demand.
Opening the closed U.S. market for sugar also would help. While our American friends tend to view sugar and ethanol policy as unrelated issues, the lack of open trading partners for sugar directly pressures sugarcane ethanol producers in Brazil, especially those in the northeast. This region is economically underdeveloped but politically influential in the capital city of Brasilia. Producers in the northeast were some of the loudest voices calling for a tariff on imported ethanol and would most directly benefit from access to larger sugar quotas on the international market.
Finally, our organization is optimistic that RenovaBio—a new program in Brazil modeled on both the U.S. Renewable Fuel Standard and California’s Low Carbon Fuel Standard—will be a game changer. By providing more predictability for investors and incentives for technological innovation, RenovaBio should stabilize Brazil’s sugarcane sector and benefit global biofuels players.
