Ethanol programs in developing countries: prospects for ethanol exports

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1 Introduction Ethanol programs in developing countries: prospects for ethanol exports Diego de Mendonça Fileni 1 With COP21 and the signature of the Paris Agreement, the humanity realized that climate change mitigation has never been so urgent. Basically, the international community has 30 years to act and make the transition to a low carbon economy a reality. Some countries embarked in this journey earlier than others. This is the case of Brazil. With more than 45% of energy coming from renewables, the country has one of the world s cleanest energy mix. Sugarcane is the number one source of renewable energy. The plant is used to produce ethanol and bioelectricity, on top of food. In the 70s, the country adopted an ethanol policy to substitute oil imports. Forty years later, the country is almost energy independent and is a leader in renewables. Sugarcane ethanol has unmatched environmental performances. It reduces emissions by 90% on average, it has an outstanding energy balance and its productivity is very high. On top of that, the sector in Brazil generates more than 1 million jobs, mainly in rural areas, and integrate independent sugarcane farmers with both family mills and multinationals. Ethanol is a ready to use solution that doesn t require big investments in infrastructure, but can bring significant greenhouse gas (GHG) emission savings. This is the type of option we need to start acting now on climate change. Conscious of this, many countries have adopted ethanol mandates in recent years. For Brazil, they are potential export markets. In this report, we will examine the current ethanol policies in three regions of the world, namely, Asia, Latin America and Africa. Countries in each region have been classified into three different categories: (i) countries that already have in place a requirement to blend ethanol into gasoline, (ii) those that have an optional ethanol mandate; and (iii) countries that are seriously considering the adoption of an ethanol policy. Finally, we will draw some conclusions on Brazil s potential to export ethanol to these markets. 1. ASIA Asia is the most populated continent and one of the biggest of the world. Since the 90s, this region has exhibited an extraordinary economic dynamism - particularly in East Asia - as well as a robust population growth that make it one of the most attractive place in the world for business opportunities. The impressive economic development of Asia combined with its large population, has not only a significant impact on the world economy, but also on the environment. Its total annual GHG emissions amounts to 21,000 million tons of carbon dioxide equivalent (mtco2equ.), which 1 Diego is a student of Business and International Trade at the Université Paris-Est Créteil Val de Marne (UPEC) and a former Unica (Brazilian Sugarcane Industry Association) intern. 1

2 CO 2 emissions (million t) represents 58% of the total GHG emission in the world. Moreover, out of the 10 countries that produce most of GHG emission in the world, eight countries are in Asia, as shown in figure 1. Figure 1. Global GHG emissions It is therefore urgent for these Asian countries to look at ways to reduce, as quickly as possible, their GHG emissions. In that sense, ethanol is an attractive solution as it can be implemented rapidly as it does not require any change in infrastructure. Ethanol programs in Asia Like many renewable energies, ethanol need to be promoted by public policies to be adopted by consumers. Blending mandates are the most common form of support. a. Countries with a mandatory mandate of ethanol blend The first category of countries we will analyze are the ones where a mandatory ethanol blend is in place. These are basically India, Indonesia and Philippines. India has a mandatory 5% blend of ethanol into gasoline. The feedstock used is sugarcane molasses, but because India is the second largest producer of sugarcane, domestic production has been enough to fulfill the current demand. On top of that, import taxes on undenatured ethanol the one used for fuel are very high (150%) while duties on denatured ethanol are much lower (5%). However, as the Indian government has announced its intention to increase the mandatory blend to 10% very soon, this market could further develop and attract some imports. Indonesia has a mandatory blend policy of 1%. This is a first step in the right direction, but the mandate would need to increase for Indonesia to become an attractive market. In addition, the country applies an MNF duty rate for both types of alcohol of 30%. Current demand is approximately 20 million liters per year. 2

3 The Philippines has an E-10 mandate and the government is expected to increase it to 20% by The applied import tariff is 10% which make this country more attractive than its more protected neighbors. b. Countries with an optional ethanol blend policy Some countries authorize ethanol blends but don t make it mandatory or the mandatory blend only applies to a portion of the territory. This is the case of China, Japan, Thailand and Vietnam. China is the third largest ethanol producer after the United States and Brazil. A 8 to 12% mandatory blend is required in 6 provinces and in 30 cities across 5 other provinces. A very high import tariff of 40% applies on import of undenatured ethanol. The Chinese government has temporarily lowered the duty on denatured alcohol to 5% but with the condition of this ethanol not to be used for fuel purposes. The objective of China is to expand the 10% mandatory blend to the whole territory in Japan has an optional blending policy of 3%. The country needs to import most of the ethanol it consumes, because its production is too low compared to its needs. Ethanol is mainly use as a component of ETBE. The MNF applied duty is 27.2% for both type of ethanol. In 2015, they imported 587 million liters of ethanol. Thailand has a more sophisticated ethanol policy. Consumers can choose between E10, E20 and E85, depending on the vehicle they own. Although E10 is the fuel that is mostly consumed, E20 is progressing pretty rapidly. Thailand s potential market is very important, but the import tariff is 2.28 US$ (US dollars) per liter and the country is also the world third sugarcane producer and a big producer of cassava. Therefore, it is unlikely they will have to import in the near future. Vietnam has an optional ethanol policy and the government is actively promoting its consumption. E5 is available all over the country and E10 is sold in some provinces. The government is planning to make E10 available nationwide. However, Vietnam applies a high import tariff of 40% which excludes this country from the list of potential future market. c. Countries considering to adopt a blending policy Countries such as Bangladesh, Pakistan, and Taiwan have not adopted any kind of policy regarding ethanol, but they might have an interest in doing so in the future. Bangladesh is a considerable gasoline exporter and they have goals to increase their exports. This country is considering applying an ethanol blending policy to reduce its gasoline consumption to get more quantities to sell abroad. However, to become a potential importer this country would have to reduce its import duty which amounts to 25%. Pakistan has expressed its intention to apply a B5 and E10 policy by However, the country is the seventh biggest sugarcane producer and they can easily be auto-sufficient, reducing drastically the need to import. In any case, the import tariffs for ethanol are high: 90% to 80% for undenatured ethanol and 50% for denatured alcohol. 3

4 Taiwan already has a biodiesel policy. However, they have reached the limit of the mandate and the government is now considering an E3 mandate. The MNF duty rate applied to ethanol is 20%. Considering the economic development of Taiwan, Taiwan could be a potential export destination in the future. Looking forward Overall, 12 Asian countries that account for 93% of the population in the region already have or are considering adopting plans to introduce ethanol. Thus, only three countries have a mandatory ethanol blending policy (India, Indonesia and Philippines). It is important to note that fuel demand is expected to increase sharply in the future. If we compare China and India current number of vehicles per inhabitant, with an emerging country, such as Brazil, we will have a better idea of the potential growth of the fuel market. In Brazil there are 249 vehicles per 1,000 people, while in India there are only 18 and in china there are 128. This means that Brazil has 14 times more vehicles per 1,000 people than India and twice as much as China. Therefore, if India had the same amount of vehicles than Brazil, it would need to increase 14 times its gasoline consumption and the demand for ethanol, considering an E10 mandate would amount to 39,200 million liters. In China, ethanol consumption could reach 29,000 million liters under the same scenario. But despite this fact and the willingness of many to raise the blends in the future, the biggest challenge for imports seems to be the high import duties that apply in the majority of these countries. Table 1. Summary of ethanol programs in Asia Countries Status Ethanol (%) MNF duty rate for undenatured alcohol(%) MNF duty rate for denatured alcohol (%) India M E5 150% 5% Indonesia M E1 30% 30% Philippines M E10 10% 10% China O E10 40% 5% Japan O E3 27.2% 27.2% Thailand O 0% 0% Vietnam O E5/E10 40% 27% Pakistan UC 90% 50% Taiwan UC 20% 20% Bangladesh UC 25% 25% Subtitles: M = mandatory; O = optional; UC = under consideration 4

5 Table 2. Quantities of ethanol required for E10 to be implemented in countries with an existing ethanol program in Asia Countries Consumption of gasoline Potential ethanol demand considering E-10 (million liters) (million liters) India 28,000 2,800.0 Indonesia 33,000 3,300.0 Philippines 5, China 145,008 14,500.8 Japan 51,823 5,182.3 Thailand 8, Total 270,850 27, LATIN AMERICA Latin America is a much smaller continent but it is interesting for at least three reasons. First of all, it has a relevant impact on climate change. The region s total GHG emission is 1,327.8 mt CO2equ. The countries where the emission are more important are Brazil (507 mtco2equ.), Venezuela (207 mtco2equ.), Mexico (457 mtco2 equ.), Argentina (202 mtco2 equ.), Chile (82 mtco2 equ.) and Colombia (81 mtco2 equ.). Secondly, Brazil, which is the largest and most populated country of the continent, is a pioneer in terms of ethanol policy and it's also the second largest producer. Finally, Latin America is a continent where agricultural production has a bright future because of the land and water available. Ethanol programs in Latin America As in the previous section of this paper, we will analyze the current ethanol programs in the region, based on three categories: (i) the first one will address the countries that already have policies with mandatory blends; (ii) countries that have an optional blending policy; then (iii) the countries where those policies are being considered. a. Countries with a mandatory ethanol blend Argentina, Colombia, Ecuador, Panama, Paraguay and Peru have all mandatory blending policies in place. We excluded Brazil for obvious reasons. Argentina have an E10 policy and it has a target to increase the mandate up to 12%. Still, studies show that they could apply E20 without damaging cars. However, Argentina s ethanol production, both from sugarcane and corn, is 900 million liters, and its potential market is 850 million liters. Therefore, imports are strongly unlikely. 5

6 Colombia has a mandate which varies from 8 to 10 percent, depending of the region. However, the country has been struggling to fully implement this policy and actual blend barely reaches 6%. Nevertheless, Colombia still need to import some ethanol to be able to keep up with the mandate. For example, in 2015 they imported 17 million liters of ethanol. Costa Rica has an E7 blending policy. Import duties applying on undenatured and denatured ethanol are respectively 12.33% and 14%. Even if the tariffs are not so high, the market is very small and the potential for import is around 69.1 million liters of ethanol a year. So, like Colombia, Costa Rica could be an importer, but the quantities would be very limited. Ecuador has an E10 blending policy and applies no import tariff on undenatured ethanol. A 15% import duty is charged on imports of denatured alcohol. The potential market is million liters a year. Although tariffs are low and the potential market is good, Ecuador is also a sugarcane producer. Panama has also adopted an E10 blending mandate. MFN import duty for undenatured ethanol 10% is relatively low and no import tax applies to denatured alcohol. The potential market is 92.9 million liters a year, which is good. Therefore, Panama could be a potential importer. With a 25% blend, Paraguay is the second country in Latin America with the largest share of ethanol blended in gasoline. The country is foreseeing an increase of the mandate to 27% in the future, the same as Brazil. However, Paraguay is an ethanol exporter with a domestic production of 215 million liters compared to a potential market of 195 million liters. On top of this, import duties amount to 20%, so Paraguay is not a future market for Brazil. Peru has a 7% to 8% ethanol blending mandate and the country needs to import some ethanol in order to fulfill it. Import duties are low (6%) for both kinds of alcohol. So, Peru could be a candidate to import ethanol in the future. b. Countries with an optional ethanol blending policy There are two countries in Latin America with an optional blend, Mexico and Uruguay. Mexico has an optional ethanol blending policy, however it is not applied all over the country. The program started with an E2 optional mandate in Guadalajara, and soon after, it was extended to Mexico City and Monterrey. Considering that Mexico is the second largest country in Latin America, the potential for ethanol is high. In addition to that, there are no Import duties applying undenatured and denatured ethanol in Mexico. Uruguay has an optional blending mandate of 5% and is interested in increasing the blend to 10%. The Import duties applying undenatured and denatured ethanol are 20% for both types. Their gasoline consumption is of 638,3 million liters per year, so if they were to apply a mandatory E10 blend policy, they would need to consume 63,8 million liters of ethanol per 6

7 year. If we take in consideration that their ethanol production is of 5,8 million liters per year, we can consider that Uruguay is a interesting and a prosper importer of ethanol. c. Countries considering to adopt a blending policy In this section, we have identified two countries with a clear interest in applying an ethanol blending policy in the future, Chile and Guatemala. Chile does not have any kind of policy for biofuels yet, but they are targeting a 5% ethanol blend in gasoline and a 5% biodiesel blend in diesel. Also, The Import duties applying undenatured and denatured ethanol are 6% for both types of alcohol. Guatemala is an important producer of ethanol, although virtually all the production is exported. The country intended to implement a biofuels policy several time but without success. The Import duties applying undenatured and denatured ethanol are 40% for both types of alcohol. Looking forward With seven countries that have implemented biofuels policies, Latin America is a very dynamic continent as far as clean fuels are concerned. All these countries are sugarcane producers and could supply their local market with ethanol produced out of molasses. Import duties are, in general, lower than in Asia and some countries could be interested in importing either to complement their own production or to continue exporting to premium markets, such as Europe, while supplying their domestic market. Some countries, like Mexico, present a real potential due to their size. The total consumption of gasoline of the 9 countries that already have a biofuel policy in place is 70,517.8 million liters per year. Therefore, if those countries would implement an E10 mandate, the total ethanol potential market would be of 7051,78 million liters per year, instead of the actual one which is 15,59 million liters. Therefore, even if Latin America has the most favorable policies towards ethanol, they can always improve. The main challenges Latin America is facing relate to infrastructure and political willingness to implement mandates. Table 3. Summary of ethanol programs in Latin America 7

8 Countries Status Ethanol (%) MNF duty rate for undenatured alcohol(%) MNF duty rate for denatured alcohol (%) Argentina M E12 20,0 20,0 Colombia M E ,0 10,0 Costa Rica M E7 12,3 14,0 Ecuador M E10 0,0 15,0 Panama M E10 10,0 0,0 Paraguay M E25 20,0 20,0 Peru M E7,8 6,0 6,0 Mexico O E2 in some 0,0 0,0 cities Uruguay O E10 20,0 20,0 Chile UC 6,0 6,0 Guatemala UC 40,0 40,0 Subtitle: M = mandatory; O = optional; UC = under consideration Table 4. Simulation of E-10 adoption for countries that already have ethanol programs in Latin America Countries Consumption of gasoline Potential ethanol demand considering E-10 (million liters) (million liters) Argentina 8, Colombia 5, Costa Rica Panama 3, Paraguay Peru 5, Mexico 45,089 4,508.9 Uruguay Total 70, ,78 8

9 3. AFRICA Africa is the second largest continent in the world and the second most populated, with a total population of 1.1 billion people. This represents 15% of the total human population and 20.4% of the earth surface. If total GHG emissions are compared, Africa has a slightly smaller impact on the environment than Latin America. The total GHG emissions are 1,290.9 mtco2equ. while Latin America emits 1,327.8 mtco2equ. However, its consumption of gasoline (50,468.9 million liters per year) is much smaller than the consumption of Latin America (80,267.5 million liters a year). The countries with the most important emission are South Africa (476 mtco2equ. ), Egypt (237 mtco2equ.), Algeria (147 mtco2equ.), Nigeria (94 mtco2equ.) and Morocco (65 mtco2equ.). Current ethanol programs in Africa At the difference of Asia and Latin America, there is no African country with an optional blending policy. There are 11 countries with a mandatory target or an interest in applying a biofuels policy. There are seven countries with a mandatory blending policy of ethanol, i.e., Angola, Ethiopia, Malawi, Mozambique, South Africa, Soudan and Zimbabwe. They represent around 28% of the African population. There are also four countries accounting for 22% of the population that are considering having a mandate (Kenya, Mauritius, Nigeria and Zambia). a. Countries with a mandatory ethanol blend There are nine countries that have already adopted a biofuels policy requiring a mandatory ethanol blend. Angola is one of the OPEC members, and one of the countries with the most important gasoline consumption in Africa (1,450.8 million liters). They have an E10 blending mandate. To implement the mandate, they would need million liters of ethanol a year. Although Angola is not producing any ethanol, the import tariff is 20% for both kinds of ethanol. Ethiopia has an E5 mandate, but this is a small market. Gasoline consumption amounts to million liters. So, if the mandate is fully implemented, Ethiopia would consume 11.3 million liters of ethanol a year and imports would be needed as the country only produces 5.8 million liters of ethanol per year. Malawi implements an E10 mandate, but its level varies according to the domestic availability of ethanol. The Import duties applying undenatured and denatured ethanol are respectively 1205% and 11,65% Even in the case of full implementation of the policy, Malawi is a small market and the country won't need to import. Mozambique has an E10 mandate in place and would need 23.8 million liters of ethanol a year to implement it. Despite being a sugar producer, Mozambique does not produce ethanol. Their low import duty (7.5 %) on undenatured ethanol would make it a potential importer. 9

10 South Africa is the country with the most important gasoline consumption of all the countries with a mandatory mandate. Policy regarding ethanol varies with the minimum blend being set at 2% and the maximum at 10%. Currently, the consumption of ethanol amounts to 11,490 million liters. However, the potential to grow is huge. South Africa would consume 1,149 million liters of ethanol per year if the E10 blending requirement was applied countrywide. Production amounts to only 5.8 million liters today and their import tariff is zero. However, the country is also an efficient sugarcane producer and the industry will probably increase ethanol production if required. Zimbabwe has an E15 mandate but its application varies according to the harvest. Despite this fact, the country would like to implement an E20 mandate. Their gasoline consumption is million liters, meaning that the potential market would be 35.7 million liters of ethanol if the mandate were to be fully implemented. Zimbabwe does not have any tariff in place on ethanol, but the country produces more fuel ethanol than it consumes. b. Countries considering to adopt a blending policy In this section, we will provide an outlook of the countries that are considering adopting a blending policy. These countries are Kenya, Mauritius, Nigeria and Zambia. Kenya has an E10 mandate in one city only, Kisumu, which is the third largest city of the country. Gasoline consumption is million liters, meaning that if an E10 mandate were applied all over the country, million liters of ethanol would be required. Kenya is a sugar producer but does not produce fuel ethanol and would therefore need to import, at least until the industry adds distilleries to the sugar mills. However, import tariffs are the highest in Africa (25%) and could discourage imports. Mauritius has the target to implement an E5 mandate. But the country will need to improve its infrastructure in order to do so. In any case, Mauritius remains a small market and an E5 mandate would mean a consumption of 8.4 million liters of ethanol per year. Mauritius is a sugar producer and would probably fulfilled its own domestic demand. Also they don t have a Import duties applying undenatured ethanol. But for denatured ethanol is of 2,5%. Nigeria is interested in applying an E10 blend. The adoption of this mandate could have a significant impact as Nigeria is the most populated countries in Africa, with high gasoline consumption records (10,387.4 million liters). Also they don t have a Import duties applying undenatured ethanol. But for denatured ethanol the import duties is of 20%.Nigeria is already importing the ethanol for non-fuel purposes it consumes and could therefore be an attractive market if a mandate were to be implemented. Zambia consumes million liters of motor gasoline per year but has no mandate. If they would apply the E10 policy the potential market for ethanol would be of million liters. Looking forward 10

11 Africa has a lot of potential to develop an ethanol industry. Many countries produce sugarcane and cassava, two excellent feedstock for ethanol production. On top of that, the continent would strongly benefit from the positive externalities of this renewable fuel. An ethanol industry would create jobs, it would decrease dependency on oil and reduce import bills, it would bring electrification to rural areas and provide clean fuel for cook stoves. Imports could complement domestic production, especially at the beginning of the implementation of the programs and between crop seasons. Imports would also be useful to guarantee the implementation of the mandate independently of the availability of domestically-produced ethanol. Nigeria and South Africa seem to offer the best potential for imports. Table 5. Summary of ethanol programs in Africa Countries Status Ethanol (%) MNF duty rate for undenatured alcohol(%) MNF duty rate for denatured alcohol (%) Angola M E Ethiopia M E5 Malawi M E10 12,5 11,65 Mozambique M E10 7,5 20 South Africa M E2 0 0 Sudan M E5 Zimbabwe M E Kenya UD E Mauritius UD 2,5 11,29 Nigeria UD 20 7,5 Zambia UD 5 15 Subtitle: M = mandatory; O = optional; UC = under consideration Table 6. Simulation of E-10 adoption for countries that already have ethanol programs in Africa Countries Consumption of gasoline Potential ethanol demand considering E-10 (million liters) (million liters) Angola 1, Ethiopia Malawi Mozambique South Africa Zimbabwe Total 13, ,

12 5. CONCLUSIONS AND FINAL REMARKS Countries across the globe are looking for solutions to reduce their GHG emissions and many of them have adopted ethanol blending policies. 54 countries already have mandates in place while 11 are seriously considering to implement ethanol blends. The signature, and hopefully entry into force, of the Paris Agreement will increase the interest of nations for this ready-touse solution. This study demonstrated that the best prospects are in Asia because of its growing population and economic dynamism that will lead to increased fuel demand. On top of that, this continent urgently need to reduce its GHG emission, especially China. Because of the availability of land and the production of sugarcane, Latin America and Africa also offer good prospects. However, Brazilian ethanol is facing three main challenges to penetrate these markets. First of all, ethanol policies are conceived as domestic agricultural policies. As a result, the programs are often calibrated to attend the national production and mandate can even vary to make sure they will be fulfilled according to the harvest. This inward-looking vision is also reflected in the high level of import tariff imposed on foreign ethanol in many countries. Finally, some regions still lack infrastructure to implement a credible biofuels policy while oil distribution is a monopoly in various countries, slowing down the deployment of ethanol blends for the consumers. Therefore, ethanol imports could be a good complement to domestic production but will hardly supply the majority of the required biofuels. In addition, in the case of Asia, the freight cost for Brazilian products is high compare to other producers in the region such as Thailand for instance. However, Brazilian sugarcane ethanol is the most efficient biofuels in terms of GHG savings. It reduces emissions by 90% on average and ticks all the boxes as far as sustainability is concerned. On top of that, ethanol is also benefiting public health as high ethanol blends emit less local pollutants than diesel or gasoline. The pressure from the international community to mitigate climate change and the complaint of citizens to improve air quality will force governments to act and Brazilian sugarcane ethanol will definitely be a good candidate to help countries to achieve their climate change objectives. Sources World Trade Organization. TAO Tariff Analysis Online facility provided by WTO. Available: [Accessed June and July 2016] 12

13 United States Department of Agriculture. Foreign Agriculture Service Global Agriculture Information Network. Available: [Accessed June and July 2016] Biofuels Mandates Around the World: 2016 Biofuels digest. Available: / [Accessed June and July 2016] Rahman, Shakilur. (2009) An assignment on bio-fuel. - Significance of Biofuel in aspect of Bangladesh. Available: [Accessed June and July 2016] Tariq Ali, Jikun Huang, Jun Yang (2012) An overview of biofuels sector of Pakistan: status and policies. International Journal of Economics and Research, 3(1): Available: OR_OF_PAKISTAN_STATUS_AND_POLICIES. [Accessed June and July 2016] Global Carbon Atlas, GHG Emissions. Available: June and July 2016]. 13