Saturday, March 10, 2007

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That's some powerful biofuels agreement

Peter Baker reports in the Washington Post that the United States and Brazil have announced a new biofuels initiative:

President Bush announced a new energy partnership with Brazil on Friday to promote wider production of ethanol throughout the region as an alternative to oil, the first step in an effort to strengthen economic and political alliances in Latin America.

The agreement, reached as Bush kicked off a six-day tour of the region, was crafted to expand research, share technology, stimulate new investment and develop common international standards for biofuels. The United States and Brazil, which make 70 percent of the world's ethanol, will team up to encourage other nations to produce and consume alternative fuels, starting in Central America and the Caribbean.

The new alliance could serve not only to help meet Bush's promise to reduce U.S. gasoline consumption but also to diminish the influence of Venezuelan President Hugo Chávez, the fiery leftist who has used his country's vast oil reserves to build support among neighbors. Analysts have called it the beginning of a new OPEC-style cartel for ethanol makers, a characterization U.S. officials dispute because they say they want to expand, not control, production.

Sounds pretty ambitious... until we get to this snippet of this New York Times story by Jim Rutenberg and Larry Rother:
[D]espite the agreement, some strains were visible between Mr. da Silva and Mr. Bush.

Mr. da Silva is hopeful that the United States will reduce its tariff of 54 cents a gallon on Brazilian ethanol, which is made primarily from sugar cane — a trade barrier that protects the American farmers who produce corn for ethanol.

But when Mr. da Silva was asked about the possibility of eliminating the tariff, Mr. Bush jumped in. “It’s not going to happen,” he said, noting that it is congressionally mandated through his term.

Mr. da Silva joked: “If I had that capacity for persuasion that you think I might have, who knows? I might have convinced President Bush to do so many other things that I couldn’t even mention here.”

You can read more in the White House transcipt of Bush and Lula's press conference. It contains this accurate Lula summary of the state of play in the Doha talks:
I learned from my Minister, Celso Amorim, that if we draw a triangle, we could show you what the difficulties are in the negotiations we have. What do countries want from the European Union? They want it to facilitate access to their agricultural market for poorer countries to export to them, including the U.S. wants to export to them.

What do we want from the U.S.? We want them to reduce subsidies that they pay in their domestic market. And what does the U.S. and the European Union, what do they want from us Brazilians and other countries in the G20? That we have greater flexibility and access to markets for industrial products and services. That's what's at stake. That's what's in the game.

If we are intelligent enough and competent enough to pull out of our vest pockets the numbers that are still held secret, as top state secrets, then we will find a common ground. Don't ask me what the number is. If I knew, I wouldn't tell you, because if I knew, then I'd establish a paradigm, and he'd say that I should back off a little bit. So that's why these numbers are held back, though, as a soccer player, when they're going to kick a penalty goal, they never say which corner they're going to try to kick into. But things are happening. They're underway.

posted by Dan on 03.10.07 at 09:50 AM


It would have been more interesting, at least to me, if either the Post or the Times had said anything about what the ethanol agreement actually does.

Each paper included a sentence or two about what it is intended to do, buried in a lot of political chatter and (in the Post) quotes from the usual suspects among frequently quoted energy observers and environmental organizations. But as to whether the agreement has any substance to it neither paper really says anything.

posted by: Zathras on 03.10.07 at 09:50 AM [permalink]

Man, it seems Lula is on roll here. His assertions are forthright and he is showing guts to express those openly whereas all other state leaders may keep on circling the wagon.

Couple of other thoughts - as far as alternative energy policy and open market for ethanol goes; Pres. Bush is right - it is the Congress thing. Congress needs to be open on this issue, but unlikely.

I am not aware of any presidential candidate who is explicitly and emphatically saying 'no' to farm subsidies as a rational basis for ethanol policy.

For long time to come, there does not seem to be any leadership coming on this issue by Americans. Same will happen in World Trade negotiations. With American global economic clout waning and no visionary leadership coming from American politicians; we will not get anything much - same old farm subsidies, convoluted trade policy and stalled world trade.

posted by: Umesh Patil on 03.10.07 at 09:50 AM [permalink]

Brazil has accepted its role as supplier of agricultural raw materials and importer of industrial goods. The revolution of Getulio Vargas has been defeated.

posted by: jaim klein on 03.10.07 at 09:50 AM [permalink]

Jaim Klein,

Tell that to Embraer, which a few years ago comprised 25% of Brazil's total exports.

posted by: Randy Paul on 03.10.07 at 09:50 AM [permalink]

To Umesh Patil's point upthread, the relationship between farm subsidy programs and ethanol policy is tenuous at this point in time.

In the first place, many of USDA's commodity programs -- for example, the ones for rice, cotton, wheat and peanuts -- have little or nothing to do with ethanol production. The major program that does -- the one for corn and feedgrains -- has support levels keyed to prices: the government spends a lot on the program when market prices for corn are low. Increasing ethanol production is facilitated by this program's historic incentives for increasing corn production, but otherwise ethanol affects the program much more than the program affects ethanol.

The one commodity support program that does impact ethanol is the sugar program. This program is based not on direct income support to American sugar producers, but rather on very restrictive import quotas on foreign sugar (the quotas for individual countries can be even more restrictive than the aggregate quota on sugar imports). Restrictions on imports of less costly foreign sugar boosts the market price of corn, because corn is used to make artificial sweetener as well as ethanol. Separate tariffs on ethanol imports from countries like Brazil (where ethanol is made from sugar, not corn) discourage importation of the finished product; they are separate from the sugar program though supported by the same interests.

The sugar program is among the least defensible activities of the federal government, even leaving its impact on ethanol out of the picture. But the other major program that has the effect of checking ethanol production and use presents a more ambiguous picture. This is the Conservation Reserve Program (CRP), under which farmers can sign ten-year contracts to take land determined to be highly erodible out of production. The program was created by the 1985 farm bill, and is the single largest conservation program USDA runs, with annual expenditures approaching $2 billion. Unlike the commodity programs, CRP's costs are not tied to market prices.

Ending or cutting back on CRP contracts could bring more farmland into corn production to feed the ethanol industry. Indeed, as ethanol production drives corn prices higher farmers whose CRP contracts are expiring can be tempted to let them expire and resume production on land now tied up in the program. Now, some of the land in CRP probably isn't erodible enough to justify paying farmers to keep in out of production; other CRP land isn't productive enough for farming it to be worthwhile; and a great deal of CRP land is in Western states where corn production is impractical. But a reduction in land enrolled in CRP -- whether this happens through Congressional action or as a product of farmers' decisions -- could bring several million acres into corn production. Since much of this land really is highly erodible, the impact on water quality in some areas of the country could be significant. Sediment, nitrogen, phosphorus and pesticides draining into watersheds could increase substantially. This would have costs worth setting against whatever benefit we might gain from a marginal increase in ethanol production.

posted by: Zathras on 03.10.07 at 09:50 AM [permalink]

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