Biofuel Regulation in Brazil
© Springer International Publishing Switzerland 2015
Yanko Marcius de Alencar Xavier (ed.)Energy Law in Brazil10.1007/978-3-319-14268-5_66. Biofuel Regulation in Brazil
Yanko Marcius de Alencar Xavier1, 2 , Patrícia Borba Vilar Guimarães1 , Anderson Souza da Silva Lanzillo1 and Samuel Max Gabbay1
(1)
Department of Private Law, Federal University of Rio Grande do Norte, Natal, Brazil
(2)
Natural Resources and Energy Law Research Group, Natal, Brasil
Abstract
In this chapter, a general view about biofuel regulation in Brazil is provided. Unlike oil and gas sectors, Brazilian biofuel sector has no legislation that deals with biofuels in general. The legislation is fragmented and related to a specific kind of biofuels rather than the biofuels per se. This situation is due both to historical reasons (the arising of biofuel industry in Brazil) and to market reasons (competition with gasoline and diesel). Thus, the Brazilian legislation is the regulation of two kinds of biofuels: biodiesel and ethanol. The study shows the general rules applied to biofuels but deserves a special focus on biodiesel and ethanol legislation. As a result, Brazilian legislation provides more instruments to promote biofuels as a complementary fuel to the market than a standalone product to compete with diesel and gasoline.
6.1 Introduction
Like many other countries, Brazil has a substantial number of motor vehicles. Development of the automobile industry began in the 1950s, during the presidency of Juscelino Kubitschek. Highway transportation is currently the most widely used, compared to the others.1
Dependence on road transportation meant the country was reliant on petroleum and its derivatives. Among these derivatives is the intensive use of gasoline and diesel, accounting for the highest participation in the Brazilian energy matrix.2
However, with the two oil crises in the 1970s, oil-importing countries such as Brazil began to feel the effects of dependence on fossil fuels. In 1973, a barrel of oil shot up from 3 to 12 dollars, reaching 32 dollars in 1979.
From that time on, the national energy matrix began to diversify in order to no longer depend on the leading oil-exporting nations, which were profiting from the successive collapses in the 1970s.3 Brazil began to invest heavily in alternative sources that could substitute the role exercised by oil, above all considering the natural characteristics present in the country, favorable to the development of such energies.
For this reason, the Brazilian government initiated programs aimed at developing alternative sources of energy, especially renewable types, such as hydraulic. The aim was to generate electrical energy and biomass, notably ethanol, to replace gasoline.
Simultaneously, there was a gradual change in public thinking as a result of ecological awareness, which, in this period, reflected on society through numerous environmental movements promoted by NGOs and the various international conferences focusing on the environment and concerns with the state of the global environment.
Although previously known, the negative effects of fossil fuels became even more evident at that time. There was thus a call for energy sources that had less impact on the environment and reduced greenhouse gas emissions (GGEs), primarily carbon dioxide (CO2), a compound released by car engines driven by fossil fuel and extremely harmful to respiratory functions and the ozone layer.4 In this respect, Agenda 21 and the Kyoto Protocol had significant influence on the emergence of biofuel production, suggesting the “qualification, education and diffusion of technical and scientific knowledge, in addition to the resumption of sustainability, replacing fossil fuels with sources of renewable energy.”
Also worth mentioning are a number of conferences that addressed sustainable development and influenced the apogee of biofuels, since the search for renewable energy sources translates into a sustainable mentality, based on the notion of meeting the country’s energy matrix through economically viable energies with less potential to harm the environment. The search for energy efficiency, that is, for the production of clean viable energies, represents the conciliation between economic growth and national development, resulting in sustainable development.5 Thus, the policy of increasingly introducing biofuels is a tool for sustainable development, in relation to economic, environmental and social aspects.6
Despite the importance of oil and gas and the stability of the supply chain of these energies, owing to the ecological awareness and the need for diversification in the energy matrix, the world is seeking alternative forms of clean and renewable energy. Among these concerns and considering Brazil’s agriculture potential and past experiences with ethanol,7 in recent years the country has created a regulatory framework for biofuels.
Construction of this framework is both a challenge and an opportunity.
The challenge is that, even with its environmental appeal, biofuels compete directly with traditional fuels derived from oil and gas, with barriers to its inclusion in the national fuel market, requiring the State to adopt a strategy to include it. In addition to producing the fuel, having suitable infrastructure and an economic network, this inclusion also requires judicial guidelines.
The opportunity lies in the fact that Brazil already has experience with biofuels and must take advantage of this experience to thrive in the renewable energy market that is being gradually constructed on a global scale. To achieve this requires not only financing and research but also judicial guidelines, that is, regulation.8
As explained, Brazil needs to develop alternative energies to decrease its dependence on oil and biofuels for the automotive sector. Currently, there are two types of biofuels in Brazil: ethanol and biodiesel. In the sphere of Brazilian public policy, biofuels are considered a source of alternative energy, whose objectives are to complement/substitute fuels derived from oil to minimize the negative effects that they exert on the environment. They also represent another form of producing economically viable energy, removing the dependence on oil-producing countries and the instability it generates.
Their emergence and prevalence in the Brazilian energy scenario involved a series of factors that, in combination, form the perfect scenario for their acceptance on a global scale. Foremost, the search for an energy alternative to oil derivatives finds support mainly in economic and environmental terms.9
Biofuels can be obtained from organic animal or plant matter, such as soy, sugarcane, from which alcohol is extracted after sugar fermentation, wood and seaweed, among numerous other raw materials. Currently, the productive process of biofuels is characterized in “generations,” which are classified and ensue according to the mode of obtaining the raw material used.
Successful cultivation of biomass depends, among other things, on two main factors: the existence of fertile land and the high incidence of sunlight, characteristics present in abundance in Brazil, given the country’s privileged location. Thus, Brazil exhibits favorable conditions for the production of biomass-derived energy by using either sugarcane, resulting in ethanol, or oil extracted from plants, as occurs with biodiesel.
Given these preliminary technical and economic considerations underlying biofuel regulation in Brazil, the present chapter aimed at studying and analyzing regulation applicable to two Brazilian biofuels, ethanol and biodiesel.
6.2 General Aspects of Biofuel Regulation in Brazil
The Brazilian State has the constitutional right to monitor and regulate economic activities, thereby exercising the power of policing the economy, intervening to reduce inequalities and promoting development and social justice.10
The economic order, a set of principles and rules governing the economy, aims at delimiting the area of activity of economic agents and is directly linked to the fundamental political options of the constitutional power.11
The case of biofuels is different from that of oil production. Its activities, from production to the final consumer, are not subject to the monopoly regime.12 Thus, these activities are not restricted to the State. However, this does not mean they are not available to entrepreneurs to explore with significant freedom. The Constitution determined that fuel activities (including biofuels) would be regulated by law. This was done when the law established rules on the distribution and sale of fuels.13 Thus, although not restricted to the State, it is up to the State to define general rules regarding the functioning of the sector (since Brazil is a federation, the regulatory entity in general is the federal government).
However, if the biofuel sector is “regulated,” how is it different from a monopoly? The difference is that because the sector is only regulated, the law or other infralegal acts cannot “monopolize” it or say that the sector will be developed exclusively by the State in Brazil. In the biofuel industry in Brazil, the federal constitution’s current profile does not allow the State to exclusively exercise the activities of the sector, which does not occur in the case of oil and gas.
Given the constitutional framework of the biofuel sector, in order to understand how it is regulated it must be decided which laws are pertinent to biodiesel and ethanol. To that end, we will discuss the common laws that cover the two types of biofuels and then analyze the specific law that governs them. Common law is understood as a set of guidelines that encompass all the types of biofuels, outlining the basic structure of the sector.
In the general institutional picture, the regulatory authority of the Brazilian State in the question of renewable energy is outlined in the Federal Constitution, which also defines specific policies for the sector.
The authority to determine renewable energy policies is in the hands of the Federal Government. This authority is stated in article 22 as follows: “Article 22, The Union has authority to legislate on: I – civil, commercial, penal, electoral procedure, agrarian, aeronautical, spatial and labor laws; […] IV – water, energy, informatics, telecommunications and broadcasting.”14
These provisions clearly show that the renewable energy policy is a constitutional task to be implemented by the Federal Government. This includes general guidelines, as well as strategies to promote energy initiatives, considering the specificities of each region.
The wide constitutional support of renewable energy policy in Brazil is contained in the constitutional principles of the economic order that underlie the constitutional interpretation of renewable energies, such as the social function of property, free competition, consumer rights, environmental protection and the reduction of regional and social inequities contained in articles 225, 170, III, IV, V, VI, VII, among others.15 It is important to highlight that the connection between regulation and competition is a key element governing any action taken by the Brazilian State regarding the judicial-economic support of renewable energy production. In the economic sphere, the State has a regulatory role as well as defending competition, as contained in articles 173, § 4, and 174.16
In addition to environmental protection, article 170 seeks to reduce regional and social inequities through public policies and incentives to reduce the differences between regions in our country. This is also one of the primary aims of the Federal Republic of Brazil, as established in article 3, III of the Federal Constitution.17
Action on the part of the states of the federation in defining regulations for renewable energies is possible, given that the law can attribute specific authority to legislate a number of points applicable to its member States (article 22, single paragraph) or coordinative or supplementary authority (articles 23 and 24, single paragraph and §§ 1, 2, respectively), as well as on related issues such as environmental protection (article 23, VI) and legislation on economic law (article 24, I). The most important to underscore is that the renewable energy policy is constitutionally governed by the Federal Government and can be coordinated and supplemented by the States.
Despite the various possibilities of a number of biofuels, the Brazilian energy matrix consolidates the large-scale commercial use of ethanol and biodiesel, originating in different sources, whose regulation will be discussed further on.
If ethanol legislation was to a certain extent asymptomatic, without the required guidelines and systematization, consolidation of biofuel regulation occurred with the enactment of Federal Law No. 11.097/2005,18 becoming part of ANP regulatory authority. This guideline was responsible for the inclusion of biodiesel in the Brazilian energy matrix and the modification of a number of provisions in Oil Law, giving new meaning to the ANP, which was renamed the National Oil, Natural Gas and Biofuels Agency (ANP).19 With the enactment of Federal Law No. 12.490/2011, ethanol was recognized as fuel, whose production was regulated and monitored by the ANP.
This law also modifies a number of provisions of Oil Law, and in article 6, item XXIV considers biofuels as a fuel derived from renewal biomass or use in internal combustion engines or, as regulated, another type of energy generation, which can partially or totally substitute fossil fuels. Article 6, item XXV, defines biodiesel as a biofuel derived from renewable biomass for use in internal combustion engines with compression ignition or, as regulated, to generate another type of energy that can partially or totally substitute fossil-based fuels. Article 6, item XXX, defines ethanol as a liquid biofuel derived from renewable biomass, whose main component is ethyl alcohol, which can be used directly or via alterations, in internal combustion engines with spark ignition, in other forms of energy generation or in the petrochemical industry, and can be obtained through different technological routes.
Regulation of Brazilian fuels follows a specific policy, the National Energy Policy (PEN), contained in Oil Law. Its objectives are to “increment, economically, socially and environmentally, participation of biofuels in the Brazilian energy matrix” (article 1, item XII), as well as “ensure the supply of biofuels throughout the country” (article 1, item XIII), “encourage research and development of renewable energy” (article 1, item XVII) and “mitigate greenhouse gas emissions and pollutants in the energy and transport sectors, including with the use of biofuels” (article 1, item XVIII). They are included in the PEN, the National Program for the Production and Use of Biodiesels (PNPB) and PROALCOOL.
The PNPB was created in 2004 by the Federal Government to implement the sustainable use of biodiesel. Thus, technical and economic aspects of the production and use of biodiesel were covered.20
Since its creation, the PNPB has been governed by objectives, which are the main guidelines of the program. These include guaranteeing competitive prices, encompassing quality and supply; producing biodiesel from different oleaginous sources; strengthening regional potentials for the production of raw materials.21
The National Alcohol Program (PROALCOOL) was created by Decree No. 76.593 of November 14, 1975, with the aim of providing state stimulus for the production of alcohol. The original intention of the program was to meet the needs of the domestic and foreign markets and the automotive fuel policy in force at the time of its enactment, via greater supply of raw material through increased agricultural production, the enlarging of existing distilleries and the installation of new producing and storage units.22
The primary motivation for the creation of the PROALCOOL was the strong negative impact on the national economy caused by the two oil shocks in the 1970s. The program underwent different phases. The first of these was between 1975 and 1979 and was marked by efforts to increase the production and consumption of anhydrous ethanol. The difficulties that arose led to the creation of a commission on the issue, the National Executive Alcohol Commission (CENAL) and the National Alcohol Council (CNAL).
The IAA offered technical and administrative support to the Executive Secretary of CENAL, analyzing applications presented by parties interested in modernizing, enlarging or installing distilleries, issuing a report for final assessment by CENAL. To ensure the commercialization of ethanol, the National Petroleum Council (CNP) established delivery programs to oil distributors and/or consumer companies, which received the product at a price determined by the CNP itself and divulged by the IAA.
A third phase occurred between 1986 and 1995, encompassing a period of stagnation in the production and consumption of ethanol, due to the stabilization of oil prices in the international market. Added to this is the lack of government subsidies in the late 1980s, discouraging alcohol production and thereby discrediting PROALCOOL. During this period, one of the only important laws for ethanol was Federal Law No. 8.723/1993, which established minimum and maximum percentages of this fuel to be added to gasoline (fixed at 22 %, ranging from a minimum of 18 % to a maximum of 25 %), preventing the ethanol industry from going out of business at the end of the oil crisis.23
Starting in 2002, alcohol fuel policies were renewed. This time, however, the motivation was diverse: expansion of sugarcane plantations, with their advancement beyond traditional areas, such as in the interior of São Paulo State, the Northeast, the Cerrado and Southern Brazil, and the considerable concern with climatic change and greenhouse gas emissions, which has led countries to invest in less-polluting energy sources to construct cleaner matrices.24
Once again, there was a large difference between gasoline and alcohol prices, giving rise to the use of flex-fuel cars or biofuels, which allow both hydrated alcohol and gasoline in the tank, depending on personal preference.25
PROALCOOL was abolished, and its regulation incorporated into the wider fuel legislation. Even without a specific program, and ethanol being submitted to market forces, the requirement of adding alcohol to gasoline, together with production of flex-fuel cars, is a stimulus for the production and consumption of ethanol.
However, the potential use of ethanol in the gas tanks of cars has not produced the desired impact on domestic consumption, given the noncompetitive prices for consumers in most Brazilian states. Environmental awareness alone has not yet resulted in a preference for ethanol in Brazil, despite the intensive campaign promoting renewable energies, mainly owing to competition from traditional fossil fuels and the monopoly they detain.26 Therefore, regulatory action is needed, given the lack of environmental awareness.
The aforementioned aims were incorporated into the Oil Law, via both Federal Law No. 11.097/2005 and Federal Law No. 12.490/2011. Article 2 of Oil Law led to the creation of the National Council for Energy Policy (CNPE), which is linked to the Presidency and presided over by the Ministry of Mines and Energy (MME). The MME has the authority to establish guidelines for specific programs, with the use of natural gas, coal, thermonuclear energy, biofuels, solar energy, wind energy and other alternative energy sources (article 2, item IV).
Innovations were also introduced into the authority of ANP, in article 8 of Oil Law. In this respect, item XVI stipulates that the Agency will regulate and authorize activities related to production, import, export, storage, stocking, transport, transfer, distribution, resale and commercialization of biofuels. In addition, according to the following item, it is up to the Agency to assess compliance and certify its quality, monitoring directly or in association with other Federal, State, Federal District or Municipal bodies.27
Another important inclusion to Oil Law was article 68-A, which states that any company or consortium of companies, constituted under Brazilian law, with headquarters and administration in the country, can obtain authorization from the ANP in order to exercise economic activities in the biofuel industry. Thus, the opening and functioning of ethanol plants follow the rules contained in the aforementioned provision.28
Thus, biofuels are initially involved in national policy regarding exploitation of existing energy sources, renewable or not. Objectives related to the development of the biofuel market include environmental protection, the use of alternative energy sources, the promotion of free competition, increased participation of biofuels in the national energy matrix, guaranteed supply of biofuels to the national market, the use of biofuels in electrical energy generation, greater participation of Brazilian biofuels in the international market, attracting investment for infrastructure projects related to biofuels and the use of biofuels to help decrease polluting gases and greenhouse gas effects.
It is important to bear in mind that the legislation itself is not sufficient to drive the biofuel industry in judicial terms. This occurs because the Constitution, the laws and even the decrees often only establish general conditions. The introduction of the idea of regulation in Brazil is also committed to allowing greater dynamicity in regulating the sector since the law establishes the basic guidelines and policies to be followed, and it is up to the regulatory agency to implement and adapt this policy to the dynamics of both the sector and Brazil.
However, when regulating the industry, there is a basic principle that the regulatory agency (the ANP) must respect: the principle of legality. According to this principle, the regulatory action of the ANP must be contained within the limits authorized by the general law of the regulated sector. It can complement but not exceed the law. Although there is a need for specific regulation on the issue, if it is not legally authorized to regulate this question, it cannot take any action.29
One regulation issue common to biodiesel and ethanol is related to the conditions to authorize the retail sale of fuels, which are contained in ANP Ordinance No. 116/2000. As general conditions to exercise the activities, the interested party must obtain a registry of retail sales from the ANP and own a petrol station. To apply for the registry, the interested party must fill out an application form, have a registration form, have a CNPJ (company registration number) and state inscription, present a social contract or statute filed at the Chamber of Commerce, as well as a municipal business license. Any alterations must be communicated to the ANP. The retail seller can only acquire ethanol from dealers authorized by the ANP and cannot establish quantitative sales limits or mix products with the ethanol sold. The distributor is forbidden to engage in retail sales, except for training purposes.