Global Biofuel Trade: How Uncoordinated Biofuel Policy Fuels Resource Use and GHG Emissions

In recent years we have seen significant volumes of bilateral trade of physically identical ethanol between the United States of America and Brazil driven by their different biofuel policies. The trend emerged in 2010, and accelerated in the second half of 2011, with large quantities of ethanol crossing paths in bilateral trade between the two countries. While this two-way or intraindustry trade of homogenous products is not a new phenomenon, it is typically explained by factors such as seasonality or cross-border exchanges caused by transportation cost differentials. However, we find that traditional market factors do not explain the notable volumes of bilateral trade in ethanol between the US and Brazil. Instead, this trade appears to be driven by differential and uncoordinated environmental policy. The conclusion is that the uncoordinated environmental legislation is inducing the product differentiation that invites arbitrage between the two countries, resulting in the two-way trade of an otherwise physically homogenous product; in so doing, additional fossil energy is consumed in the bilateral trade of ethanol along with the associated emissions of greenhouse gases (GHGs) from transport. Transport, as a result of the individual policies, also raises the price of biofuels to consumers which may suppress the displacement of fossil fuels. Both of these unintended consequences work in direct conflict with stated environmental objectives of many biofuel programmes. The potential for intra-industry trade in biofuels could be further stimulated by evolving legislation within the European Union (EU). With tighter environmental constraints on biofuel production written into EU policy, the potential competition for certain classes of renewable fuels increases and could extend its reach from ethanol to biodiesel and/or the underlying feedstocks in the EU, the US and Brazil. This would create additional opportunities for counter-productive arbitrage among the three regions. We highlight one negative consequence of uncoordinated biofuel policy and propose options for mitigation through the use of a “book and claim” system under which each country could continue to pursue its own policy objectives while acting in a coordinated fashion to reduce costs and GHG emissions.