The issues of the agricultural alcohol industry

At the request of the Industry, the EU Ethyl alcohol market is now subject to Regulation N° 670/2003 of 8 April 2003 which entered into force in 1st January 2004. The Commission Regulation N° 2336/2003 introducing certain detailed rules for applying Regulation N° 670/2003 was then published (OJ L 346/19). Basically, this new legislation establishes a system of automatic import licences aimed at better assessing the level of imports into the EU. This system is by no means restrictive in quantity terms. Member states are requested to provide the Commission with statistical data which the Commission will process into a yearly Community balance of the sector. The first balance is expected in March 2005.

The main issue that affects the EU agricultural alcohol industry is the growing number and volume of imports from countries where ethyl alcohol is cheaply produced because producers have access to cheap raw materials and labour force, because they have no EU-like expensive environmental standards or because ethyl alcohol is mainly produced for fuel purposes which is heavily subsidised in certain countries. The combination of all these factors seriously distorts competition, especially when this ethyl alcohol is then sold on the world market and into the EU in particular.

In the EU, ethyl alcohol is subject to an import duty (10.2 Euro per hectolitre for denatured alcohol and 19.2 Euro per hectolitre for undenatured alcohol) which, when the dollar is weak as it is, barely plays the role of a fair countervailing duty to balance these distorting elements. However, the EU has signed a number of free trade agreements with a considerable number of third countries (ACP, GSP agreements) who are now able to export their production either duty free or at a much lower import duty. The opening of the EU market to this production is unfairly impacting on the EU industry’s competitiveness and UEPA is working towards the implementation of fair market rules, which would take these disturbing factors into consideration.

Furthermore, the EU has been negotiating an unprecedented free trade Agreement with Mercosur, a group of four countries which includes the biggest world alcohol producer, namely Brazil. These negotiations are currently on hold but they could resume anytime. The EU’s offer to Mercosur includes a quota of 1 million tonnes of fuel ethanol, whilst the EU fuel ethanol market is presently at just 500.000 tonnes. This quota was offered on the grounds that the EU biofuel programme leads to a bioethanol market estimated at between 8 to 10 million tonnes per year by 2010. This assumption is made on the hypothesis that all Member states do comply with the objectives set out in the Directive on the promotion of biofuels (Directive 2003/30/EC of 8 May 2003; OJ L 123/42). However, given the reports made so far by the Member states on the implementation of the directive, it appears that this assumption is already not valid as a number of them are heading towards a lesser percentage.

In these circumstances, the industry is concerned that this huge quota has the potential to prevent the development of an EU fuel ethanol industry if prematurely introduced on the market. In a constructive attempt to conceal both the development of the EU biofuels programme and the EU’s agenda in these negotiations, UEPA has proposed that such quota be granted in the form of a percentage of the market growth. This would be the wisest way to reach both objectives for the benefit of both the EU and Mercosur.

This balanced approach should unavoidably apply to imports in general to be effective. Indeed, the fast increasing duty free imports could equally disturb the development of the biofuel programme if not properly managed. UEPA therefore suggests that all imports made into the EU fuel ethanol sector be restricted to a percentage of the EU market growth as this is the case in the US fuel ethanol sector. This win-win solution would allow the EU fuel ethanol market to grow hence offering equally growing opportunities to third countries’ exports. UEPA is concerned that, if no such initiative is taken, the EU fuel ethanol market will not expand as expected to the detriment of both the EU and non-EU interests.

Certain people are of the opinion that because Brazilian ethanol can be very cheaply produced, the EU should essentially develop its bioethanol market on this production. UEPA considers that such an approach is not only contrary to the two objectives set out in the EU biofuel programme, but also unwise and unfair.

The grounds of the EU Biofuels Programme are threefold: reduce the EU growing energy dependency; reduce greenhouse gas emissions and fulfil our commitments under the Kyoto protocol; and develop rural areas. Although the impact on greenhouse gas emissions can be achieved with imported ethanol, the EU would not reduce its growing energy dependency nor develop its rural economy with imports. The EU-25 has a huge agricultural potential to achieve the 2010 objective and it has been estimated that approximately 3.6% of EU’s agricultural land would be cultivated for that purpose. Environmental legislation is far stricter in the EU than in most other countries in the world therefore it makes even more sense to produce it internally to maximise the positive environmental benefits.

Considering that the EU fuel ethanol market should rely on cheap imported alcohol is not a wise long-term solution.  Mostly because this would lead the EU to another dependent situation hence sharpening its vulnerable position in terms of prices. This likelihood is high considering that many countries in the world (India, China, Japan etc) are developing a biofuel programme while Brazil, due to the sharp increase of crude oil prices, is increasing its internal fuel ethanol demand by developing a flexi-fuel car market which can utilise hydrous ethanol. All these factors will have an impact on world ethanol prices at a certain stage and the EU should anticipate these changes.

Being competitive is mainly the result of investments which Brazil has been making for many years. The fuel ethanol industry has been flourishing (it is at about 150 million hectolitres per year) thanks to massive subsidies granted at an early stage combined with stringent state interventions to control offer, demand and therefore prices. Adding very low labour and raw material costs turns Brazilian ethanol into an unrivalled world-wide producer. The USA have been developing their own bioethanol industry (at about 120 million hectolitres per year) for as long as Brazil, injecting significant state aids into their programme, but the US production costs are still higher than the Brazilian’s. Without a controlled import policy which includes a high import duty on fuel ethanol, the USA would never have been able to develop their national fuel ethanol industry. In the light of this, asking the EU nascent fuel ethanol industry to compete with the Brazilian production is unfair and sweeps away any possibility for the EU industry to invest in a fuel programme that would generate numerous jobs in both the industrial and rural sectors. An industry does not become competitive by coincidence: it needs investments, political support and time.

UEPA supports the view that the EU market as a whole should be more open to third country economies, especially to developing and Least Developed Countries (LDCs) in order to stimulate growth in these countries. The World Trade Organisation (WTO) has undertaken this move and UEPA subscribes to it. However, the ethyl alcohol industry has already made a significant contribution to this policy given that its market is already open to many world countries whilst the EU industry cannot export on the world market because of the existence of cheaply produced subsidised alcohol. Considering what was highlighted about the Brazilian ethanol production, any reduction of the import tariff on ethanol would exacerbate the unfair pressure on the EU ethanol industry at a moment when huge investments need to be made to achieve the EU’s targets. Furthermore, reducing the import duty would penalise all the smaller GSP/ACP countries who currently enjoy duty free access to the EU Market. Most of them will never be able to compete with the world’s biggest producers.