By the end of 2007, the European Commission aims to devise environmental standards for biofuels -- standards that will be of particular interest to Brazil, and ultimately, to the agriculture sector globally. While so-called sustainability standards will likely come under close scrutiny as a potential non-tariff trade barrier, the commission has a narrow intent in mind for them which could prove acceptable to Brazil, the world's emerging biofuels leader.
If these standards catch on beyond the EU's borders, they could set a precedent for the future development of other codes of conduct for industrial agriculture. Such standards could also lead to a further rise in already-high agriculture commodity prices -- which is good news for Latin America's Southern Cone.
The EU will require 10 percent of automotive fuels sold within the union to comprise alternative fuels (not fossil-fuel-based) by 2020. The EU's interest in biofuels is part of a larger energy strategy recently devised to secure three objectives: efficiency, carbon emission reduction and -- most important to German Chancellor Angela Merkel, who devised the policy -- energy security.
Importing Brazil's sugar-cane-based ethanol currently is the most appealing way, in terms of price and supply, to meet the 10 percent requirement, but critics have warned that in its pursuit of cleaner-burning fuels, Europe ironically risks funding ecological destruction. The poster child for this concern is the Amazon rainforest, which has been reduced at alarming rates in the past decade, in part to allow for soya crop expansion. Therefore environmental certification is being proposed to accomplish two specific objectives: to make sure less carbon dioxide is released in the production of biofuels than will be conserved by burning them in place of gasoline, and to make sure that valuable wildlife is not destroyed to make room for plantations. The second goal aims to preserve biodiversity but also links back to the carbon concern; destruction of the Amazon forest, wetlands or other similar areas would constitute the destruction of natural carbon sinks -- usually by burning, which releases more carbon into the atmosphere.
From this perspective, Europe's demand is entirely reasonable; it is merely requesting that the policy goal leading it to purchase the biofuels in the first place not be subverted. As long as the certification's focus remains on the greenhouse gas balance of biofuels production, objections by Brazil or other would-be suppliers likely will not be perceived as legitimate.
There are two groups that would like to see the certification scheme become much more extensive, however: environmentalists and European farmers. If they get their way, the minimal "sustainability criteria" attached to biofuels will address a much wider array of topics -- from pesticide and fertilizer use to water intensity, genetically modified organisms, labor standards and community impact. For environmental groups such as WWF these are matters of principle; for the farmers, they are a matter of competitive advantage. Few European interest groups are more jealously guarded than farmers -- remember, the rigidity of Europe's Common Agricultural Policy is a significant obstacle to the Doha round of WTO negotiations.
Brazil will be consulted in the course of forming the standards, and there is a chance the requirements will be mutually acceptable. As Doha sputters out, the EU is reviving its interest in a stalled EU-Mercosur trade agreement and needs Brazil as an enthusiastic broker to have any chance of success. Europe is not likely to bend on its standard agriculture protectionist measures for Mercosur any more than it did for the Doha negotiations as a whole. Thus, it will have to offer Brazil something appealing in exchange for a reduction in Brazil's industrial tariffs, a more rigorous intellectual property rights regime, and greater access to Brazil's financial, insurance, government procurement and maritime transportation sectors. Favorable ethanol import conditions are one of the best carrots the EU has to offer.
Of course, the EU structure requires unanimous consent for important trade-related decisions. Hence, even though EU Trade Commissioner Peter Mandelson has made it clear that he does not believe local farmers can produce enough biofuels to meet the EU's objectives, and he explicitly said he does not want to see protectionist barriers against ethanol imports, it is quite possible that the environmental requirements will have to be beefed up to pass muster with all of the EU's constituents.
Brazilian President Luis Inacio "Lula" da Silva is also already taking steps to head off not only European environmental critics but also Cuba's Fidel Castro and Venezuela's Hugo Chavez, who perceive Brazil's ethanol push as an affront to Venezuela's Petrocaribe program and other oil diplomacy initiatives, and have warned that the expansion of biofuels production could raise food prices for the poor. Brazil has clamped down on forced plantation labor and is phasing out the burning off of the foliage in sugar cane fields -- a process used to facilitate manual harvesting -- in favor of mechanized harvesters. These measures will not be enough to satisfy Europe, however. While da Silva's confrontation with Castro and Chavez has been mostly rhetorical, Europe will require actual guarantees that its demands will be met. Ultimately, the result is likely to be increased standards for Brazilian agriculture, but not enough to fully open the gates of the European market for most producers.
The sustainability criteria that Europe eventually decides upon will need some form of accountability tied to certification. Enforcement mechanisms have been a central problem for the credibility of environmental and social codes of conduct in a wide range of industries, and the solutions that are proposed for the biofuel question -- as well as some of the specific standards imposed -- could become a model for further certification efforts aimed at other industrial agriculture crops.
Environmental and social requirements will further drive up the price of agriculture commodities. Agriculture prices have risen steadily for the past few years, driven in part by growing Chinese demand for soya, and corn and wheat prices have already risen in the United States as corn-based ethanol competes for farmland. These rising prices have helped buttress economic growth for the past few years in Brazil, Argentina, Paraguay, Uruguay and Bolivia.
Commodity prices tend to rise and fall cyclically, and Latin American countries often face political crises during the troughs. Thus, while Brazil's ethanol expansion gives it a chance to gain clout as a world leader, it will also indirectly help maintain high agriculture prices -- and, therefore, regional stability.