Greater biofuel production, domestic use and eventual trade can bring multiple benefits to developing and developed countries. In the context of the current historically high oil prices, the economics is sound, as a greater share of biofuels in total primary energy supply can help reduce dependency on oil imports and promote nationally-developed energy sources.
1) What are the main challenges for the sector?
2) What are the most pressing issues in order to address the scale problematic of biofuels?
3) What could be the benefits for the environment regionally and globally?
1. What are the main challenges for the sector?
The main challenges for the sector have been the subject of lengthy discussions and analysis. We all know that the human interaction with the environment is at least 20% ahead of the natural recycling capacity of Planet Earth. We all know – and I quote the advertisement of one of the largest oil companies published by the magazine The Economist – that “a 5% reduction in global energy use would be enough to power Australia, México and the entire UK.”
The same advertisement asks:
“So, what are we waiting for?”
The challenge of raising capital and managing risks:
Brazil alone cannot answer for the rest of the world, but this country has been pointing for some time to serious energy alternatives and ways to curb the greenhouse gas emissions. We have had in this country, for decades, programs to develop cleaner fuels and hybrid engines for the automobile industry, well ahead of the existing programs and goals of the European, Asian and North-American Countries.
My particular experience and contribution comes from the role of Chairman of the Board of the BM&F. To directly address the questions raised by this panel I would like to focus on two fundamental points:
• costs of capital and
• risk management
For all the industries and agribusinesses engaged in the search for new and cleaner sources of energy.
The Brazilian Mercantile and Futures Exchange deals with financial and commodities contracts and ranks 5th among the global Futures Exchanges, according to data from the Futures Industry Association – FIA, of Washington DC.
As the Chairman of the special committee created by the Brazilian Department of Agriculture (Ministério da Agricultura) for Insurance and Credit, I have suggested new financial papers, like the CDA and WA, already in place. Large industries and producers of sugar and ethanol have raised working capital to cover the production, storage and the domestic and international trade of these commodities.
The contracts traded at BM&F offer proper tools to hedge against the volatility of the commodities prices. As I said at the IDB conference, local and international traders of biofuels, biomasses and related commodities benefit from the risk management opportunities offered by BM&F. At the end of the financial road, the clean/energy related industries and commodity chain users of the BM&F contracts may get the advantages of the reduction of costs of raising capital.
At this point, I think that I have already answered the question: “what are we waiting for?”
We are not waiting, but I have to say that the share of users of derivatives in Latin America is substantially lower than in the US or Europe. So, the non-users are working at higher levels of risk management. We should work to fulfill this gap and the role of the World Economic Forum, as sponsor of initiatives like this, is of utmost importance.
Besides, even taking into consideration the Brazilian programs to develop cleaner energy sources, the intensity of the energy matrix of Latin American countries, measured in terms of CO2 emissions, grew 2% between 1980 and 2003. That performance is not promising, when analyzed under the viewpoint of sustainable development. I believe that, to begin a process of sustainable development in the region, we must, besides promoting a job and revenue growth policy, revert the trend created during the last 20 years.
That trend can be reverted if we opt for a development path that leads the way to a greater energy efficiency and potential use of renewable energy sources based, as I have mentioned, on the use of alcohol, crushed sugar cane, bio-diesel, solar and wind energy, among others.
The Clean Development Mechanism
In this path, the Clean Development Mechanism (CDM) can be a highly useful tool, as it contributes at the same time in order for developed countries to fulfill their emission reduction goals (within the Kyoto Protocol context), and also allows developing countries to voluntarily promote sustainable projects.
The share of the Brazilian projects reached 20% of the total number of projects within the MDL framework. The same percentage occurs when taking into consideration the amount of carbon credits generated by these projects until 2012.
To summarize, I think that I have answered the two questions raised by this panel, from the point of view of risk management and capital supply.
I would also emphasize that the MDL may already be considered as proper instrument to effectively favor the development of sustainable projects in Brazil. The 98 Brazilian projects being developed, or already under construction, may potentially generate 18 million tons of CO2 equivalent/year. At a presumed cost of US$10 per ton, that would mean US$180 million in revenues for the country.
The number of CDM projects (registered at the UN Executive Board) has been significantly increasing. In March of this year, it reached the expressive number of 150 projects, with a potential of reducing an equivalent of 330 million tCO2 until 2012. Brazil is the country with the largest number of registered projects at the UN. On the other hand, I consider the commitment of several stakeholders to enhance the potential use of CDM in Latin America fundamentally important.
First, the involvement of Multilateral Organisms is essential, especially in the financing of CDM projects (of energy efficiency) and in actions that promote what we call “capacity building”. Without this, it will be very difficult to increase the offer of good CDM projects.
I also consider the involvement of local governments to be imperative, particularly in the context of “Pragmatic CDM”. As you know, in accordance to the COP/MOP 1 decision (the first meeting after the Kyoto Protocol entered into effect), which took place at the end of last year, a program (or group) of government activities (or private) can be registered at the CDM Executive Board as a single activity of the CDM project. With this, governments can define a group of actions, for example, in the energy sector that promote in an efficient, integrated, and sustained manner the reduction of greenhouse gases in their respective regions.
The BM&F facility for the Carbon Market
BM&F has a solid project. The Brazilian Carbon Market (MBRE) is a joint initiative between BM&F and the Brazilian Ministry of Development, Industry and Foreign Trade (MDIC), which has already been implemented. With this initiative, we intend to develop an efficient trading system for Certified Emission Reductions, aligned with the principles underlying the Kyoto Protocol. More precisely, the BM&F/MDIC initiative consists in creating in Brazil the base for an active carbon market, to be considered a benchmark by international participants.
BM&F emerges in this context like a tool or a group of tools that can contribute to improving the commodity chain, bringing more wealth to all the participants of the trade, more jobs and more business opportunities for foreign investors and multinational companies.
BM&F’s initiatives in the area of biomass and energy can trigger historical changes. The Exchange was pioneer in launching sugar and alcohol futures contracts and highlighted the importance of clean energy before the rest of the world and other international exchanges woke up to the significance of the environment. If we come together under this flag, which permeates all agribusiness, we can take huge steps towards the development of Latin America.
The first phase of the carbon market, launched by BM&F at the Rio de Janeiro Stock Exchange in September 2005, corresponds to the implementation of the BM&F Carbon Facility. This registers projects validated by Designated Operational Entities (UN certifying agencies), according to CDM rules – thus, projects that will generate future Certified Emission Reductions (carbon credits). This market also registers what is known as Project Idea Notes. These are partially structured ideas, whose aim is to become validated projects within the CDM context.
Validated projects and project idea notes registered at BM&F benefit enormously from this system – enabling them to promote projects and attract attention from interested parties to either draw investments or to acquire future carbon credits associated to their project. It is worth mentioning that the BM&F Carbon Facility is also open to the registration of expressions of interest, which allows a foreign investor, eventually interested in acquiring carbon credits, to register his interest, describing the characteristics of desired projects.
The second stage of the organization of the Brazilian Carbon Market entails the set up of a carbon credit trading environment in the option, forward and spot markets. This phase will be gradually implemented towards the end of 2005.
By creating the BM&F Carbon Facility, the Exchange is specifically seeking the extensive development of the carbon market in the region. A greater development of this market will surely contribute to reduce the costs of structuring CDM projects and increase the sales of potential credits. This will lead to more market liquidity and, consequently, to more fair and equal business opportunities. This way, the market can contribute more efficiently to the region’s sustainable development, as it boosts revenues from the commercialization of credits.
Never have we been so close to develop a virtuous cycle for agribusiness, involving producer, industry, financial sector… – in summary, involving all the implicit links of a commodity chain, elevated in this case to a superior level and very different from the simple business of primary goods that has been part of this region for so long in the past.
This panel raised the question of the “benefits for the environment regionally and globally”. We believe that the programs we just mentioned clearly answer this question. We thank the World Economic Forum for the opportunity to talk about the Brazilian and BM&F initiatives. We have had the opportunity to address audiences in Beijing and Geneva and we firmly believe that the Brazilian experiment with agribusiness focused on biomasses and clean energy should receive some more space in international agendas.
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