Lessons From Brazil: How To Develop An Energy Policy

When President Bush declared that Americans were “addicted to oil” it felt like a crack cocaine dealer lecturing a community to say no to drugs. I must acknowledge that in moments like this I have a grudging respect for President Bush’s brazen braggadocio. This is a man whose family profited enormously from a generational alliance with Saudi royalty. It awed me that he could deliver such a line with a straight face and no embarrassment. Putting Bush’s hypocrisy aside, there may be value in his uttering those words. Even a discredited President such as Bush commands an enormous megaphone from the bully pulpit and Americans may finally be receptive to a candid discourse about adopting a genuine energy policy. Yes, Vice President Cheney and Bush’s Energy Commissar Samuel Bodman wasted no time in reassuring the oil industry that the speech was simply rhetoric.

Nonetheless, even disingenuous words from a President are a catalytic agent to the body politic and the public appears to be more engaged about developing alternative fuels and conservation. The national discourse requires a sense of urgency about energy policy. Although not yet at a crisis point, global warming combined with Mid-East politics is putting America on a collision course with calamity.

Brazil’s recent history is instructive when contemplating our current situation and evaluating what works. In the fall of 2001, a metastasizing corruption scandal (sound familiar?) and an energy crisis severely eroded President Fernando Henrique Cardoso’s authority and ability to govern. As high profile politicians resigned from scandalous revelations, blackouts and energy rationing plagued the nation. The situation resembled the crisis confronted by Californians several years ago. President Cardoso desperately tried to deflect blame from his administration onto his predecessors for not investing in the energy sector. The public blamed Cardoso instead.

Cardoso had implemented a policy of deregulation and liberalization in the energy sector. Luiz Inacio Lula da Silva pursued a very different course upon assuming the Presidency in October 2002. He immediately put a moratorium on the privatization of state owned companies. da Silva also established a different electricity blueprint to facilitate the development of additional power plants. Neil Ford, an energy specialist writer wrote in the April 7, 2005 edition of Power Economics (apologies but no available link) that:

“Most governments attempt to encourage private companies to develop new power plants by allowing them to compete with state owned operators. Brazil is something of a case apart, however, as the country’s new model actually aims to minimize competition between generators, on the grounds that established state owned hydroelectric plants will always offer cheaper electricity than the new gas fired facilities that have been developed.”

Ford noted that hydroelectric power accounts for 80% of Brazil’s energy generating capacity but “as in much of the rest of the world gas fired plants are making an increasingly important contribution." One reason for the government’s incentive to reduce Brazil’s dependence on hydroelectric production is because of drought. This contributed to the energy crisis for Brazil in 2001, because low rainfall reduced their national generating capacity resulting in energy rationing. Brazilians were forced to import electricity from Argentina. Droughts may also be attributed to global warming that is already causing water shortages in America’s southwest region and complicates any hydroelectric based planning.

Those challenges notwithstanding, da Silva’s energy policies appear to have provided Brazil’s state owned enterprises increased autonomy in the development of the power sector while simultaneously promoting competition. As Ford reported about da Silva’s scheme, “It effectively created two parallel trading pools that are operating in tandem: a free market power pool and a more heavily regulated system.”

The free market sphere is comprised of generating companies competing to sell electricity to distributors. The regulated sphere is comprised of a state regulator fixing prices and acting as the consumer’s advocate. Trading is monitored by the Camara de Commercializacao de Energia Electrica (CCEE). Hence, da Silva has implemented an innovative model that combines the best of free market competition with government oversight to maintain price stability. This is a model worth studying. Is it also worth adopting for the United States? I wonder.

Where Brazil is really leaving their mark is their pursuit of energy independence. Brazil is the largest country in South America and at one time imported 80% of its crude oil. Yet as Hembree Brandon writes in the November 16, 2005 edition of the Southeast Farm Press, Brazil “expects to be self-sufficient in a few years.” Think about that. Over thirty years ago OPEC jerked America’s chain and scared Presidents Nixon and Carter to make high profile speeches about energy independence. Brazil was confronted with their energy crisis five years ago and they’re light years ahead of the United States. 40% percent of all the fuel Brazilians pump into their vehicles is ethanol mostly derived from sugarcane bagasse. It is important to note that the Brazilian government requires that all fuel sold within their country contain at least 25% ethanol. Can you imagine Bush and Cheney implementing such a policy?

Among the benefits of these policies for Brazil are profit windfalls for their agricultural industry. With billions of dollars priming into Brazil’s ethanol sector, their nation’s rural economy is booming. More than 300 ethanol plants are operational with another 50 in development. Consequently, Brazil is profiting from ethanol exports to eager consumers worldwide, including the United States. The United States in comparison produces 3 billion gallons of ethanol annually from 70 plus plants with perhaps a dozen more in construction. That is a sobering comparison. As the New York Times said in their February 1st editorial after Bush’s speech, “It should be a humbling shock to American leaders that Brazil has managed to become energy self-sufficient during a period when the United States was focused on building bigger S.U.V.'s.”

I don’t write this simply to shame my fellow citizens. Quite frankly, in researching this topic I am humbled at my own ignorance about the complexities involved. In this instance, I think it best that our national posture be one of humility. In 2000, President Bush campaigned on the notion of America as a humble nation. Well, one aspect of humility is to acknowledge when we have something to learn from others. It seems to me that we have much to learn from Brazil about energy. I have no idea whether their approach can be replicated in the United States. I am also aware that there are legitimate criticisms of ethanol and I am not trying to curry favor with Iowans. Nevertheless, as we confront challenges posed by global warming and Mid-East politics such as growing tensions with Iran, the Brazilian experience appears to merit our interest. In my humble opinion.