DIFFERING BRAZILIAN VOICES ON U.S. ETHANOL POLICY AT

UNCLAS SECTION 01 OF 03 SAO PAULO 000650

SIPDIS
SENSITIVE

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: DIFFERING BRAZILIAN VOICES ON U.S. ETHANOL POLICY AT
BIOFUELS CONFERENCE

REF: Brasilia 1393; Brasilia 1553

SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY


1. (U) Summary: At the Government of Brazil's (GOB) much
anticipated International Conference on Biofuels held in Sao Paulo
from November 17 to 21, GOB reps, for the most part, stuck to the
spirit of the U.S.-Brazil biofuels MOU and kept to promises to
remain united with the U.S. on expanding ethanol markets, focusing
on bilateral cooperative efforts and downplaying our differences
over the ethanol tariff. In contrast, Sao Paulo state governor Jose
Serra criticized U.S. ethanol production in both his opening and
closing remarks, using the occasion to lambaste U.S. trade policy
and the higher production costs of corn ethanol. He also made the
charge that the U.S. is actually obstructing the creation of a
global biofuels market. Governor Serra may have been showing an
economic nationalist streak or merely taking the opportunity to
curry favor with his constituents in a lead up to his expected
Presidential bid in 2010. GOB officials meanwhile took pains to
remind the U.S. delegation that Serra did not speak for the Brazilin
government. There were many Brazilian non-governmental participants
whose comments are not characterized in this cable but will be
addressed more specifically in further conference reporting. End
Summary.


2. (U) The GOB had criticized U.S. ethanol production during the
food vs. fuel debate earlier this year. However, since the Food and
Agriculture Organization's meeting in Rome when President Lula
famously differentiated between good and bad ethanol, GOB reps have
consistently told Mission contacts that Brazilian government
strategy was not to differentiate sugar from corn ethanol. (Note:
Ministry of Foreign Relations officials had assured Ambassador Sobel
the speech was the work of errant speech writers whose focus was
more agricultural than energy and would not be repeated. End Note.)
Instead, they chose to line up with the U.S. in countering ethanol
critics and work with Washington to create a global marketplace for
ethanol.


3. (SBU) Andre Correa do Lago, Ministry of Foreign Affairs'
Assistant Secretary-equivalent for Energy, has on multiple occasions
told Ambassador Sobel and visiting U.S. delegations that it is not
in Brazil's interest to differentiate between types of ethanol, as
doing so would only hamper efforts to develop a worldwide market in
biofuels. Under Secretary for Energy and Science Andre Amado went
further, suggesting to the Ambassador and others that the campaigns
against biofuels and differentiating feed stocks were the result of
orchestrated efforts by entrenched industrial interests.


4. (SBU) Indeed, GOB conference panelists and invited speakers,
including Energy Minister Edison Lobao and Presidential Chief of
Staff Dilma Rousseff (likely opponent of Serra's in a 2010
presidential bid),by and large adhered to the message that common
efforts to develop the world ethanol market would be good for both
Brazil and the U.S., with Rousseff particularly highlighting the
cooperation between the U.S. and Brazil in developing biofuels
industries in developing countries. Both highlighted the virtues of
ethanol, limiting discussion about the differences among types of
ethanol production. In Minister Lobao's closing speech, he
countered several common criticisms of ethanol, stating that
fertilizers were the largest contributor to food price inflation and
that ethanol had less environmental impact than fossil fuels.
(Note: See septels for more on the International Conference on
Biofuels topics. End Note.)


5. (U) President Lula himself avoid any repeats of past unfortunate
comments differentiating types of ethanol and instead focused on the
importance, particularly in times of global economic crisis, of
developing a global markets for biofuels. He said that Brazil
doesn't want the U.S. or Europe to stop producing their respective
biofuels products, and only asks that they work to bring biofuels
industry to developing countries as well. He voiced his willingness
to work with any country that wanted to transform the life of the
people and create income. Lula also echoed some of the themes of
Lobo's speech, countering past claims that biofuels were to blame
for the food crisis. (Note: Though he stayed positive on biofuels,

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in discussing climate change and biofuels' role in addressing it,
Lula did highlight statistics showing the U.S. as the largest
greenhouse gas emitting country in the world. End Note.)


6. (U) Governor Serra, in contrast, was extremely critical of U.S.
ethanol, along with U.S. trade policy, and underscored the
differences between U.S. and Brazilian ethanol during both his
opening and closing remarks to the conference. In his conference
keynote, Serra boasted about Brazil's energy matrix, citing Brazil
as the "greenist" industrialized country with 48 percent share of
its energy generated from renewable sources. He went on to point
out that 15 percent of Brazil's energy is derived from sugarcane,
highlighting ethanol for automobile fuel as the primary driver.
Serra further identified the state of Sao Paulo as the major
producer of ethanol. Sixty percent of Brazil's sugar production and
two-thirds of the country's ethanol for export are produced in Sao
Paulo. Serra noted that Sao Paulo was working toward the total
elimination of the manual sugarcane harvest, which requires burning
the fields after harvest, and also touted the state's investments
and research endeavors into biofuels.


7. (U) In both speeches, Serra distinguished Brazilian ethanol from
other sources, paying particular attention to U.S. ethanol. Serra
stated that U.S. ethanol is less efficient and blamed worldwide food
price inflation on U.S. corn ethanol. He said that U.S. corn-based
ethanol production was "much more costly, and that it was largely
responsible for the recent period of high inflation because of
higher corn prices." Serra added that Brazilian sugarcane ethanol
did not compete with food production and that it was the cheapest
feed stock. He noted that second generation cellulosic ethanol
production would not erase the production cost benefit of Brazilian
ethanol.


8. (U) Serra emphasized that U.S. policies obstruct the existence
of a global biofuels market and indentified the United States as the
most protectionist developed country. He said the "U.S. preaches
but does not practice" free trade. Serra told the high level
delegation at the closing ceremony that the U.S. tariff of 14 cents
per liter against imported ethanol was only one of many non-tariff
obstacles to entry into the U.S. market. He said domestic subsidies
increased the effective tariff to 30 cents per liter, the rough
equivalent to the production cost of Brazilian sugarcane ethanol.
According to Serra, the U.S. had to establish these types of regimes
to protect the market for the less efficient corn-based ethanol.


9. (U) Finally, Serra said that Brazil should help other countries
develop ethanol markets in order to expand the ethanol supply needed
to develop a global market. He highlighted the investment and
technical assistance that the GOB had been doing in third countries.
Serra failed to mention that such programs are a key part of the
U.S.-Brazil MOU, which established third country assistance.


10. (SBU) Comment: Governor Serra's attack on U.S. ethanol likely
reflects his positioning of himself for the 2010 presidential
election. Serra is staking out his credentials as a green economic
nationalist, an identity that could play well as the global
financial crisis hits Brazil and puts pressure on the Lula
administration to respond. Serra has been very proactive in recent
weeks in demonstrating his efforts to strengthen various entities of
the state of Sao Paulo against the financial crisis. GOB contacts
at the conference admitted to U.S. delegation members that they were
embarrassed by Serra's attacks on the U.S. One of the organizers
lamented that Serra "just didn't get the point of the conference."
Multiple GOB representatives took pains to remind the U.S.
delegation that Serra did not speak for the government. Based on
these reactions and GOB actions and rhetoric both in advance of and
during the conference, it appears that, despite nationalistic
rhetoric from some quarters, the GOB intends to stick to its
message: that biofuels are better than oil, a global market is
essential for this quick and clean alternative to flourish, and
wealthier nations must assist developing nations in taking advantage
of the opportunities presented by biofuels. Post will continue to
work with the GOB to advance our mutual efforts in this direction
and will seek opportunities to counter Serra's nationalist drift
with more accurate information about the U.S.-Brazil energy

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partnership. The ethanol tariff will continue to be an irritant in
bilateral relations as long as it remains in place, but overall
cooperation in the biofuels arena is still a highlight of the
bilateral relationship and offers great opportunities for continued
positive engagement.


11. (SBU) COMMENT CONTINUED - BIO NOTE. Most observers expect
Governor Serra to be the center-right PSDB candidate for the 2010
Presidential election. He likely will square off against President
Lula's preferred successor, Chief of Staff Dilma Roussef. Lula, who
came into office billed as a Workers Party (PT) leftist, has shown a
pragmatic streak, particularly on macroeconomic issues. Serra,
although leader of a party considerably to the right of the PT, is
himself seen to have leftist tendencies, some undoubtedly honed in
his period of political exile from Brazil during the military
dictatorship. His comments last week on trade and biofuels are a
case in point. While often critical of the U.S., Serra is not
anti-American, and is an effective administrator willing to work
with us on issues of mutual interest and concern. End Comment.


12. (U) This cable was coordinated/cleared by Embassy Brasilia and
the ATO in Sao Paulo.

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