What is RenovaBio and how important is it in the decarbonization process?

The emergence of a low-carbon economy and the growing global demand for renewable energy sources have led to biofuels being seen as a viable alternative to fossil fuels. In terms of distribution, scope and consumer adoption, the Brazilian case remains unique in the world. This is mainly due to the country's experience and efficiency in large-scale production of sugarcane and fuel ethanol, which dates back to the 1970s.

Changes in the objectives of Brazilian incentive policies over time have led to significant transformations in this industry. Key aspects of this process include the Proálcool (National Alcohol Program) and the introduction of automobiles powered 100% by hydrated ethanol (E100) in 1975. Also noteworthy is the period immediately following the 90s, when a phase of significant development began, marked primarily by the cessation of direct government intervention in the sector and the advent of dual-fuel vehicles in 2003 (known as flex-fuel).

Throughout its history, the sector has gone through periods of growth and crisis, and until the 2010s, the use of biofuels was still less attractive to consumers. This was due to price competition in relation to gasoline and other fossil fuels – which meant that biofuels were always at a sub-optimal level of use.

The use of ethanol in combustion engines is a simple alternative to help reduce greenhouse gas (GHG) emissions and is a powerful tool for the country to meet its climate goals. However, Brazilian history shows that to expand the use, production and efficiency of ethanol, investments and the creation of a stable long-term institutional structure are necessary.

It is in this context that the National Biofuels Policy, also known as RenovaBio, emerged in Brazil in 2017, after a long period of discussion involving public and private agents in the sector. This policy established a broad and complex structure for recognizing the positive externalities of biofuel, with the following stated objectives:

i. Encourage the reduction of GHG emissions in the transportation segment, contributing to the achievement of the commitments assumed by Brazil in the Paris Agreement;
ii. Induce economic and environmental efficiency gains in the production of biofuels;
iii. Define rules for expanding the supply of clean energy, replacing petroleum derivatives without, however, impacting the refining capacity already installed in the country;
iv. Recognize and value the positive externalities associated with biofuels - both those already sold on a commercial scale in Brazil (notably ethanol) and those originating from developing routes (such as biogas and aviation biokerosene, for example).

RenovaBio sought, primarily, to introduce a mechanism that attributes economic value to the reduction of GHG emissions promoted by biofuels, without defining volumetric targets, altering existing mandates, delimiting any captive market or establishing any type of subsidy. In other words, the aim was to create a program that was quite different from the interventions based on state mandates that had occurred previously, such as Proálcool, which proved to be unsustainable over the years due to its high cost and the great need for planning and governance.

To that end, the program is based on three main pillars. The first refers to the proposal of a ten-year decarbonization target for the Brazilian transport sector. This instrument aims to define the maximum annual limit of carbon intensity (CI) for the Brazilian fuel matrix. To meet this limit, it is necessary to increase the share of biofuels or produce them with lower levels of GHG emissions.

The second pillar of RenovaBio deals with the mechanism for valuing the carbon that was not emitted in the process of replacing fossil fuels with renewable energy. This valuation is given through the trading of the emission reduction certificate called Decarbonization Credit (CBIO) , which is generated when the biofuel is sold by the producer or importer. The program's regulatory framework provides for the purchase of this certificate by fuel distributors to meet their annual decarbonization targets. The price of the CBIO, in turn, derives from market conditions, with adjustments made through its trading on an organized market.

This dynamic aims to correct a significant market failure that characterizes the use of renewable energies and ethanol in Brazil: the presence of externalities that result in a suboptimal level of production and consumption of biofuels and overinvestment in fossil fuels. In essence, according to the mechanism proposed by RenovaBio, what was a positive externality becomes an economic return for the biofuel producer; what was a negative externality, on the other hand, becomes an additional private cost to fossil fuels.

The third and final pillar of the program establishes a link between the energy-environmental efficiency of production and the revenue that can be earned by the biofuel producer from the sale of CBIOs. By quantifying emissions according to the characteristics of each producer, RenovaBio recognizes the different stages of the production and marketing processes, so that the more efficient the producer is - that is, the greater its capacity to generate clean energy while emitting less GHG - the greater the amount of CBIOs generated.

An example of this last case occurs with producers who manage to reduce diesel consumption throughout the ethanol production chain. These producers end up receiving a higher Energy-Environmental Efficiency Rating (NEEA) and are therefore able to generate more CBIOs for the same volume of biofuel sold. This system aims to value efficiency gains in production, inducing investments in new practices and products that reduce emissions. These efficiency gains, in turn, can be transferred to the end consumer through competition between different fossil and renewable fuels.

Although adherence to RenovaBio by the biofuel producer or importer is voluntary, its implementation – the right to issue CBIOs – requires the producer to submit its production process to certification and audits.

As of the date of publication of this article, 312 production units were certified by RenovaBio and others were in the process of certification. In the case of ethanol, certified units account for approximately 90% of Brazilian production. In the case of biodiesel, certified units account for approximately 75% of national production. These figures demonstrate that there is still potential to expand the supply of CBIOs, especially for biofuels other than ethanol.

References and recommended readings:
This text was based on:
RODRIGUES, L.; GILIO, L. . Brazilian Biofuel Governance: The Case of Brazilian Ethanol and RenovaBio. In: Niels Søndergaard; Camila Dias de Sá; Ana Flávia Barros-Platiau. (Org.). Sustainability Challenges of Brazilian Agriculture. 1st ed.: Springer, Cham, v. 64, p. 315-337, 2023.

Recommended reading:
RODRIGUES, L. The consolidation of bioenergy as an instrument for decarbonization. Agroanalysis. v. 40 n. 9. 2020.

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