Loss of a tax break makes the biofuel less competitive against gasoline at the pump and jeopardizes Brazil's flagship Paris proposal

By Marcelo Teixeira

SAO PAULO, Aug 26 (Reuters) - Biofuel and climate experts have questioned Brazil's commitment to a plan to cut carbon emissions by raising ethanol use after the country's government this week said it planned to scrap a tax break on the biofuel.

Brazil pledged under the 2015 Paris Climate Accord to increase cane-based ethanol and biodiesel in its energy mix to nearly 18 percent by 2030. That would require an increase in annual production to 50 billion liters of ethanol by 2030 from around 30 billion in 2015/16, experts said.

It was one of the marquee components of Brazil's proposed contributions to the agreement to wean the global economy off fossil fuels and arrest global warming.

But the government on Wednesday said it had no plans to extend a tax break on ethanol sales that expires in December, underscoring its desperation to boost revenues as Brazil suffers its worst recession since the 1930s.

The loss of the tax break would make the biofuel less competitive against gasoline at the pump, prompt drivers to flock back to the petroleum-based fuel, and jeopardize Brazil's flagship Paris proposal, experts said.

"Brazil's intended contributions are very pretty on paper, but so far it's just that: a declaration," said Andre Luis Ferreira, a director at the Institute of Energy and Environment, in Sao Paulo.

The Brazilian ethanol industry has long asked for preferential tax treatment on environmental grounds compared with carbon-rich gasoline.

Elizabeth Farina, head of cane industry association Unica, said the return of the ethanol tax would likely push cane mills to further switch from the biofuel to sugar production next year, as the sweetener already offers far better margins.

"The state doesn't have to spend a cent on us, it only needs to show it wants more biofuels and ... adopt policy recognizing all costs are not reflected in the pump price," Farina told Reuters, referring to the fact ethanol is considered carbon neutral due to the sequester of carbon dioxide by cane plants.

Brokers INTL FCStone on Friday projected Brazil's center-south, the top cane growing region, will produce 26.8 billion liters of ethanol in the 2016/17 crop, 4.7 percent less than in the previous one.

On Wednesday, in an apparent defense of the government's decision, Agriculture Minister Blairo Maggi suggested sugar mills reliant on government handouts were inefficient and should stop asking for subsidies.

"He (Maggi) showed that he does not understand the sector or the mechanisms behind fuel pricing," said Tarcilo Rodrigues, head of sugar and ethanol brokerage Bioagencia.

Brazil's environment ministry declined to comment.

If the government does not recognize the environmental and economic benefits of a strong biofuels industry, the alternative is to import gasoline, given the country's lack of refining capacity, Rodrigues said. (Reporting by Marcelo Teixeira; Editing by Andrew Hay)

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