THE LEGAL AND REGULATORY FRAMEWORK OF FUELS AND BIOFUELS IN THE BRAZILIAN LEGAL SYSTEM
Alexandre Walmott Borges* & Fabiana Angélica Pinheiro Câmara**
ABSTRACT: The article analyzes the legal framework of fuels in the Brazilian system. The main purposes of this article are to present the constitutional and legal rules on fuels, specifically rules on oil, natural gas and biofuels and to examine the evolution of Brazilian legislation on the subject. The research materials used are sources of the Brazilian Legal System.
KEYWORDS: Brazil; legal framework; fuels
The text aims to introduce readers to the evolutionary vision of Brazilian legislation on fuels. Since the beginning of this century, Brazil appears as a privileged player in the market of various fuels. The country plays an important role in the market of traditional fossil fuels such as oil and natural gas, as well as green fuels like ethanol and biodiesel.
The article shows the changes in legislation and the legal principles of economic activities, the property of mineral resources and other main aspects of the energy and fuels law. The goal is to offer readers a panoramic and general view of the Brazilian legal System, indicating the main features of the scheme.
II. Eras of Brazilian constitutional history. The definition of a fuel-energy policy. The property of the oil resources
Brazil had 7 constitutions in effect, in your political and constitutional history, from 1822 to the present day. In this period were promulgated and granted constitutions with various forms of political state organization. There were an imperial Constitution, in 1824, and six Republican Constitutions in the years of 1891, 1934,1937,1946,1967 and the latest which was enforced in 1988.
Furthermore, another possible classification is one about the ‘economic’ Constitution. The classification of these 7 constitutions by the level of Government intervention in the economy and constitutional structure of social and economic rights, is the following: 2 constitutions were regarded as liberal constitutions - 1824 and 1891; 5 constitutions were regarded as social or interventionist constitutions with norms of Government intervention in the economy including the bill of social and economic rights – 1934, 1937, 1946, 1967 and 1988 (Barbosa, 2013; Bonavides & Andrade, 2004).
The constitutions of 1824 and 1891 were edited on the basis of liberal Constitution models. The imperial Constitution of 1824 used the European constitutions of 19th century restoration as a model. In this sense, the Republican Constitution of 1891 was modelled on the U.S. Constitution. The characteristics of these two constitutions were the presence of classic individual rights and restriction on State´s powers (Bonavides & Andrade, 2004; Barbosa, 2013). In common these two constitutions did not present rules concerning government intervention in fuel policies, energy policies, on exploration of mineral resources, on the property of mineral resources, or on the production of fossil fuels or biofuels.
Moreover, the Constitution of 1824 adopted the imperial model with 4 government branches: executive, legislative, judiciary and moderator. During part of the period in which the imperial constitution was enforced, the Government parliamentary system was adopted. The Constitution of 1824 had in its text the freedom of work and of free enterprise, and the right to property on the chapter of individual rights. There was no distinction between property and soil/ subsoil resources. Despite this, it was only in 1850 that specific rules on rural real property were edited. Before that, there was a dubious concession system of land used by the Government. It is important to bear in mind that the Slavery remained in force until 1888 and the abolition act was edited in the penultimate year of the Brazilian monarchy. A commercial code law for the regulation of company´s activities was also edited in the year of 1850 (Barbosa, 2013; Bonavides & Andrade, 2004; BRAZIL , 1824).
The 1891´s Constitution adopted the Republican and Federal System and it is known that the U.S constitutional model wielded strong influence on it. Even the name of the State was the United States of Brazil. The 1891 Constitution abolished the elder forms of monarchy but placed an emphasis on: (1) a bill of individual rights; (2) the restriction on government power. In 1926 was approved an amendment to the Constitution that distinguished soil from subsoil property. The subsurface resources became federal government´s property. Since then, in all Brazilian constitutions, the subsurface property and the property of mineral resources belong to the Federal government (BRAZIL, 1891).
The Constitution of 1934 was the first Brazilian Constitution to include economic and social rights in its text. In addition to economic and social rights, this Constitution also embraces rules regarding government intervention in the economy. An example of government intervention in the economy was given by the possibility of the Government to monopolize sectors of the economy. This Constitution also incorporated contents of economic nationalism, and these could be mostly seen on immigration policies. This Constitution was effective only within the period of 3 years. In 1937, a coup d´état, inspired by right-wing ideologies from that time, introduced a new era of Government – The ‘Estado Novo’ (BRAZIL, 1934).
Therefore, in 1937, the 'Estado Novo’ enacted a Constitution that combined elements of State corporatism, fascist organicism, general ideas of positivism, economic nationalism and Government intervention in the economy. The period of the ‘Estado Novo' was marked by dictatorial and authoritarian state policies. This Constitution preserved the legal framework for operating monopoly by the Government. During the period between 1934 and 1937 constitutions, until 1945, several rules of government intervention were edited. At the same time the Government initiated the expansion of governmental agencies and companies. The sugar and alcohol industry started to be heavily regulated. Apart from that, during this period, the government agency “Instituto do Açúcar e do Álcool” was created with the purpose of regulating prices, contracts and amounts of sugar and alcohol production. At that time, the production was originally for human food consumption and activities other than the use as fuel (BRAZIL , 1937; BRAZIL, 1933; NOVACANA, 2013-18).
The end of the Second World War influenced the Brazilian policy. In this manner, in 1946, the Constitution of democratic restoration was promulgated. Thus, unlike the constitutions of 34 and 37, which had strong authoritarian contents or greater government intervention in the economy and in the society, the 1946 constitution adopted the model of a social-democratic constitution. This Constitution followed the tradition of the previous constitutions – 1934 and 1937 - and incorporated the legal regime of government monopolies (BRAZIL, 1946).
In the 50´s the discussions on oil policy were heated. In the year of 1953 the law which created the monopoly of researching, prospecting, exploitation, extracting and refining oil was enacted: Federal Law n. 2.004, 1953. The Federal law also established that all oil resources were federal government´s property. The same federal law created the governmental oil company namely ‘Petrobras’. The activities of petroleum products and their derivates distribution were left out of the oil monopoly. According to the Federal Law n. 2.004, the oil monopoly became an exclusive activity operated by the Government Company Petrobras (BRAZIL, 1953).
However, the authoritarian Constitution of 1967 modified the system until then adopted. In this sense, rather than providing a generic prescriptive foresight for the possibilities of monopolized activities, the Constitution of 1967 classified monopolies into 2 paradigms: (1) a generic provision for any activity that could be monopolized and regulated by an ordinary law; (2) a specific provision for the oil monopoly. In other terms, the oil monopoly gained the status of a constitutional rule, and no longer the status of an ordinary law (BRAZIL, 1967).
In the 70´s, with the oil crisis, it was necessary a change in the regulation of oil exploration industry. So, Brazil adopted the legislative form of risk contract regime. From this, private companies could obtain concessions for oil exploration. This was a change from the current exclusive system of exploration led by the governmental company Petrobras. At the same time the difficulties caused by the oil crisis encouraged new uses of alcohol. The product that had played until then a marginal role in the sugar production, or other plantations, became an important fuel to the automotive fleet (Cunha, 1995; BRAZIL , 1975).
Therefore, from the 70´s, alcohol became the Brazilian energy matrix and started to be used as the main fuel for light vehicles. In the mid-80´s, approximately 90% of the light vehicles fleet was using this fuel in Brazil. The old structure of IAA government agency had as main objective to regulate food production and, after the 70´s, it started to develop fuel regulatory policies (NOVACANA, 2013-18).
It must be said clearly that there was no sustainability or environmental content in these policies introduced in the years between 70´s and 80´s. Agencies and polices were influenced by problems arising from the balance of payment (the cost of importing oil), and Brazil had a lot of sugar cane industrial plants already installed. Those plants were an inheritance of the Brazilian tradition of sugar production. Brazil enacted the law of national environmental policy in 1981. Therefore, the Decree of the PROALCOOL in the 70´s was not influenced by any environmental policy. In the early years of using alcohol as fuel, several questions remained open about its usage such as: fraud in contracts with workers, inhumane working conditions, production residues in rivers and waters, and low performance of the alcohol-fueled cars (BRAZIL , 1981).
In the season of 1989-90, the ethanol market experienced supply shortfall. The supply of ethanol has been dramatically reduced. This was due to the high prices of sugar and its derivatives on the international market. Consequently, the sugar cane producers preferred to manufacture sugar instead of ethanol and this fact led to a widespread shortage. The result was the lack of confidence of the ethanol-powered cars owners and it was only in by the end of 90´s, with the appearance of safe bi-fuel vehicles, that the owners´ confidence was recovered. This crisis of 89-90 ended up leaving a permanent scar on the ethanol market and marked government policies subsequently. Sometimes, government creates barriers to sugar exportation in order to increase ethanol local production. Other times, the government adopts tax incentives in the prices of fuel cars and, still other times, the government made mandatory the blending of ethanol with petrol.
III. The system of the 88 Constitution
The Brazilian legal system relies heavily on the primacy of free enterprise and free competition – articles 1 and 170 of 1988 Federal Constitution. The economic activities that may be subject to state intervention are, initially, public utility services. Public utility services are divided in the constitution text as a power of the Federal Union, federal states and municipalities. Each of constituent unity of the Brazilian Federation has the power to operate a certain amount of public utility services. Moreover, the Constitution defines quotas for public utility services that each entity shall operate. Furthermore, the Federal Constitution also discriminates what activities are considered as public utility services. Therefore, the Constitution introduces a system of enumerated list of public services and, on the other side, an area of remaining power to free enterprise and free competition (BRAZIL, 1988).
Interestingly, in addition to the enumerated list of public utility services, the Constitution exceptionally admits government intervention in economic activities. This type of intervention receives the designation of ‘direct exploitation of an economic activity by the State’ – article 173, Federal Constitution. The grounds for this Government intervention are ambiguous and vague: national security and the relevant collective interest. And this power is an exclusive power of the Union that could not be extended to the federal states and municipalities. These situations of government intervention shall be defined by Federal Law and shall be enacted by the Government. The Government shall only be allowed to operate intervention in competition with private companies. In these cases, the Government operations can only by executed by government companies. In a restricted way, the government companies may not enjoy fiscal privileges which are not extended to private sector companies. It is important to clarify that there are two government companies in Brazil: public companies which have all their capital under government´s control and joint stock or mixed-owned companies which are still subject to government control but have a portion of their shares traded on the stock market (BRAZIL, 1988).
Finally, in exceptional cases explicitly outlined by the Constitution, there are government monopolies of economic activities. The monopoly is a particularity within the regime of direct exploitation of an economic activity by the State. As it is defined in the Brazilian Constitution, the following are monopoly of the Union: I – prospecting and exploitation of deposits of petroleum and natural gas and of other fluid hydrocarbons; II – refining of domestic or foreign petroleum; III – import and export of the products and basic by-products resulting from the activities set forth in the preceding items; IV – ocean transportation of crude petroleum of domestic origin or of basic petroleum by-products produced in the country, as well as pipeline transportation of crude petroleum, its by-products and natural gas of any origin; V – prospecting, mining, enrichment, reprocessing, industrialization, and trading of nuclear mineral ores and minerals and their by-products (BRAZIL, 1988).
It’s easy to observe that the large part of fossil hydrocarbon energy matrix is monopolized by the Union. A form of monopoly was abolished by constitutional amendment in 1999: it was the monopoly of the reinsurance sector. All state monopoly operations shall only be carried out by government companies - Petrobras or Eletronuclear.
There are differences between the monopoly of oil and the monopoly of nuclear activities. The first, the Union may contract with the government company, Petrobras, or with private companies. The latter can only be explored by the Government company Eletronuclear (and its subsidiaries). Contracting with private companies was only possible after the issue of a constitutional amendment, which was issued in the year of 1995. Until then, only one company could undertake monopolized activities and this company was the Government Oil Company: Petrobras (BRAZIL, 1988). On the monopoly of oil and natural gas it can be said that this has gone through various phases: (1) from 1988 till 1995 the Union was allowed to contract exclusively with the government company, Petrobras; (2) then, after the constitutional amendment of 1995, the Union became able to contract with government companies and private companies. (preferably with government company); (3) in the first decade of the 2000´s, with the exploration of pre-salt oil reserves, there was again a preference for the government company; (4) and from 2016, there has been the possibility of partition – and to contract - the pre-salt oil also with private companies (BRAZIL, 1988; BRAZIL, 2010; BRAZIL, 2016).
After the crisis of the ethanol supply (1989-1990), the sugar-alcohol sector has undergone extensive renovation by the end of the 90´s. An important factor for the industry to come back again to fuel production market, and not only for the production of sugar, was the development of bi-fuel vehicles. On the other hand, the exploration and production of oil have been also stimulated. This growth can be measured by two events: The Government Company Petrobras launched the operations on the high seas, and in addition to that, the Federal Law made possible to contract with private companies for the execution of monopoly activities (as abovementioned). All these transformations occurred from the mid-90 and remained until the first decade of 21st century (BRAZIL, 1997).
As it was stated above, the policy of using ethanol, in the 70´s, was guided by the use of plantations and by the use of existing industrial plants. More by chance than by anything else, The policies and protocols on environment implemented in the 70´s and 80´s made ethanol to become green energy, clean/ renewable fuel source (BRAZIL, 1993).
After 1997 the old structure of government agencies has been modified. The National Oil Agency was created in 1998, and soon after that, this agency´s name changed to National Agency of petroleum, natural gas and biofuels-ANP. Some criticisms are made as the agency has the administrative power to regulate both fossil fuels, such as oil and gas, and biofuels. Even some political conflicts occurred when biofuels compete with fossil fuels (BRAZIL, 1997).
From the half of the first decade of the 20th century, there have been several changes within the biofuels sector. With the availability of new technologies and government incentives, it was possible to observe the following changes in the production: (1) it has become something other than ethanol production; (2) the production of biodiesel has been incorporated; (3) there has been a diversification of raw materials to the production, not only with sugar cane plantation but also with native or exotic grains, seeds and palms; (4) incentive policies have emerged to biofuels production by peasants; (5) seasonal policies demanding mandatory percentages of biofuels in fossil fuels have been implemented; (6) tax incentives for the vehicles adapted for bi-fuel use, or use of biodiesel have been developed (ANP, 2018; BRAZIL, 2016).
From 2012 to 2014, the biofuel sector experienced a new crisis. This crisis was a consequence of fossil fuel prices. The Government kept petrol and diesel prices artificially low. Thus, as the ethanol price became less attractive, the consumption plummeted. Several industrial plants and production expansion projects suffered serious losses.
IV. Main points of the Brazilian System of fuels and biofuels
With the above information it is possible to establish the following picture of the Brazilian legal system:
· Activities with oil and natural gas are considered monopoly of the Union; it is a peculiar legal framework that does not fit into the list of public utility services- article 173 combined with article 177, Federal Constitution;
· The monopoly of oil and natural gas is related to “direct” exploitation of an economic activity by the State-article 173, Federal Constitution;
· Petroleum and natural gas fit into an even more peculiar legal framework that is the monopoly of the Union- article 177, Federal Constitution;
· The exploitation and production are preferably operated with the government company: Petrobras;
· Since the late 90's it has been possible to operate these activities with private companies;
· Biofuels activities are not subject to monopoly regulation, as oil and natural gas;
· The activities of biofuels are considered areas of free enterprise and free competition;
· This means that the Government intervenes indirectly, with tax incentives and fuel policy measures;
· There is a single regulatory agency for the two sectors, fossil fuels and biofuels, the ANP;
· Although one highlights the environmental benefits of ethanol, its policies are subject to other purposes and guidelines which are not related to environmental issues.
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* Professor at the Federal University of Uberlândia - UFU. Professor of graduate programs in law and biofuels. Visiting Professor at UNESP. PHD in law at the Federal University of Santa Catarina-UFSC. PHD in History at the Federal University of Uberlândia-UFU. A researcher at the American laboratory of Compared Constitutional Studies – LAECC.
** PHD in History at the Federal University of Uberlândia-UFU. Master in international economics– University of Reading, UK. Researcher at the American laboratory of Compared Constitutional Studies – LAECC. There is another count: 8 constitutions. This count includes the 1969 Constitutional Amendment, which was produced by the military dictatorship and is considered to be the eighth Constitution.
In the Brazilian constitutional history, a formula of 4 entities has been adopted in the Federation: Union (central Government), Federated States (regional powers), Federal District (for the Federal Capital) and Municipalities (local powers).
 Article 116, Constitution of 1934 (BRAZIL, 1934).
 Article 13, e, and article 16, VIII, Constitution of 1937 (BRAZIL , 1937).
 During the Second World War ethanol was used as fuel blended with petrol. It was an emergency solution for fuel shortage caused by the war.
 Also known as gasoline.
 ‘Eletrobras Eletronuclear was established in 1997 in order to operate and build nuclear power plants in Brazil. Subsidiary of Eletrobras is a joint stock company and is responsible for generating approximately 3% of the electricity consumed in Brazil. The interconnected power system, this energy comes to the main centers of the country consumers and corresponds, for example, more than 30% of the electricity consumed in the state of Rio de Janeiro, a proportion that will increase considerably when Angra 3, the third nuclear power plant Admiral Álvaro Alberto - CNAAA is completed’ (ELETROBRAS ELETRONUCLEAR, 2018). ‘We are a publicly-held company operating on an integrated basis and specializing in the oil, natural gas and energy industry. We are present in the exploration and production, refining, marketing, transportation, petrochemicals, oil product distribution, natural gas, electricity, chemical-gas and biofuel segments’ (PETROBRAS, 2018).
 Constitutional Amendment n° 09, 1995: ‘Article 1. Paragraph 1 of article 177 of the Federal Constitution shall henceforth be in force with the following wording: “Article 177. [..] Paragraph 1. The Union may contract with state-owned or with private enterprises for the execution of the activities provided for in items I through IV of this article, with due regard for the conditions set forth by law’ (BRAZIL, 2010).
 After 2007, a new exploratory area was discovered in the pre-salt layer, which contains a large amount of light oil.
 Currently the Government oil company also operates in the sector of biofuel. Petrobras has 5 biodiesel plants (PETROBRAS, 2018).
 The abolition of the Agency – IAA. Federal Law n° 8.029,1990 (BRAZIL, 1990; BRAZIL, 1990).