Article written by USP researchers could provide assistance for other studies and public policies focusing on putting new types of vehicles on the Brazilian market, such as electric, hybrid, and fuel cell models

Reductions of the Value-Added Tax on the Circulation of Goods and Services (ICMS) and the Motor Vehicle Property Tax (IPVA), plus the creation of infrastructure, are crucial factors for the expansion of the use of alternative fuels in substitution of gasoline and ethanol, as is the case of vehicular natural gas (VNG). This is the focus of the article Natural Gas, A Vehicular Fuel in Brazil: Barriers and Lessons to Learn, recently published in Energy Policy magazine.

“In the early 2000s, many drivers of light vehicles in the states of Rio de Janeiro and São Paulo began to use VNG. The attraction was the price: VNG would be a cheaper option than gasoline and ethanol,” says Environmental Engineer Luis Guilherme Larizzatti Zacharias, lead author of the article. “However, the application of policies and incentives were handled differently in these two states. The article seeks to understand what impacted this and why the use of VNG has always been more successful in Rio de Janeiro than in São Paulo over the past two decades.”

The article came out of the results of the Master’s thesis that Zacharias is currently writing within the Graduate Program in Environmental Science of the Institute of Energy and Environment of the University of São Paulo (IEE-USP). “But the conclusions of the article are not limited to the VNG market,” says Drielli Peyerl, advisor of the Master’s thesis and one of the article’s authors. “During the process of energy transition in which we currently find ourselves, due to global warming, it is important to understand how a fuel can, or cannot, be placed on the Brazilian market. They are the ‘Lessons to Learn’, mentioned in the title of the article. That is, what lessons can we learn from this historical process that may be applied to the development of a new energy transition policy focused on the near future, with electric, hybrid, and fuel cell vehicles?” says Ms. Peyerl, a Young Researcher at the São Paulo Research Foundation (FAPESP), connected with IEE-USP and the Research Centre for Greenhouse Gas Innovation (RCGI), funded by FAPESP and Shell of Brazil.

Heavy Investments – To use VNG, the driver must convert the vehicle at auto repair garages accredited by the National Institute of Metrology, Quality and Technology (INMETRO). Then, it is necessary to obtain certification from the State Department of Transportation (DETRAN). “It’s a huge financial investment. In order to begin to use this alternative fuel, drivers must be sure they will be able to get a proper return on their investment in converting their vehicles. That return could come from a lower fuel expense,” says Zacharias. “The financial issue is highly important in Brazil when choosing types of fuels and adapting to new technologies and it is the underlying factor in the driver’s choice. We need to be aware of this. If the environment issue weighs on energy transition in developed countries, drivers in Brazil are even more concerned with how it affects their budgets.”

According to the researcher, the advantages obtained through tax incentives were crucial to decreasing the time of return on investment and making the price of VNG competitive on the Rio de Janeiro market. “In Rio de Janeiro taxi drivers or application drivers, professionals who cover many kilometers during their work, can compensate for this expense in about five months, while the ordinary user will take around a year and a half. In São Paulo, the turn around time for professionals varies between eight and nine months. And in the second case it can take as long as three years.”

Zacharias states that, in 2021, the ICMS charged on the price of gasoline in São Paulo was 25%, while in Rio de Janeiro it was 34%. As for ethanol, the same tax was a little lower (32%) in Rio. “But in São Paulo the difference was greater. The ICMS on ethanol was 13.3%. This is because the state is the largest ethanol producer in Brazil and the state government seeks to encourage the consumption of this fuel by reducing the ICMS.” As for VNG, the ICMS charged in Rio de Janeiro was 13%. “The Campos Basin, as well as the Capixaba Basin, on the coast of the states of Rio de Janeiro and Espírito Santo, are major producers of natural gas. The government of the State of Rio de Janeiro is interested in this consumption. In São Paulo, the ICMS on ethanol (13.3%) was cheaper than that of VNG (15.6%). That is, for the ordinary user, it was not worth using VNG in São Paulo, from a financial standpoint.”

The researcher recalls that recently, after pressure from the federal government, the ICMS rate for gasoline was reduced in both states to 18%. “With this change, the price difference between gasoline and VNG is less, reducing the cost-benefit of vehicle conversions to VNG. However, it is worth remembering that tax reductions have a direct impact on state and municipal revenues. In the case of the ICMS, the reduction in the amount collected has an impact on such essential services as education, health, and safety. Governments should carefully weigh the advantages and disadvantages when modifying tax rates.”

Another tax analyzed by the article is the IPVA. In Rio de Janeiro, the rate charged to VNG-converted vehicles is 1.5%, while those powered by gasoline/ethanol pay 4%. In São Paulo, vehicles running on VNG pay a 3% IPVA and gasoline/ethanol models, 4%. “The difference is very small in São Paulo. It doesn’t pay for the driver to make the change,” says Zacharias. “While ICMS impacts fuel prices, IPVA impacts the cost of vehicles. The combination of these taxes results in economic advantages for consumers who will need to do a cost-benefit analysis to compensate for the expense of technology change.”

In the article, the researchers used seven indicators focusing on aspects related to infrastructure and economics when analyzing the differing realities of São Paulo and Rio. “Everything is interconnected and impacts the market,” says Peyerl. The market boom in Rio de Janeiro, for example, boosts the accreditation process for auto service garages, so a larger number of them convert vehicles to VNG. “This makes life easier for drivers who don’t need to waste time and money looking for accredited workshops, a factor that weighs in when they decide on this fuel alternative,” she adds.

Another point is the distribution network. In 2019, Rio de Janeiro had 142 m/km² of pipelines, while São Paulo came in with less, at 82 m/km² “The development of the VNG market is linked to the availability of supply infrastructure. This demands both federal and state investments, cause the difficulty involved with finding the fuel drives consumers away. On the other hand, if there is a low demand for the fuel from drivers, service stations will not be encouraged to make investments to adapt their facilities to VNG. It’s a vicious circle,” Zacharias concludes.