The difficult solution to fuel prices

The discussion between the federal government and the states about the ICMS on fuels brings up points that go beyond the issue of price itself. By deciding on different taxation in each state, Confaz, the council of state finance secretaries, shows how difficult a tax reform that unifies tax rates will be, such as those proposed in PEC 45, in the Chamber, and PEC 110, in the Senate.

Brazilian federalism leads to tax autonomy in some taxes, such as the state ICMS, which makes a bottom-up solution to unify different realities difficult. As ICMS is the main tax charged by states, it is natural to think of tax situations in which a place will need to charge more due to a higher deficit, for example.

However, this tax has become one of the most complex for any company with national operations to administer and the simplification of a single rate would have the positive effect of simplification that would bring long-term gains for the country. As much as in this discussion the proposed rates are lower in several states than originally proposed by Complementary Law n. 192/2022, the additional question arises whether we should tax less a good with increasing negative externalities such as fuels.

With climate change making fossil fuels the object of less investment in the coming years, thinking about lowering the tax for the sake of stimulating consumption is nonsense. Obviously it is the shortest way to mitigate the price variation for the population, but the type of discussion that is seen in the case of this product we do not see happening in other goods that are also experiencing strong price increases.

In the case of food, we know that the strong variation comes from the exchange rate and high international prices, but there is no movement behind it as noisy and intense as in fuels to lower their prices. Behind this there are much more organized lobbies and political pressures, for example, from truck drivers, which does not exist in the case of food. After the May 2018 strike, Brasilia’s fear of fuel price increases reached unbelievable levels.

Why a dividend compensation fund to smooth the price of fuel and not for other assets? It is not worth saying that fuels affect the entire chain that several other products do as well. The truth is that in the case of fuels, there was the false idea that, since the government had control of Petrobras, this could affect prices more easily, as the Dilma government did so many times by damming the price of gasoline and causing damage to the company. that caused. Not to mention the damage to the alcohol chain, which saw several plants going into debt and several going bankrupt after the government forced prices down.

So, instead of changing taxes or thinking about smoothing mechanisms, the government should think about how to make the fuel market more competitive. Petrobras is a state monopolist and in order to privatize the ANP would need to be strengthened to regulate the market and avoid price abuses. Here comes another problem. As the various governments from Lula to Dilma dismantled the regulatory capacity of the agencies, transforming a state monopoly into a private one would not help much.

Privatizing would only make sense if the company was broken up into several and/or regulatory agencies had more power than they have today. Cade, here, would also have a role to prevent market concentration in the sector, a role that is difficult when the company is state-owned, as is Petrobras.

It is past time to sell the company. Oil is an old product in a world that eagerly seeks renewable energy and to which the government has given less focus than it should. But it needs to be done in the right way to avoid problems ahead. It needs to be a public policy that actively involves, in the future, the ANP and CADE.

Furthermore, if the government were following a more secure economic administration, we would have a much lower exchange rate than the current one. The depreciation of the real has been greater than other pairs due to the risks still present in the fiscal issue not only this year, but also what may happen in the next government.

Without organizing a solution that involves several government agencies, there will be no positive long-term results. In any case, the Brazilian population has always been reluctant to sell the state-owned company when asked in opinion polls. It’s going to take a big political force to make that happen. I don’t see the Bolsonaro government managing to break through this blockade, much less an eventual Lula government, for which the attempt will be to renationalize whatever is possible. But that’s another story.