Recent high oil and gas prices and concerns about global climate change have heightened interest in ethanol and other biofuels as alternatives to petroleum products. The Western Hemisphere produces more than 80% of the world's biofuels, led by Brazil (producing sugar-based ethanol) and the United States (producing corn-based ethanol). Some have argued that increasing biofuels production in Latin America could bolster energy security, reduce greenhouse gas emissions, and promote rural development in the region. Others are concerned about the huge investment outlays and government subsidies needed to build up nascent biofuels industries. Skeptics also worry about the potential negative effects that increased biofuels production may have on the environment, labor conditions, and food prices in the region. The United States and Brazil, the world's largest ethanol producers, have recently agreed to work together to promote the use and production of ethanol and other biofuels throughout the Western hemisphere. Increasing U.S.-Brazil energy cooperation was a top agenda issue when President Bush visited Brazil and when President Lula visited Camp David earlier this year. On March 9, 2007, the two countries signed an agreement to (1) advance research and development bilaterally, (2) help build domestic biofuels industries in third countries, and (3) work multilaterally to advance the global development of biofuels. Many Bush Administration officials and Members of Congress note that the new biofuels partnership with Brazil may help improve the U.S. image in Latin America and diminish the influence of President Chávez in the region. In the past few months, the U.S.-Brazil biofuels agreement has already had a significant political effect in Latin America. "Ethanol diplomacy" appears to be helping Brazil reassert regional leadership relative to oil-rich Venezuela under Hugo Chávez. Increasing biofuels cooperation with Brazil and other countries in Latin America may prompt challenges to existing U.S. trade, energy, and agriculture policies. For example, U.S. tariffs on foreign ethanol imports may prove to be an obstacle to U.S.-Brazil energy cooperation. In the 109 th Congress, legislation was introduced that would have eliminated current tariffs on foreign ethanol. While some Members support ending the ethanol tariffs, other Members of Congress support further extensions of the ethanol import tariffs. Some have also proposed using tariff duties collected on foreign ethanol imports to fund advanced ethanol research and production within the United States. This report examines the opportunities and barriers related to increasing U.S. cooperation with other countries in the hemisphere on biofuels development, focusing on the U.S.-Brazil agreement. It provides background information on Western hemisphere energy challenges, the ethanol industries in Brazil and the United States, and the biofuels potential in the region. It then raises a number of policy issues that Congress may choose to consider related to bolstering the development of ethanol and other biofuels in Latin America. The term biofuels generally refers to motor fuels produced from agricultural commodities or other biological materials such as agricultural and municipal wastes. The most widely used biofuel is ethanol (both in the United States and worldwide), an alcohol usually produced from the fermentation and distillation of sugar- or starch-based crops such as sugarcane or corn. Ethanol can also be produced from cellulose-based materials (such as perennial grasses and trees), although the technology to produce cellulosic ethanol is in its infancy, and no commercial-scale cellulosic ethanol plants have been constructed. Other biofuels include biodiesel and other renewable diesel fuel substitutes produced from vegetable oils or animal fats (such as soybean or palm oil), and butanol produced from various biological feedstocks. Biofuels have several potential benefits relative to petroleum-based fuels. First, the use of biofuels can reduce emissions of some pollutants relative to gasoline or diesel fuel. Second, most biofuels lead to lower emissions of greenhouse gases than petroleum fuels—some can lead to substantial greenhouse gas reductions. Third, biofuels can be produced domestically to displace some petroleum that would otherwise be imported. Finally, some biofuels can reduce overall fossil energy consumption, given that much of the energy needed to grow the feedstock plant material is supplied by the sun. There are also many potential drawbacks to biofuels. First, in nearly all cases, biofuels are more expensive to produce than petroleum fuels. Second, infrastructure limitations can lead to even higher costs for biofuels than for conventional fuels. Third, biofuels have their own potential environmental drawbacks, including increased emissions of some pollutants and the potential for increased greenhouse gas emissions (in some cases, depending on the particular biofuel) when the entire production process is taken into account. While both the United States and Brazil—as well as many other countries—are studying and investing in many different biofuels, this report focuses on ethanol supply and use for several reasons: (1) ethanol production and consumption far exceeds that of other biofuels; (2) ethanol can be (and is) used as a direct blending component with gasoline, and gasoline engines are dominant in passenger automobiles and light trucks; and (3) current mandates in both Brazil and the United States favor ethanol use, either directly or indirectly. While oil and gas producers such as Venezuela, Mexico, Argentina, Bolivia, Colombia, Ecuador, and Trinidad, and Tobago are net energy exporters, most Latin American and Caribbean nations are net energy importers. Countries that rely on oil as their primary energy source are particularly vulnerable to increases in global oil prices. In many Caribbean island nations, oil accounts for more than 90% of total energy consumed. In Central America, oil dependency ranges from an estimated 51% in Costa Rica to 73%-78% in El Salvador, Honduras, and Panama, and to 84-85% in Guatemala and Nicaragua. Many Latin American countries experienced dramatic increases in their energy bills after oil price hikes began in 2005, straining government budgets in Central America and the Caribbean. To fill a clear need and attempt to extend his influence in the region, Venezuelan President Hugo Chávez has offered oil on preferential terms in a program known as PetroCaribe launched in 2005. His government has also reached preferential energy agreements with South American countries such as Argentina, Bolivia, and Ecuador. In December 2005, Mexico, perhaps in an attempt to act as a countervailing force to Venezuela in the region, initiated the Meso-American Energy Integration Program (PIEM) with Central America, the Dominican Republic, and Colombia. As part of the plan, Mexico will supply the bulk of the crude oil to be processed by a new oil refinery in either Guatemala or Panama, which will be used primarily to satisfy Central America's energy needs. Given declining oil production levels in both Venezuela and Mexico and the unstable political environment in Bolivia, a major natural gas producer in the region, some analysts have pointed to biofuels as a potential solution to Latin America's petroleum dependency. Producing biofuels would, some argue, allow oil-importing countries in the region to reduce energy costs and the need for imported oil. The Western Hemisphere produces more than 80% of the world's biofuels, led by Brazil (producing ethanol from sugar) and the United States (producing ethanol from corn). Biofuels proponents argue that the climate, surplus of arable land, and excess production of sugarcane and other potential biofuels crops make parts of Latin America ideally suited for an expanded biofuels industry. The potential is greatest in tropical countries that have high crop yields and low costs for land and labor, characteristics that are present in several countries in Central America and the Caribbean. An April 2007 study by the Inter-American Development Bank (IDB), A Blueprint for Green Energy in the Americas , reports that some Latin American and Caribbean countries have shown great interest and promise in the development of biofuels. Beyond Brazil, which has been the leader in ethanol development and production, the study also highlights several other countries with potential for biofuels development. The study also suggests ways the IDB could support the development of biofuels production in the region, including support for a biofuels development fund, the development of regulatory frameworks, and research and development. Regional highlights from the IDB study include the following: Central America: The bulk of ethanol production in Central America involves reprocessing hydrous ethanol from Brazil or the European Union (EU) for export to the United States. The IDB study asserts that while the sugarcane harvesting season in Central America is shorter than in Brazil, Costa Rica, El Salvador, and Guatemala have efficient sugar industries and could produce significant sugar-based ethanol. Costa Rica and Guatemala, which house 44% of Central America's ethanol processing factories, have the most well-developed policies in place for biofuels development. Under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), signatory countries continue to share duty-free access for some ethanol exports to the United States under conditions established by the Caribbean Basin Initiative (CBI) , but exports from Costa Rica and El Salvador enjoy specific allocations. In the future, CAFTA-DR could spur indigenous ethanol production in Central America. Caribbean: Within the Caribbean, Jamaica has exported the largest amount of ethanol to the United States under CBI, most of it reprocessed hydrous ethanol from Brazil. Trinidad and Tobago has an ethanol dehydration plant, but the largest ethanol plants in the Caribbean are located in Jamaica and the Dominican Republic. Beyond Jamaica and the Dominican Republic, Grenada has been identified as having future production potential for sugar-based ethanol. The United Nations is working with Brazil to provide technology transfer and technical assistance to examine the potential of a biodiesel industry in Haiti from jatropha, a drought-resistant shrub that can grow almost anywhere.