A critique of the Brazilian ethanol industry making the case that lack of long term planning by the national government has led to uneven growth and missed opportunities and affecting value chains from sugarcane farmers through ethanol producers to the automotive industry, with Brazilian consumers ultimately paying the price.
Invited Contributor: Patricia Guardabassi authored this piece exclusively for The Review. She is a Giorgio Ruffolo post-doctoral Research Fellow in the Sustainability Science Program at Harvard’s Kennedy School of Government. She is a chemical engineer (class of 2001) and holds a master’s degree in Energy (University of São Paulo, 2006).
The Brazilian sugarcane ethanol program is recognized worldwide as model of renewable energy policy. However, 38 years of experience were not enough to avoid a crisis that led to a significant reduction of production levels and competitiveness against gasoline in recent years.
The Brazilian Alcohol Program was established in 1975 with a goal to expand production of anhydrous ethanol to supply the domestic market. Origins of the program were rooted in the country’s dependence on imported oil: at the time of the 1973 oil embargo, Brazil imported 80% of the oil used domestically.
The country continued using only anhydrous ethanol blended with gasoline until the late 1970s, when the production of dedicated ethanol vehicles began. During the 1980s ethanol consumption grew and 85% of new cars were dedicated to this fuel—a pattern that reflected a combination of favorable regulation for ethanol along with subsidies. However, in 1985, due to the increase of sugar prices on the international market at a time when oil prices where low, changes in policy along with market forces led to a reduction in ethanol production. The result was domestic fuel shortages that led the federal government to import methanol and lower the requirements for blending of anhydrous ethanol with gasoline. Given this ethanol shortage in the market, consumers formed long lines gas stations and consumer confidence was adversely affected. The production of ethanol-dedicated cars decreased to almost cease in the late ‘90s. This radical shift in demand forced the sugarcane ethanol industry to become more competitive. Indeed, the entire country’s energy policy shifted during that decade to a larger role for market forces and reduction in subsidies; the ethanol industry was no different, and by 2001 the special pricing and regulatory supports that had sustained the industry since 1975 had been removed and the gasoline/ethanol market was fully liberalized.
In 2003 a technology innovation developed and introduced in Brazil by the automobile industry — the flexible fuel engines — which can run with any blend of ethanol and gasoline (from E25 to E100) helped restore confidence in the viability of ethanol by giving the consumers the ability to decide which fuel to use, according to its price. Consumers were so positive about the technology that in 2005, it already accounted for 50% of new cars sold in Brazil. In 2012, 87% of new cars sold in Brazil were flex-fuel, and the fleet of such vehicles counts of approximately 19 million units.
Investment in the expansion of sugarcane planted areas, as well as the cultivation of new areas increased ethanol production from 10 million liters in the 2000/2001 harvest to 15 million liters in 2005/2006, and attracted international investment to the country. The harvested area in the same period increased from 4.8 to 5.8 million hectares and continued growing. This was especially relevant in the state of São Paulo, a traditional sugarcane grower region, responsible for 60% of the national production.
The main concerns related to expanding the amount of land under cultivation for energy crops (or any other use) are the irreversible conversion of virgin ecosystems and the competition over land for the production of food crops. None of these have been observed in the case of new sugarcane areas since they have mostly been planted on idle pasture lands or already degraded land where there is little competition for food and where there is no discernible equilibrium effect on crops elsewhere in the country that could displace virgin forests. This rapid expansion encouraged the government, at different levels, to introduce regulation aiming to ensure the sustainable production of sugarcane ethanol and prevent environmental damages.
An immediate response was given by São Paulo state with the establishment of the so-called “Green Cane Program” that comprised two main initiatives. The first one was the Agro Environmental Protocol, an agreement between public and private sector that includes a series of requirements related to the gradual phase-out of sugarcane burning practices as harvesting method and the shift to mechanical harvesting; protection of riparian forests and water springs; soil conservation; reduction of water consumption; waste management and atmospheric emission reduction plans. The second one was the Agro-Environmental Zoning tool used in determining the award of production licenses. This zoning comprises information about soil and climate potentials, surface water availability, underground water vulnerability, restrictions to mechanized harvesting, biodiversity protection areas, biodiversity connectivity, biodiversity protection importance and integral protection units. This new zoning approach has made it possible for state regulators to adopt an ecosystem-wide approach to planning — something that has been particularly difficult for many governing authorities that have control over individual projects whose affects aggregate to important system-wide impacts.
At the national level, an Agro Environmental Zoning was prepared; however it took longer to be launched given the country’s extension, distinct soil and climate patterns and complexities related to environmental protection, as well as political conflicts between environmental and agricultural sectors. Thus, the adoption of positive and necessary socio and environmental practices, such as the mechanical harvesting, the growth in the number of formal jobs; along with the increase in the price of land due excessive market demand, converged to increase production costs of ethanol roughly by 40%. The industry was growing at a 10.4% annual rate until the economic crisis of 2008/2009 when substantial investments in new production units were diverted to industry consolidation, slowing down the pace of expansion to 3.5% per year. At that time the sector was responsible for a gross domestic product (GDP) of U$28.15 billion, or 2% of national GDP.
In subsequent years the lack of investment in expansion and the renewal of sugar crops, combined with unfavorable environmental conditions, decreased productivity thus reducing the supply of ethanol by about five million liters. Forty companies closed operation between 2008 and 2012.
For more than six years, the federal government has maintained the price of gasoline in the domestic market unchanged (lower than it pays to import the fuel); taxes on gasoline have been reduced.
All these factors contributed to the loss of competitiveness of ethanol in the domestic market and hit the private sector’s confidence. Once again, prices of sugar in the international market were more attractive and industries that have flexibility of production diverted raw material from ethanol to sugar production.
Ethanol supply declined from 27.5 billion liters in 2008/2009 to 22.6 billion liters in 2011/2012 at levels near to the domestic demand; exports dropped from 4.7 to 1.9 billion liters in the same period.
Brazilian Sugar and Ethanol Production
The increasing light vehicle fleet in Brazil pushed demand for ethanol; flex fuel vehicle owners can choose which fuel will put in their tank. However the content of ethanol in gasoline also pushes ethanol demand up. Aiming to mitigate the pressure on ethanol demand, in October 2011 government lowered ethanol content in gasoline from 25% to 20%. It was even necessary to import ethanol from the USA.
Did history repeat itself?
At this point, the Brazilian ethanol industry — internationally acclaimed, which had received a series of incentives to develop — was facing a serious depression.
Proactive government action was taken in late 2012. In November of that year, the government launched a special financing program through the Brazilian Development Bank (BNDES) to support the renovation of old sugarcane crops as well as the expansion of planted areas. In January 2013 a modest increase in gasoline prices was announced. In April, government announced initiatives to support domestic market production, such as tax reduction and the maintenance of lower interest rates to investment in crop renewal and storage of ethanol. As of May 2013 the content of ethanol in gasoline returned to 25% levels.
On the private sector perspective, investments were made and idle capacity began to be productive again. Prospects for the coming season report an increase of 10.7% in sugarcane production, and ethanol production should grow to 25.4 billion liters, an increase of 19% in comparison to the last season.
Apparently, the private and public sector is returning to follow a development path, hopefully sooner than in the 90’s, not jeopardizing too much the reputation of this important biofuel once again. UNICA, the association of ethanol producers, is promoting a strong advertising campaign on radio and TV highlighting the benefits of ethanol.
More has to be done. The definition of a political framework that includes long term planning and clear rules is fundamental. It seems illogical that the role of ethanol in the Brazilian energy matrix has never been defined by the government; policies are adopted according to immediate demands. The option to maintain gasoline prices stable at domestic market is also nonsense since it simultaneously harms the finances of Petrobras and the ethanol sector. A long term plan is essential to decouple ethanol and sugar production because the latter usually finds better payments and a safer commercial environment at the international market.
The definition of clear rules is imperative to attract investment in infrastructure, logistics, research and development and technologies that can increase productivity and promote social and environmental sustainable production; ensuring competitiveness and reliance on ethanol in the domestic and international markets.
© Latin American Energy Review 2013
About the Author:
Patricia Guardabassi is a Giorgio Ruffolo Post-doctoral Research Fellow in the Sustainability Science Program at Harvard’s Kennedy School of Government. She is a chemical engineer (class of 2001) and holds a master’s degree in Energy (University of São Paulo, 2006). Over the past decade she has been associated to the Brazilian Reference Center on Biomass, developing studies related to biomass-based energy production. She received a PhD in Science from the University of São Paulo, Brazil, in 2011. Her dissertation includes an analysis of the main existing barriers to the development of bioethanol industry in developing countries, especially those located in Latin America and Africa. She has published papers and chapters on the sustainability of biofuels production in Brazil.