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No substitute for oil? How Brazil developed its ethanol industry
ARTICLE IN PRESS Energy Policy 37 (2009) 2450–2456
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No substitute for oil? How Brazil developed its ethanol industry$ Anil Hira a,, Luiz Guilherme de Oliveira b,1 a b
Department of Political Science, 8888 University Drive, Simon Fraser University, Burnaby, BC, Canada V5A 1S6 ˜o Administraca ˜o de Empresas—PPGA, Universidade de Brasilia—UnB, ICC Norte, Modulo 25, Asa Norte–Brasilia-DF, Brazil Departamento de Pos-Graduaca
a r t i c l e in f o
a b s t r a c t
Article history: Received 11 December 2008 Accepted 11 February 2009 Available online 26 March 2009
The world is presently mired in an energy crisis that challenges our ability to maintain standards of living in the North and raise them in the South. With accelerating demand for fossil fuels and relatively stagnant supplies, the fundamental bases of our transportation, energy, and agricultural systems are being questioned. Biofuels provide a more feasible technology than other renewables that could serve immediately to substitute for petroleum products in transportation. However, biofuels have been much reviled as leading to increased food prices and being environmental unfriendly. This article examines the case of Brazil. As a pioneer of biofuel use, Brazil is a key case for studying the possibilities, trade-offs, costs and benefits, of ethanol as an alternative to petroleum. Brazil has had an active program for over 30 years and is the world leader both in terms of technology and usage of ethanol. With relatively low economies of scale, a number of developing countries could successfully adopt the Brazilian system, reducing their dear dependence on petroleum. The evolution of the Brazilian ethanol system and its parameters are therefore of paramount interest to those interested in energy policy around the world. & 2009 Elsevier Ltd. All rights reserved.
Keywords: Biofuels Ethanol Brazil
1. Introduction The world is presently mired in an energy crisis that challenges our ability to maintain standards of living in the North and raise them in the South. With accelerating demand for fossil fuels principally related to the growth spurts of India and China, and relatively stagnant supplies, reflected in record high petroleum prices, the fundamental bases of our transportation, energy and agricultural systems are being questioned. While there has been much discussion about the need to develop clean, renewable energy sources such as wind, to date there is no sign that they are able to produce energy on a large enough scale or with enough efficiency to move beyond the very ambitious goal of 10% of energy supply for the foreseeable future. Moreover, with the liquid fuel nature of our transportation system, and very limited energy storage technology, there are major additional constraints in regards to transportation, which is the fastest growing user of
$ A previous version of this paper was given at a Sloan Foundation sponsored conference on biofuels at the University of Illinois at Urbana-Champaign. I would like to thank Gale Summerfield and Ju¨rgen Scheffran for their organization of the conference, and anonymous reviewers for their helpful comments. Note to readers: ethanol is used here to denote the blend of alcohol and gasoline used for fuel purposes and should not be mixed up with ethanol as a form of alcohol. Corresponding author. Tel.: +1778 782 3286. E-mail addresses: [email protected] (A. Hira), [email protected] (L.G. de Oliveira). 1 Tel.: +55 61 3307 2545; fax: +55 61 3307 2540.
0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2009.02.037
petroleum. Unlike electricity generation, transportation has relied almost exclusively on petroleum. Biofuels provide a more feasible technology than other renewables that could serve immediately to substitute for petroleum products in transportation. However, biofuels have been much reviled in the popular press as leading to increased food prices and being inefficient. Biofuels have also been reviled for being environmentally unfriendly. In fact, biofuels in the form of lower ethanol have lower emissions. In terms of their net energy output, that depends on the source crop (or feedstock) used. This article examines the case of Brazil, currently the 2nd largest producer of ethanol fuel in the world. Ethanol as used here is a mix of alcohol and gasoline. As a pioneer of biofuel use, Brazil is a key case for studying the possibilities, trade-offs, costs, and benefits, of ethanol as an alternative to petroleum. Brazil has had an active program for over 30 years now, and is now the world leader both in terms of technology and usage of ethanol. Brazil has been able to substitute petroleum for ethanol for 20% of automotive fuel and 80% of Brazilian cars can take various blends of gas and ethanol. Brazil’s ethanol is sugarcane based, and there is consensus that it is considerably more efficient than other feedstocks (corn, rapeseed) used elsewhere. In fact, the efficiency has improved to the point where there is no wastage, as stalks are burned to create excess electricity and remaining waste is used as a fertilizer. At US$ 70/barrel, sugarcane thus provides the basis for an economical and environmentally friendly petroleum substitute. With relatively low economies of scale, a number of
ARTICLE IN PRESS A. Hira, L.G. de Oliveira / Energy Policy 37 (2009) 2450–2456
developing countries could successfully adopt the Brazilian system, reducing their dear dependence on petroleum. The evolution of the Brazilian ethanol system and its parameters are therefore of paramount interest to those interested in energy policy around the world.
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It is more likely to explode and burn accidentally. It is more threatening to the environment if spilled or leaked. It leaves a residue gum on surfaces where it is stored, and the fuel leaves carbon deposits in combustion chambers.
It requires extensive pipeline networks, and incredibly risky, expensive exploration and development. Alcohol can be produced, by contrast, at low economies of scale.
2. Technical background 2.1. How ethanol is produced Alcohol for fuel can be produced in a straightforward fashion before blending it with gasoline to make ethanol. The source crop or ‘‘feedstock’’ is fermented into a ‘‘beer’’ that contains diluted ethyl alcohol in water. The ethanol base is removed from the beer by vaporizing and condensing it, a process referred to as distillation. The distilled ethanol is about 190 proof, 95% alcohol, 5% water. Before blending with gas, it must be dehydrated to make it at least 199 proof or it will not dissolve (Sperling, 1988). Though many different products have been tested as sources of ethanol, corn and sugar are the most widely used. The US primarily uses corn. Corn has certain advantages: high yield/acre; high starch content; slow perishability (important for producing ethanol off-season); high value of co-products, including protein that can be used as animal feed. Co-products are nutrients and other constituents that are separated from the original feedstock during pretreatment and fermentation, and that have value for other uses. The co-products of grains and tuberous plants are much less valuable, by contrast. The co-products from sugar crops are almost valueless, though the roughage from sugarcane (bagasse) can be burned as the fuel source in the distillation process. Nonetheless, there is widespread agreement that sugars are the best feedstock from an efficiency standpoint. They also leave no residue. Cellulose such as wood and grasses are the least efficient feedstocks. Biofuels have been widely criticized as being net negative in terms of their capacity to deliver energy and therefore will require ongoing subsidization (Steenblik, 2007), however we have seen that this really depends on the feedstock and the price of petroleum. In short, while alcohol can be fermented from almost any plant, there are major differences in the efficiencies of conversion, the energy yielded, and the effects on the environment. 2.2. Alcohol vs. gas Before beginning the Brazilian case, it is important to examine the technical literature on ethanol as a fuel source. At 10% or less alcohol, normal gas engines can take ethanol. At higher levels, engine modifications are needed. There are both advantages and disadvantages to using petroleum vs. ethanol as a fuel source (Sperling, 1988). The advantages of petroleum are as follows:
It is less corrosive on engines, though more recently noncorrosive materials to alcohol have been designed.
It provides more energy per unit of volume, thus allowing for smaller fuel tanks.
It has a lower ignition temperature, and therefore leads to easier starts in the winter.
There are many important by-products of petroleum, including plastics and fertilizer. The disadvantages of petroleum vs. alcohol-based fuel are:
Petroleum has a lower octane rating, and a higher toxicity. It produces more dangerous and threatening pollutants.
In terms of emissions, there is some consensus that ethanol produces less CO, and therefore lowers greenhouse gas emissions, however, it also produces more aldehydes and may lead to increases in NO. In Brazil, the sugarcane industry for ethanol is highly concentrated in Sa˜o Paulo state, and therefore the concerns about rainforest depletion are not immediate as they are in other crops, such as soy. As we discuss below, there are legitimate concerns about labor conditions among sugarcane workers. Workers suffer the most during the harvesting and burning phase. As a result, Sa˜o Paulo state has phased in a required mechanized harvest, but other states have not. The seasonal nature of sugarcane cropping creates another concern. Last but not least, there is a great variance in net energy and environmental outcomes depending on how sugarcane is produced. In Brazil, there is ample rainfall and cogeneration facilities for bagasse (waste) to be used for electricity generation, thus the net energy produced is quite efficient, particularly compared to other feedstocks such as corn in the US or rapeseed oil in Europe. But production conditions will vary locally. This has led to calls for sustainability certification of ethanol production. In the end, these criticisms of ethanol have to be weighed against the alternative, which at present, is continuation of a heavy dependency on petroleum, and all of the (inter)national security, labor, emissions, and resource curse problems that it brings.
3. Origins of Brazil’s ethanol program—take off, 1975–78 Brazilian regulation of the domestic sugar industry goes back at least to the early 1930s, when the Vargas government set up the Insitituto do Ac- ucar e do Alcool (IAA) to set prices, regulate, and act as a buyer of last resort in the wake of the collapse of world trade. The IAA relied upon taxes on producers and export income for its revenue. Part of the IAA’s mandate was to support medium and small growers, as well as northeastern growers who were being surpassed by those in Sa˜o Paulo. Production in the Sa˜o Paulo center-south region surpassed that of the northeast by 1951. Excess sugar production was to be channeled into alcohol. When the US closed its markets to Cuban sugar in the wake of the Cuban Revolution in 1960, the IAA began to strongly promote expansion of production in order to take advantage of the new market opportunities for exports. Sugar exports increased by 250% from 1965 to 74. By the mid-1960s sugar producers in Sa˜o Paulo had created COPERSUCAR (Cooperativa Central does Productores de Acucar do Estado de Sa˜o Paulo), which united farmers with mills and refiners, and helped with the financing and marketing of different sugar products (Nunberg, 1986). In the early 1970s, when the OPEC oil price shock hit many developing nations, Brazil was importing 80% of its petroleum and this led naturally to a financial crisis. At the same time, sugar prices had collapsed, leaving sugar producers scrambling for growth and stability in markets. The original proposal of June 1975 was geared solely to bail out the sugar sector, but this changed in a few months (Barzelay, 1986). On November 14, 1975, the president of Brazil, Ernesto Geisel, officially established the National Alcohol Program (Proa´lcool). The principal stated goal of the program was to save foreign exchange by using alcohol as a supplement to the nation’s gasoline supply (and secondarily as a
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chemical feedstock). There were four explicit goals. One, to increase the net supply of foreign exchange through reducing the demand for imported fuel. The military government saw energy dependence as a national security concern. Two, to reduce disparities of income among regions and individuals, by improving agricultural incomes in the more impoverished northeast, where much of the sugar industry was then located. Three, to increase national income through the deployment of underutilized resources, particularly land and labour. And, four, to increase the growth of the domestic capital goods sector through rising demand for agricultural and distillation equipment (Pereira, 1986). Brazilian ambitions went well beyond the goals stated in the program. They hoped that ethanol would reduce pollution, create thousands of new jobs and reduce rural poverty, and create a new source of industrial growth. Above all, Brazilians saw the program as a movement of national self-confidence, pushing for international recognition and local pride and optimism (Hammond, 1977). The initially stated target was to replace roughly 20% of anticipated gasoline demand by 1980, or 3.5 billion litres (Demetrius, 1990). Over 90% of the fuel was ethanol derived from sugar cane, 8% from cassava, and 1% from vegetable oil derived from babacu palm as a substitute for diesel fuel. A National Alcohol Commission (CNAL) was formed to develop and coordinate the program. Included in the Commission’s mandate was a provision to establish a favourable credit program to stimulate production and to guarantee a market for all alcohol produced. While production improved, the more socially-oriented objectives related to rural incomes and regional disparities did not receive much attention. Nonetheless, by 1979, a production run of 790 million gallons had been achieved. (Sperling, 1988). The need for new fuel sources converged with the motivations of sugar producers who through biofuels saw the opportunity for market growth and stability. Thus, the oil crisis was an opportune moment for a policy shift that had pre-existing support. As Sperling states (75–6). Domestic sugarcane to fuel was not a new idea. In 1931 the Brazilian government had decreed that ethanol must be blended into gasoline in a 5-to-100 proportion; the number of distilleries producing fuel-grade ethanol increased from one in 1933 to about fifty-four in 1945. During the petroleumscarce years of World War II and shortly thereafter, the average annual ethanol content in gasoline reportedly reached 40% in northeastern Brazil. In 1966 a government rule was enacted to encourage the use of up to 25% ethanol supplies (otherwise used for beverage alcohol) and to dampen fluctuations in sugar prices. Thus by 1975 there was a long history of diverting sugarcane into ethanol fuel production, but it was primarily a device to support the sugar market. The Sugar and Alcohol Institute (IAA), which regulated the sugarcane industry and advocated sugar growers’ interests, lobbied to make sugarcane the exclusive feedstock. Copersucar, a cooperative of large Sa˜o Paulo sugar and ethanol producers, lobbied to procure subsidies and to oppose the establishment of large state-administered plantations, and was the primary proponent of the alcohol initiative (Sperling, 1988; Numberg, 1986). Nonetheless, there were strong political coalitions both for and against the alcohol program from its outset. The auto industry was quietly supportive of the alcohol program, hoping for subsidies. As early as August 1976, GM, Ford and VW announced that there were no major technical barriers to the production of new engines that could use alcohol. Privately, Barzelay reports, they remained skeptical. In mid-1977, the President of ANFAVEA, the auto
producers’ association, asked the government to continue the alcohol program at least until a constant proportion of ethanol availability could be added to the gas supply across the whole nation. Barzelay characterizes the 2 groups in the argument as ‘‘otimistas’’ (optimists) and ‘‘negativistas’’ (pessimists). The otimistas included President Geisel, the Minister of Industry and Commerce (MIC), sugar interests, and the few entrepreneurs who quickly received permission to construct new autonomous distilleries. The negativistas included the Minister of Mines and Energy, Shigeaki Ueki, Petrobra´s, and financial agencies such as the Minister of Finance, the Central Bank, and the Banco do Brasil. The 2nd coalition did not hold sway in the interministerial Council for Economic Development (CDE), which continued to set certain goals for Proalcool. Nevertheless, the negativistas slowed Proalcool considerably. The negativistas pushed the doubts about economic efficiency shared by some technocrats (Barzelay, 1986). In fact, as early as 1975, Petrobra´s had engaged in various efforts to derail Proa´lcool. These included attempting to create a subsidiary that would control the alcohol market; producing manioc on its own farms as a feedstock, which did not work out, as disease spread through the crop; and working together with the financial authorities to label the program as inflationary and thus reduce capital for needed expansion (Barzelay, 1986). Eventually, 4 key support policies were set up. The first was to require Petrobra´s to buy a guaranteed amount of ethanol each year. The second was to provide low interest loans to ethanol distilleries through the Bank of Brazil (Banco do Brasil). The third was to set subsidized and regulated prices to increase ethanol’s attractiveness to consumers. The fourth was to create a production quota for sugar and establish export controls (Goldemberg et al., 2005; van den Wall Bake, 2006). Amidst this conflict, not surprisingly there was vacillation by government ministries. There were also problems with the subsidization scheme. By October 1976, of thirty-two projects approved by the National Alcohol Council, only eight had received funding; by May 1977 the funding rate had barely increased to twenty-eight awards out of 112 approvals. Funding approvals by the banks in 1978 and 1979 continued to lag far behind the council’s project approvals. The Bank of Brazil, even though stateowned, was reluctant to issue what it considered ‘‘bad’’ loans, not unreasonable given the questionable economics of the projects and the uncertain future of alcohol fuel; the Central Bank was reluctant to issue loans at below-market rates because of the inflationary effect on the economy (Sperling, 1988). Sperling states (77): The program remained fragmented in the early years as various public sector organizations pursued their own objectives, each in accordance with its own parochial interests and agency missions. Some were promoting alcohol, others were actively impeding it. One independent researcher observed that the ethanol program ‘‘suffer(ed) from weak program vision, vague institutional definition and organizational restrictions which impede effective leadership y(and that) there was little or no information, analysis or supporting research to guide decision making. In consequence, many decisions were made on an ad hoc basis. Nonetheless, there were good preconditions that allowed for an easy growth phase. The low level of required ethanol blend (below 20%) also meant it could be used in auto engines without their modification. There was a strong base of the underutilized sugar sector in Brazil, including multiple mills working below capacity. Distilleries were annexed on to the mills at low cost level, often using molasses, rather than cane, as the feedstock. Few
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autonomous distilleries were built during the 1976–78 period; in June 1979, 89 of the 104 operating fuel distilleries were annex distilleries attached to preexisting sugar mills (Sperling, 1988). The main bottleneck was the lack of financing to move towards autonomous distilleries that could expand capacity, needed to reassure automakers of a steady supply. In fact, signals to reduce project financing came directly from the Central Bank in 1977–78 (Barzelay, 1986). By late 1978, excess sugar capacity was more than used up, with the 3.5 billion target reached (Demetrius, 1990) and the 20% substitution of ethanol was being approached. The government began to consider taking the next logical steps of replacing petroleum with pure alcohol, requiring new fuel transportation infrastructure, and new automobiles that could handle higher blends of alcohol. Each of these steps required the development of autonomous and larger scale distilleries. However, the aforementioned fragmentation of interests both within and outside of the government prevented decisive action. In fact, there was no consensus up through 1978 as to whether the alcohol program was a short-term measure to help out sugar growers or a longterm energy policy solution. This led to major problems in terms of lack of financing not only for increased alcohol production but for storage tanks, transportation infrastructure, and facilities to prepare ethanol mixtures. The problem was acute in the northeast. Moreover, the level of imports of crude oil had not declined, thus negating the hoped for balance of payments benefits (Barzelay, 1986). On June 6, 1979, in line with the Iranian Revolution, OPEC announced a 37% price hike, breaking the deadlock and pushing President Figuerido into decisive nationalistic action to deal with the energy and financial crises, which he deemed called for ‘‘a war economy’’. That same day, the government raised the annual production target of alcohol from the current 790 million gallons to 2.8 billion gallons by 1985. It also set a goal of spending $5 billion to be invested during the next 6 years in fuel production and distribution facilities and created a higher-level body. In addition to CNAL, the government added the National Executive Commission (CENAL), and CINAL (an inter-ministerial commission) to oversee ethanol production targets. CINAL guaranteed the purchase of fuel against a certain price, set slightly higher than production costs, and the National Petroleum Council (CNP) was responsible for overseeing prices. Most importantly, government initiatives encouraged the auto industry to make the crucial decision in 1979 to begin manufacturing alcohol vehicles (Sperling, 1988; Rosillo-Calle and Cortez, 1998). This coincided with the establishment of the Copersucar Center of Technology (CTC) in 1979.
4. Honeymoon phase II, 1979–85 For many years Brazilian cars had been designed to burn gasoline with up to about 20% ethanol, so the initial target of blending up to 20% ethanol required no response or action from the automakers. Although privately they remained skeptical of the government’s resolve, automakers investigated the possibility of producing vehicles that could function on straight alcohol. Some parent companies, especially Ford and Volkswagen, already had initiated research in their home countries and had transferred that initial development work to their Brazilian subsidiaries. By August 1976 GM, Ford, and VW were able to announce that no major technological barriers precluded the production of alcohol cars. However, the industry was unwilling to invest in retooling factories without an assurance of continued and reliable fuel supplies (Sperling, 1988).
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By 1979, the auto industry had become more interested in producing alcohol cars, with the hope that government incentives to purchase alcohol cars would stimulate car sales, possibly eventually including exports. This went hand-in-hand with government policies to set retail prices for alcohol, increase supply, set up alcohol pumps in fueling stations, and subsidize alcohol cars. There were also recurring fears by domestic players that exports would take off, jeopardizing domestic supply. Petrobra´s’ potential blockage was finally trumped when Investia´lcool (later renamed Brasa´lcool) was set up in 1979, by private groups, foreign financiers, and the government, to provide financing for the growth of the sector (Barzelay, 1986). Foreign investment was substantial, including $1billion in loans from 9 European and American banks and another $1 billion in loans from the World Bank (Barzelay, 1986). In mid-1979 the companies began to manufacture alcohol cars. In January 1980, 980 alcohol cars were sold, representing 1.2% of new cars sold that month. Immediately, technical problems, inherent in any new sophisticated product, began to emerge. The companies made minimal changes to the gas-based cars—including replacement of materials that were incompatible with ethanol; increases in engine compression ratios to take advantage of the higher octane rating of ethanol; adjustment of carburetors; and placement of one-totwo quart gasoline tanks under the hood to assist in cold starts. Technological improvements, including improving starting performance to 01C, were gradually introduced (Sperling, 1988). The key states support policies for the honeymoon period were (BNDES and CGEE, 2008):
Establishing higher minimum ethanol fuel blends (progres
sively increased to 25%). Guaranteeing lower prices for ethanol vs. gasoline. Guaranteeing minimal prices to bioethanol producers. Creating credit lines for sugar mills to expand capacity. Requiring the availability of ethanol at gas stations. Maintaining strategic reserves to stabilize supply.
The government used several policies specifically to push alcohol-based car production. They made alcohol car purchases attractive relative to gasoline cars by reducing the registration tax on them and providing easier credit in the form of longer payment periods and smaller down payments. The government also capped ethanol prices at 65% of that of gasoline. Sperling also reports that Brazilians felt nationalistic pride in their locally developed vehicles and fuel. The new alcohol-based cars boomed. Sales of the cars increased from 1% of total car sales in January 1980 to 73% by December of that year. The stock of alcohol cars was further expanded by retrofitting existing gas cars. When performed by government-certified mechanics the conversion cost was $250, but by early 1980 these mechanics were so overwhelmed that many motorists turned to unauthorized mechanics who charged as little as $60. Many of the early retrofitted vehicles were taxicabs that, because of their high usage, had the most to gain from subsidized fuel prices. (Sperling, 1988).
5. Crisis, 1985–2002 However, the boom was short-lived. The boom surprised policymakers, consequently, market mismatches with severe shortages of alcohol, a rapid accumulation of gasoline stocks, and an inability to continue financing on that scale all surfaced (Barzelay, 1986). There were still problems with corrosion, lack of starting reliability, build up of carbons, and high fuel consumption, especially in the retrofitted vehicles. There were also concerns about tight alcohol supplies, inflationary pressures from
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the diversion of agriculture to fuel supplies, and the need to continue importing diesel fuel (which couldn’t be replaced by ethanol). The diesel left gasoline as a by-product, which then was re-exported. Moreover, world sugar prices began to increase. As a result, the government gradually lifted the price ceilings on ethanol in late 1980, raising the ethanol price from 40% to 65% of gasoline. This led to immediate drops in consumer demand for alcohol cars, from 73% of new car sales in December 1980 to just 9% in July 1981. Also, in June 1981, the government decided to suspend credit subsidies, as opponents labeled it a source of inflation with no real benefits in reducing oil imports. The cycle renewed again, as, from 1981–2, the government experimented with various policies to re-incentivize the sector, including reducing alcohol prices; reducing taxes on alcohol cars; assuring that alcohol prices would be at or below 59% of gas prices for 2 years; additional subsidies for the purchase of taxis and even lower alcohol prices for taxis. Not surprisingly, this resulted in a mushrooming of ‘‘part-time’’ cab drivers. In mid-1982, the price of owning and operating an alcohol-fueled car was roughly equivalent to a gas-powered one (Sperling, 1988; Barzelay, 1986). Petrobra´s also moved to support the Proa´lcool program as Brazil went into a full-scale debt and financial crisis. It offered to provide capital and purchase stocks from producers (Sperling, 1988). However, the previous year’s reversals had shaken consumer and producer confidence in the government’s commitment to the sector, and recovery was delayed (Barzelay, 1986). By year-end 1985, with 85–90% of all new cars being alcohol powered, over 2 million of Brazil’s 10 million car fleet was fueled entirely by ethanol. The generous subsidies drew major new private investment into the production of ethanol in autonomous distilleries (autonomas), i.e., ones not attached to sugar mills. Autonomous plants (as opposed to annexes on sugar mills) accounted for over half of all ethanol output (Demetrius, 1990). However, progress was cut short by external events. In 1986, in line with the collapse of world oil prices, research and development funding was cut and guaranteed purchase prices were set below average production costs. Fluctuating blend ratios further confused matters. Moreover, a significant rise in world sugar prices led the government to free sugar export market restrictions. This led directly to severe ethanol shortages and shook consumer confidence in alcohol-based vehicles, leading ironically to Brazil becoming the world’s largest importer of ethanol from 1989–96. In 1989, the government lowered tax rates for gasoline cars, leading to massive declines in alcohol-based cars (van den Wall Bake, 2006; Kojima and Johnson, 2005). With global oil prices dropping and financial crisis reigning, there was no longer political will to continue with massive subsidies for the program. The government had created the Program Nacional de Melhoramento de Cana-de Ac- ucar (Planalsucar) in 1970 to develop new sugarcane varieties, and supplement the work of the IAA (Sugar and Alcohol Institute) but both were closed down in the 1990s. An ethanol supply shortage in 1991 further dampened support for the program. The ProAlcool program was officially ended on February 15, 1991, and the CNP, CNAL, and CENAL were closed. Throughout the 1990s, subsidies and regulation were gradually removed. In 1993, in an attempt to arrest the deterioration of the sector, the government passed a law requiring all gas to be blended with 20–25% ethanol. Sugarcane prices, including freight to mills and distilleries, were deregulated from January 1, 1997, though the government also instituted a new tax (CIDE) that applied only to gasoline. The last government sugarcane harvest and ethanol plan was published in May 1997. Anhydrous ethanol was deregulated in May 1997, and hydrous ethanol in February 1999. Gasoline prices were liberalized in 1998. The 40% tariff quotas for sugar exports were eliminated and market-based prices for anhydrous ethanol become effective on
May 1, 1997. By 1997–98, just 1000 pure alcohol vehicles were sold. In response to the crisis, 181 alcohol producers formed a cartel in May 1999 that led to an exclusivity agreement over the next 3 years designed to control the supply of their output. As a result of the agreement, the price of anhydrous ethanol doubled and hydrous ethanol tripled over the next year, while petroleum prices rose by just 50% (Walter et al., 2006; Rosillo-Calle and Cortez, 1997; Rothkopf, 2007; Kojim and Johnson, 2005).
6. The comeback and current issues (2003-present) The industry became revitalized only with the introduction of flex fuel vehicles (FFVs) in March 2003. The government gave the emerging market a major spur when it reclassified FFVs as eligible for the same tax breaks as alcohol-based vehicles in August 2002 (Kojima and Johnson, 2005). FFVs can use various mixtures of alcohol and gas, thus allowing consumers to react to the different prices signals of the 2 markets. In early 2005, the sale of FFVs surpassed gas vehicles, accounting for 57% of all sales (Walter et al., 2006). The tax system still favors ethanol. As of January 2006, at the retail level, taxes for gasoline were 52.12%, 58% higher than pure hydrated ethanol. Anhydrous ethanol, mixed with gasoline, is untaxed, so it is clear the government favors this market (Martines-Filho et al., 2006). Fig. 1 illustrates that the production of alcohol appears to be taking on a new positive trajectory with the introduction of FFVs. Table 1 reinforces the rapid rise and decline of alcohol fuel vehicles, along with the stunning increase in FFVs in Brazil. The maturity of the industry is also marked by increases in economies of scale for mills and distillation plants, so that the industry is no longer a side business for sugar producers, and by the development of a new side business of cogeneration of power from ethanol plants (Goldemberg, 2007). The industry became increasingly vertically integrated over time (Conde´ de Carvalho et al., 1993). The Government regulates the sector through CINAL, the interministerial commission for alcohol, which includes representatives of the Ministries of: Industry, Commerce and Tourism; Mines and Energy; Finance; Agriculture, Division of supply and Agrarian Reform; Science and Technology; Environment, Water and Legal Amazon; Planning and Budget (Rosillo-Calle and Cortez, 1997). Government-supported research and development has been key to growth. Sa˜o Paulo has also made substantial investments in genetics research and improving sugarcane breeding. Productivity in every aspect of the industry has increased markedly over time. New varieties, biological pest control, improved management based on operations research, improved milling capacity, fermentation and distillation techniques, and greater soil selectivity have all contributed. The state of Sa˜o Paulo’s Instituto Agronoˆmico de Campinas (IAC) and Instituto Biolo´gico have complemented the long-standing efforts of CTC. The Centro Tecnologia Aerona´utica was also instrumental in helping to develop the ethanol-based auto engines. As a result, average sugarcane production yields increased from 3900 l/ha/year in the early 1980s to 5600 in 2001, or at an estimated annual growth rate of 2.3%/year from 1975–2004. Brazil is in a unique position for improvements on this scale because of agricultural availability and the fact that there is no need for irrigation of Brazilian sugarcane fields (Walter et al., 2006; Martines-Filho et al., 2006; van den Wall Bake, 2006). Sugarcane producers are paid through a price system based on the end use, either ethanol or sugar. The Organizac- a˜o dos Plantadores de Cana do Estado de Sa˜o Paulo (ORPLANA, Producers) and the Uniao da Agroindustriea Canavieira de Sa˜o Pauo (Unicamills) agreed in 1999 to a non-profit payment system called CONSECANA-SP (Conselho dos Productores de Cana-de-Ac- u´car,
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20 18 16 14
M^3
12 10 8 6 4 2
/9 2 92 /9 3 93 /9 4 94 /9 5 95 /9 6 96 /9 7 97 /9 8 98 /9 9 99 /0 0 00 /0 1 01 /0 2 02 /0 3 03 /0 4 04 /0 5 05 /0 6 06 /0 7
91
90
/9 1
0 Year Fig. 1. Brazil total alcohol production, 1990–2007. Source: UNICA, includes both hydrous and anhydrous production.
Table 1 Sales of Brazilian vehicles by fuel type, 1979–2005. Year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(*) Total
Gasoline
Alcohol
906,885 627,050 344,490 365,520 78,816 33,563 26,675 62,020 31,240 77,327 260,881 542,862 526,600 476,409 706,487 964,555 1,234,254 1,432,656 1,554,116 1,103,210 981,508 1,188,720 1,273,930 1,206,664 1,108,537 1,077,945 614,751
3120 240,643 137,307 232,575 579,328 565,536 645,551 697,049 458,683 566,482 399,529 81,996 150,982 195,503 264,235 141,835 40,707 7647 1120 1224 10,947 10,292 18,335 55,961 39,707 50,949 27,081
18,807,671
5,624,324
Flex fuel
Total (Alcohol+Flex)
Total
48,178 328,379 755,810
3120 240,643 137,307 232,575 579,328 565,536 645,551 697,049 458,683 566,482 399,529 81,996 150,982 195,503 264,235 141,835 40,707 7647 1120 1224 10,947 10,292 18,335 55,961 87,885 379,328 782,891
910,005 867,693 481,797 598,095 658,144 599,099 672,226 759,069 489,923 643,809 660,410 624,858 677,582 671,912 970,722 1,106,390 1,274,961 1,440,303 1,555,236 1,104,434 992,455 1,199,012 1,292,265 1,262,625 1,196,422 1,457,273 1,464,010
1,132,367
6,756,691
25,630,730
Notes: 2005—through November. Source: UNICA from ANFAVEA statistics.
Asucar e A´lcool do Estado de Sa˜o Paulo-Consecana) that seeks to stabilize prices (Martines-Filho et al., 2006). Foreign interest and investment in the sector have increased rapidly in recent years, as foreign companies have begun to note the potential for Brazilian exports. Japan recently signed an agreement with Brazil to develop a pipeline for export of ethanol. A wide range of companies and investors from around the world have begun to purchase or create joint mergers with Brazilian
counterparts, including Goldman Sachs, Meryll Lynch, UBS Pactual, Louis Dreyfus, Bunge, Cargill, British Petroleum, Mitsui, Bharat Petroleum, and Hindustan Petroleum, leading to greater industry concentration (BNDES and CGEE, 2008). However, given the recent fallout of oil prices, it remains to be seen if the flurry of activity will die out until the world economy recovers. Certainly, Brazil’s grand designs for large ethanol pipeline infrastructure to ports for exporting with foreign investors are likely to be put on hold in the current environment. By contrast, there is considerable concern over conditions for sugarcane workers and regional disparities. These have been characterized as unsafe, poorly paid, and seasonal (Novaes, 2007). Sa˜o Paulo has long since surpassed the northeast as the centre of sugarcane and ethanol production. There are also concerns over water contamination from the waste ‘‘vinasse’’ of the distillation process. However, there seems little reason for concern over ethanol leading to large-scale substitution of food for fuel, at least in Brazil. Sugarcane covers 10% of cultivated land, but just 1% of all arable land in the country (Goldemberg, 2007). The Brazilian case also lends itself to a strong argument of net environmental improvement. Goldemberg states that ethanol ‘‘allowed the phasing-out of lead additives, MTBE, and sulfur, and reduced carbon monoxide emissions (2007)’’. The government has addressed one of the more harmful effects of harvesting, namely the controlled burning of fields which facilitates manual harvesting. In March 2000, the government moved to eliminate burning in areas where the slope is less than 12%, pushing forward the movement towards mechanized harvesting. Approximately 55% of the national harvest will now be mechanized. The law created massive unemployment among labourers in the industry of up to 1,00,000 of a total of 1.2 million workers, and incentives to move to new more remote areas where enforcement is difficult (Martines-Filho et al., 2006).
7. Conclusion Brazilian state policies were directly responsible for the success of the ethanol program. Essentially, there were three key aspects of state intervention for the success of the program: establishing and
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supporting the market in its infant industry phase and during its market crisis; investing in infrastructure and other long-term investments, including research and development to allow the ethanol markets to function with increasing efficiency; and weaning off state support once the market became viable. The government’s pushing of the industry led directly to the technological breakthrough of FFVs that has finally made the market viable in the long-run. Policies aimed at supporting the market included minimum blending requirements, price floors, and major subsidies. Goldemberg (2007) estimates overall subsidies to be around $30 billion over 20 years, but states that more than $50 billion in petroleum imports were saved over the same period as a result of the program. Kojima and Johnson (2005) estimate that the net-oftax price of ethanol more than halved between 1980 and 2001. BNDES and CGEE (2008) state that subsidies to the industry between 1975 and 89 were approximately $7.1 billion, with $4 billion coming from the Brazilian Government and the rest from private sources. They note that $195.5 billion in foreign exchange; $69.1 billion in avoided imports, and $126.4 billion in foreign debt interest were saved through the program. With petroleum prices likely to return to 2008 highs once the current economic recovery takes hold, the sky seems to be the limit in terms of the growth potential for ethanol markets over the long-term. There should be plenty of momentum for the establishment of an international biofuels market (Hira, forthcoming). There are certainly ample opportunities for domestic substitution of petroleum among other sugarcane growers, however export opportunities require a considerably more active state along the lines of what we have described here. Brazil should become a leading exporter, if certain barriers can be overcome. The main impediments at the moment are the need for infrastructure investment, such as pipelines for developing exports, and high levels of protectionism in the North. Regardless, sugar-based ethanol could be replicated in many other developing countries with great benefits. Brazil shows that there are viable alternatives to a purely petroleum-based economy, if the state is willing to shape markets and technologies into productive directions.
Reference Barzelay, Michael, 1986. The Politicized Market Economy: Alcohol in Brazil’s Energy Strategy. University of California Press, Berkeley. BNDES (National Development Bank of Brazil) and CGEE (Center for Strategic Studies and Management) with CEPAL (UN Economic Commission for Latin America and the Caribbean) and FAO (Food and Agriculture Organization), 2008. Sugarcane-Based Bioethanol: Energy for Sustainable Development. November Rio de Janeiro: BNDES, CGEE. Conde´ de Carvalho, Flavio, Marques, Samira Aoun, Lucia Maia, Marica, Junko Yoshii, Regina, 1993. Estudo Da Integracao Vertical Na Agroindustria Sucroalcooleira No Estado de Sa˜o Paulo, 1970–92. Agricultura em Sa˜o Paulo 40 (1), 157–182. Demetrius, F.Joseph, 1990. Brazil’s National Alcohol Program: Technology and Development in an Authoritarian Regime. Praeger, NY. Goldemberg, Jose´, 2007. Ethanol for a Sustainable Energy Future. Science 315, 808–810. Goldemberg, Jose´, Teixeira Coelho, Suani, Lucon, 2005. How adequate policies can push renewables. Energy Policy 32 (9), 1141–1146. Hammond, Allen L., 1977. Alcohol: A Brazilian Answer to the Energy Crisis. Science 195 (4278), 564–566 (February 11). Hira, Anil, forthcoming. Many obstacles, but it will come: prospects for an international biofuels market. Kojima Masami, Johnson Todd, 2005. Potential for Biofuels for Transport in Developing Countries. NY: World Bank ESMAP. Martines-Filho, Joao, Burnquist Heloisa L., Vian Carlos E. F., 2006. Bioenergy and the Rise of Sugarcane-Based Ethanol in Brazil. Choices. 2nd Quarter, 21(2): 91–96. Novaes, Jose´ Roberto Pereira, 2007. Campeoes de produtividade; dores e febres no canaviais paulistas. Estudos Avancados 21 (59), 167–177. Numberg, Barbara, 1986. Structural change and state policy: the politics of sugar in Brazil since 1964. Latin American Research Review 21, 253–292. Pereira, A., 1986. Ethanol, Employment and Development: Lessons from Brazil. ILO, Geneva. Rosillo-Calle, Frank, Cortez, Luis, A.B., 1998. Towards proalcool II—a review of the Brazilian bioethanol programme. Biomass and Bioenergy 14 (2), 115–124. Rothkopf Garten, 2007. Brazil, 441–587 in A Blueprint for Green Energy in the Americas, Washington: Inter-American Development Bank. Sperling, Daniel, 1988. New Transportation Fuels: A Strategic Approach to Technological Change. University of California Press, Berkeley. Steenblik Ronald, 2007. Biofuels—At What Cost? Government support for ethanol and biodiesel in selected OECD countries. Geneva: The Global Subsidies Initiative of the International Institute for Sustainable Development (IISD). September. Van den Wall Bake, J.D., 2006. Cane as key in Brazilian Ethanol Industry: ‘Understanding cost reductions through an experience curve approach’ Master’s thesis. Utrecht University, July. Nature Science and Innovation Management, Energy and Materials. Walter Amado, Paulo Dolzan, Erik Piacente, 2006. Biomass Energy and Bio-energy Trade: Historic Developments in Brazil and Current Opportunities. IEA Task Force 40, country report. Found at /http://www.bioenergytrade.org/S. Accessed May 28, 2008.
Contents lists available at ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
No substitute for oil? How Brazil developed its ethanol industry$ Anil Hira a,, Luiz Guilherme de Oliveira b,1 a b
Department of Political Science, 8888 University Drive, Simon Fraser University, Burnaby, BC, Canada V5A 1S6 ˜o Administraca ˜o de Empresas—PPGA, Universidade de Brasilia—UnB, ICC Norte, Modulo 25, Asa Norte–Brasilia-DF, Brazil Departamento de Pos-Graduaca
a r t i c l e in f o
a b s t r a c t
Article history: Received 11 December 2008 Accepted 11 February 2009 Available online 26 March 2009
The world is presently mired in an energy crisis that challenges our ability to maintain standards of living in the North and raise them in the South. With accelerating demand for fossil fuels and relatively stagnant supplies, the fundamental bases of our transportation, energy, and agricultural systems are being questioned. Biofuels provide a more feasible technology than other renewables that could serve immediately to substitute for petroleum products in transportation. However, biofuels have been much reviled as leading to increased food prices and being environmental unfriendly. This article examines the case of Brazil. As a pioneer of biofuel use, Brazil is a key case for studying the possibilities, trade-offs, costs and benefits, of ethanol as an alternative to petroleum. Brazil has had an active program for over 30 years and is the world leader both in terms of technology and usage of ethanol. With relatively low economies of scale, a number of developing countries could successfully adopt the Brazilian system, reducing their dear dependence on petroleum. The evolution of the Brazilian ethanol system and its parameters are therefore of paramount interest to those interested in energy policy around the world. & 2009 Elsevier Ltd. All rights reserved.
Keywords: Biofuels Ethanol Brazil
1. Introduction The world is presently mired in an energy crisis that challenges our ability to maintain standards of living in the North and raise them in the South. With accelerating demand for fossil fuels principally related to the growth spurts of India and China, and relatively stagnant supplies, reflected in record high petroleum prices, the fundamental bases of our transportation, energy and agricultural systems are being questioned. While there has been much discussion about the need to develop clean, renewable energy sources such as wind, to date there is no sign that they are able to produce energy on a large enough scale or with enough efficiency to move beyond the very ambitious goal of 10% of energy supply for the foreseeable future. Moreover, with the liquid fuel nature of our transportation system, and very limited energy storage technology, there are major additional constraints in regards to transportation, which is the fastest growing user of
$ A previous version of this paper was given at a Sloan Foundation sponsored conference on biofuels at the University of Illinois at Urbana-Champaign. I would like to thank Gale Summerfield and Ju¨rgen Scheffran for their organization of the conference, and anonymous reviewers for their helpful comments. Note to readers: ethanol is used here to denote the blend of alcohol and gasoline used for fuel purposes and should not be mixed up with ethanol as a form of alcohol. Corresponding author. Tel.: +1778 782 3286. E-mail addresses: [email protected] (A. Hira), [email protected] (L.G. de Oliveira). 1 Tel.: +55 61 3307 2545; fax: +55 61 3307 2540.
0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2009.02.037
petroleum. Unlike electricity generation, transportation has relied almost exclusively on petroleum. Biofuels provide a more feasible technology than other renewables that could serve immediately to substitute for petroleum products in transportation. However, biofuels have been much reviled in the popular press as leading to increased food prices and being inefficient. Biofuels have also been reviled for being environmentally unfriendly. In fact, biofuels in the form of lower ethanol have lower emissions. In terms of their net energy output, that depends on the source crop (or feedstock) used. This article examines the case of Brazil, currently the 2nd largest producer of ethanol fuel in the world. Ethanol as used here is a mix of alcohol and gasoline. As a pioneer of biofuel use, Brazil is a key case for studying the possibilities, trade-offs, costs, and benefits, of ethanol as an alternative to petroleum. Brazil has had an active program for over 30 years now, and is now the world leader both in terms of technology and usage of ethanol. Brazil has been able to substitute petroleum for ethanol for 20% of automotive fuel and 80% of Brazilian cars can take various blends of gas and ethanol. Brazil’s ethanol is sugarcane based, and there is consensus that it is considerably more efficient than other feedstocks (corn, rapeseed) used elsewhere. In fact, the efficiency has improved to the point where there is no wastage, as stalks are burned to create excess electricity and remaining waste is used as a fertilizer. At US$ 70/barrel, sugarcane thus provides the basis for an economical and environmentally friendly petroleum substitute. With relatively low economies of scale, a number of
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developing countries could successfully adopt the Brazilian system, reducing their dear dependence on petroleum. The evolution of the Brazilian ethanol system and its parameters are therefore of paramount interest to those interested in energy policy around the world.
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It is more likely to explode and burn accidentally. It is more threatening to the environment if spilled or leaked. It leaves a residue gum on surfaces where it is stored, and the fuel leaves carbon deposits in combustion chambers.
It requires extensive pipeline networks, and incredibly risky, expensive exploration and development. Alcohol can be produced, by contrast, at low economies of scale.
2. Technical background 2.1. How ethanol is produced Alcohol for fuel can be produced in a straightforward fashion before blending it with gasoline to make ethanol. The source crop or ‘‘feedstock’’ is fermented into a ‘‘beer’’ that contains diluted ethyl alcohol in water. The ethanol base is removed from the beer by vaporizing and condensing it, a process referred to as distillation. The distilled ethanol is about 190 proof, 95% alcohol, 5% water. Before blending with gas, it must be dehydrated to make it at least 199 proof or it will not dissolve (Sperling, 1988). Though many different products have been tested as sources of ethanol, corn and sugar are the most widely used. The US primarily uses corn. Corn has certain advantages: high yield/acre; high starch content; slow perishability (important for producing ethanol off-season); high value of co-products, including protein that can be used as animal feed. Co-products are nutrients and other constituents that are separated from the original feedstock during pretreatment and fermentation, and that have value for other uses. The co-products of grains and tuberous plants are much less valuable, by contrast. The co-products from sugar crops are almost valueless, though the roughage from sugarcane (bagasse) can be burned as the fuel source in the distillation process. Nonetheless, there is widespread agreement that sugars are the best feedstock from an efficiency standpoint. They also leave no residue. Cellulose such as wood and grasses are the least efficient feedstocks. Biofuels have been widely criticized as being net negative in terms of their capacity to deliver energy and therefore will require ongoing subsidization (Steenblik, 2007), however we have seen that this really depends on the feedstock and the price of petroleum. In short, while alcohol can be fermented from almost any plant, there are major differences in the efficiencies of conversion, the energy yielded, and the effects on the environment. 2.2. Alcohol vs. gas Before beginning the Brazilian case, it is important to examine the technical literature on ethanol as a fuel source. At 10% or less alcohol, normal gas engines can take ethanol. At higher levels, engine modifications are needed. There are both advantages and disadvantages to using petroleum vs. ethanol as a fuel source (Sperling, 1988). The advantages of petroleum are as follows:
It is less corrosive on engines, though more recently noncorrosive materials to alcohol have been designed.
It provides more energy per unit of volume, thus allowing for smaller fuel tanks.
It has a lower ignition temperature, and therefore leads to easier starts in the winter.
There are many important by-products of petroleum, including plastics and fertilizer. The disadvantages of petroleum vs. alcohol-based fuel are:
Petroleum has a lower octane rating, and a higher toxicity. It produces more dangerous and threatening pollutants.
In terms of emissions, there is some consensus that ethanol produces less CO, and therefore lowers greenhouse gas emissions, however, it also produces more aldehydes and may lead to increases in NO. In Brazil, the sugarcane industry for ethanol is highly concentrated in Sa˜o Paulo state, and therefore the concerns about rainforest depletion are not immediate as they are in other crops, such as soy. As we discuss below, there are legitimate concerns about labor conditions among sugarcane workers. Workers suffer the most during the harvesting and burning phase. As a result, Sa˜o Paulo state has phased in a required mechanized harvest, but other states have not. The seasonal nature of sugarcane cropping creates another concern. Last but not least, there is a great variance in net energy and environmental outcomes depending on how sugarcane is produced. In Brazil, there is ample rainfall and cogeneration facilities for bagasse (waste) to be used for electricity generation, thus the net energy produced is quite efficient, particularly compared to other feedstocks such as corn in the US or rapeseed oil in Europe. But production conditions will vary locally. This has led to calls for sustainability certification of ethanol production. In the end, these criticisms of ethanol have to be weighed against the alternative, which at present, is continuation of a heavy dependency on petroleum, and all of the (inter)national security, labor, emissions, and resource curse problems that it brings.
3. Origins of Brazil’s ethanol program—take off, 1975–78 Brazilian regulation of the domestic sugar industry goes back at least to the early 1930s, when the Vargas government set up the Insitituto do Ac- ucar e do Alcool (IAA) to set prices, regulate, and act as a buyer of last resort in the wake of the collapse of world trade. The IAA relied upon taxes on producers and export income for its revenue. Part of the IAA’s mandate was to support medium and small growers, as well as northeastern growers who were being surpassed by those in Sa˜o Paulo. Production in the Sa˜o Paulo center-south region surpassed that of the northeast by 1951. Excess sugar production was to be channeled into alcohol. When the US closed its markets to Cuban sugar in the wake of the Cuban Revolution in 1960, the IAA began to strongly promote expansion of production in order to take advantage of the new market opportunities for exports. Sugar exports increased by 250% from 1965 to 74. By the mid-1960s sugar producers in Sa˜o Paulo had created COPERSUCAR (Cooperativa Central does Productores de Acucar do Estado de Sa˜o Paulo), which united farmers with mills and refiners, and helped with the financing and marketing of different sugar products (Nunberg, 1986). In the early 1970s, when the OPEC oil price shock hit many developing nations, Brazil was importing 80% of its petroleum and this led naturally to a financial crisis. At the same time, sugar prices had collapsed, leaving sugar producers scrambling for growth and stability in markets. The original proposal of June 1975 was geared solely to bail out the sugar sector, but this changed in a few months (Barzelay, 1986). On November 14, 1975, the president of Brazil, Ernesto Geisel, officially established the National Alcohol Program (Proa´lcool). The principal stated goal of the program was to save foreign exchange by using alcohol as a supplement to the nation’s gasoline supply (and secondarily as a
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chemical feedstock). There were four explicit goals. One, to increase the net supply of foreign exchange through reducing the demand for imported fuel. The military government saw energy dependence as a national security concern. Two, to reduce disparities of income among regions and individuals, by improving agricultural incomes in the more impoverished northeast, where much of the sugar industry was then located. Three, to increase national income through the deployment of underutilized resources, particularly land and labour. And, four, to increase the growth of the domestic capital goods sector through rising demand for agricultural and distillation equipment (Pereira, 1986). Brazilian ambitions went well beyond the goals stated in the program. They hoped that ethanol would reduce pollution, create thousands of new jobs and reduce rural poverty, and create a new source of industrial growth. Above all, Brazilians saw the program as a movement of national self-confidence, pushing for international recognition and local pride and optimism (Hammond, 1977). The initially stated target was to replace roughly 20% of anticipated gasoline demand by 1980, or 3.5 billion litres (Demetrius, 1990). Over 90% of the fuel was ethanol derived from sugar cane, 8% from cassava, and 1% from vegetable oil derived from babacu palm as a substitute for diesel fuel. A National Alcohol Commission (CNAL) was formed to develop and coordinate the program. Included in the Commission’s mandate was a provision to establish a favourable credit program to stimulate production and to guarantee a market for all alcohol produced. While production improved, the more socially-oriented objectives related to rural incomes and regional disparities did not receive much attention. Nonetheless, by 1979, a production run of 790 million gallons had been achieved. (Sperling, 1988). The need for new fuel sources converged with the motivations of sugar producers who through biofuels saw the opportunity for market growth and stability. Thus, the oil crisis was an opportune moment for a policy shift that had pre-existing support. As Sperling states (75–6). Domestic sugarcane to fuel was not a new idea. In 1931 the Brazilian government had decreed that ethanol must be blended into gasoline in a 5-to-100 proportion; the number of distilleries producing fuel-grade ethanol increased from one in 1933 to about fifty-four in 1945. During the petroleumscarce years of World War II and shortly thereafter, the average annual ethanol content in gasoline reportedly reached 40% in northeastern Brazil. In 1966 a government rule was enacted to encourage the use of up to 25% ethanol supplies (otherwise used for beverage alcohol) and to dampen fluctuations in sugar prices. Thus by 1975 there was a long history of diverting sugarcane into ethanol fuel production, but it was primarily a device to support the sugar market. The Sugar and Alcohol Institute (IAA), which regulated the sugarcane industry and advocated sugar growers’ interests, lobbied to make sugarcane the exclusive feedstock. Copersucar, a cooperative of large Sa˜o Paulo sugar and ethanol producers, lobbied to procure subsidies and to oppose the establishment of large state-administered plantations, and was the primary proponent of the alcohol initiative (Sperling, 1988; Numberg, 1986). Nonetheless, there were strong political coalitions both for and against the alcohol program from its outset. The auto industry was quietly supportive of the alcohol program, hoping for subsidies. As early as August 1976, GM, Ford and VW announced that there were no major technical barriers to the production of new engines that could use alcohol. Privately, Barzelay reports, they remained skeptical. In mid-1977, the President of ANFAVEA, the auto
producers’ association, asked the government to continue the alcohol program at least until a constant proportion of ethanol availability could be added to the gas supply across the whole nation. Barzelay characterizes the 2 groups in the argument as ‘‘otimistas’’ (optimists) and ‘‘negativistas’’ (pessimists). The otimistas included President Geisel, the Minister of Industry and Commerce (MIC), sugar interests, and the few entrepreneurs who quickly received permission to construct new autonomous distilleries. The negativistas included the Minister of Mines and Energy, Shigeaki Ueki, Petrobra´s, and financial agencies such as the Minister of Finance, the Central Bank, and the Banco do Brasil. The 2nd coalition did not hold sway in the interministerial Council for Economic Development (CDE), which continued to set certain goals for Proalcool. Nevertheless, the negativistas slowed Proalcool considerably. The negativistas pushed the doubts about economic efficiency shared by some technocrats (Barzelay, 1986). In fact, as early as 1975, Petrobra´s had engaged in various efforts to derail Proa´lcool. These included attempting to create a subsidiary that would control the alcohol market; producing manioc on its own farms as a feedstock, which did not work out, as disease spread through the crop; and working together with the financial authorities to label the program as inflationary and thus reduce capital for needed expansion (Barzelay, 1986). Eventually, 4 key support policies were set up. The first was to require Petrobra´s to buy a guaranteed amount of ethanol each year. The second was to provide low interest loans to ethanol distilleries through the Bank of Brazil (Banco do Brasil). The third was to set subsidized and regulated prices to increase ethanol’s attractiveness to consumers. The fourth was to create a production quota for sugar and establish export controls (Goldemberg et al., 2005; van den Wall Bake, 2006). Amidst this conflict, not surprisingly there was vacillation by government ministries. There were also problems with the subsidization scheme. By October 1976, of thirty-two projects approved by the National Alcohol Council, only eight had received funding; by May 1977 the funding rate had barely increased to twenty-eight awards out of 112 approvals. Funding approvals by the banks in 1978 and 1979 continued to lag far behind the council’s project approvals. The Bank of Brazil, even though stateowned, was reluctant to issue what it considered ‘‘bad’’ loans, not unreasonable given the questionable economics of the projects and the uncertain future of alcohol fuel; the Central Bank was reluctant to issue loans at below-market rates because of the inflationary effect on the economy (Sperling, 1988). Sperling states (77): The program remained fragmented in the early years as various public sector organizations pursued their own objectives, each in accordance with its own parochial interests and agency missions. Some were promoting alcohol, others were actively impeding it. One independent researcher observed that the ethanol program ‘‘suffer(ed) from weak program vision, vague institutional definition and organizational restrictions which impede effective leadership y(and that) there was little or no information, analysis or supporting research to guide decision making. In consequence, many decisions were made on an ad hoc basis. Nonetheless, there were good preconditions that allowed for an easy growth phase. The low level of required ethanol blend (below 20%) also meant it could be used in auto engines without their modification. There was a strong base of the underutilized sugar sector in Brazil, including multiple mills working below capacity. Distilleries were annexed on to the mills at low cost level, often using molasses, rather than cane, as the feedstock. Few
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autonomous distilleries were built during the 1976–78 period; in June 1979, 89 of the 104 operating fuel distilleries were annex distilleries attached to preexisting sugar mills (Sperling, 1988). The main bottleneck was the lack of financing to move towards autonomous distilleries that could expand capacity, needed to reassure automakers of a steady supply. In fact, signals to reduce project financing came directly from the Central Bank in 1977–78 (Barzelay, 1986). By late 1978, excess sugar capacity was more than used up, with the 3.5 billion target reached (Demetrius, 1990) and the 20% substitution of ethanol was being approached. The government began to consider taking the next logical steps of replacing petroleum with pure alcohol, requiring new fuel transportation infrastructure, and new automobiles that could handle higher blends of alcohol. Each of these steps required the development of autonomous and larger scale distilleries. However, the aforementioned fragmentation of interests both within and outside of the government prevented decisive action. In fact, there was no consensus up through 1978 as to whether the alcohol program was a short-term measure to help out sugar growers or a longterm energy policy solution. This led to major problems in terms of lack of financing not only for increased alcohol production but for storage tanks, transportation infrastructure, and facilities to prepare ethanol mixtures. The problem was acute in the northeast. Moreover, the level of imports of crude oil had not declined, thus negating the hoped for balance of payments benefits (Barzelay, 1986). On June 6, 1979, in line with the Iranian Revolution, OPEC announced a 37% price hike, breaking the deadlock and pushing President Figuerido into decisive nationalistic action to deal with the energy and financial crises, which he deemed called for ‘‘a war economy’’. That same day, the government raised the annual production target of alcohol from the current 790 million gallons to 2.8 billion gallons by 1985. It also set a goal of spending $5 billion to be invested during the next 6 years in fuel production and distribution facilities and created a higher-level body. In addition to CNAL, the government added the National Executive Commission (CENAL), and CINAL (an inter-ministerial commission) to oversee ethanol production targets. CINAL guaranteed the purchase of fuel against a certain price, set slightly higher than production costs, and the National Petroleum Council (CNP) was responsible for overseeing prices. Most importantly, government initiatives encouraged the auto industry to make the crucial decision in 1979 to begin manufacturing alcohol vehicles (Sperling, 1988; Rosillo-Calle and Cortez, 1998). This coincided with the establishment of the Copersucar Center of Technology (CTC) in 1979.
4. Honeymoon phase II, 1979–85 For many years Brazilian cars had been designed to burn gasoline with up to about 20% ethanol, so the initial target of blending up to 20% ethanol required no response or action from the automakers. Although privately they remained skeptical of the government’s resolve, automakers investigated the possibility of producing vehicles that could function on straight alcohol. Some parent companies, especially Ford and Volkswagen, already had initiated research in their home countries and had transferred that initial development work to their Brazilian subsidiaries. By August 1976 GM, Ford, and VW were able to announce that no major technological barriers precluded the production of alcohol cars. However, the industry was unwilling to invest in retooling factories without an assurance of continued and reliable fuel supplies (Sperling, 1988).
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By 1979, the auto industry had become more interested in producing alcohol cars, with the hope that government incentives to purchase alcohol cars would stimulate car sales, possibly eventually including exports. This went hand-in-hand with government policies to set retail prices for alcohol, increase supply, set up alcohol pumps in fueling stations, and subsidize alcohol cars. There were also recurring fears by domestic players that exports would take off, jeopardizing domestic supply. Petrobra´s’ potential blockage was finally trumped when Investia´lcool (later renamed Brasa´lcool) was set up in 1979, by private groups, foreign financiers, and the government, to provide financing for the growth of the sector (Barzelay, 1986). Foreign investment was substantial, including $1billion in loans from 9 European and American banks and another $1 billion in loans from the World Bank (Barzelay, 1986). In mid-1979 the companies began to manufacture alcohol cars. In January 1980, 980 alcohol cars were sold, representing 1.2% of new cars sold that month. Immediately, technical problems, inherent in any new sophisticated product, began to emerge. The companies made minimal changes to the gas-based cars—including replacement of materials that were incompatible with ethanol; increases in engine compression ratios to take advantage of the higher octane rating of ethanol; adjustment of carburetors; and placement of one-totwo quart gasoline tanks under the hood to assist in cold starts. Technological improvements, including improving starting performance to 01C, were gradually introduced (Sperling, 1988). The key states support policies for the honeymoon period were (BNDES and CGEE, 2008):
Establishing higher minimum ethanol fuel blends (progres
sively increased to 25%). Guaranteeing lower prices for ethanol vs. gasoline. Guaranteeing minimal prices to bioethanol producers. Creating credit lines for sugar mills to expand capacity. Requiring the availability of ethanol at gas stations. Maintaining strategic reserves to stabilize supply.
The government used several policies specifically to push alcohol-based car production. They made alcohol car purchases attractive relative to gasoline cars by reducing the registration tax on them and providing easier credit in the form of longer payment periods and smaller down payments. The government also capped ethanol prices at 65% of that of gasoline. Sperling also reports that Brazilians felt nationalistic pride in their locally developed vehicles and fuel. The new alcohol-based cars boomed. Sales of the cars increased from 1% of total car sales in January 1980 to 73% by December of that year. The stock of alcohol cars was further expanded by retrofitting existing gas cars. When performed by government-certified mechanics the conversion cost was $250, but by early 1980 these mechanics were so overwhelmed that many motorists turned to unauthorized mechanics who charged as little as $60. Many of the early retrofitted vehicles were taxicabs that, because of their high usage, had the most to gain from subsidized fuel prices. (Sperling, 1988).
5. Crisis, 1985–2002 However, the boom was short-lived. The boom surprised policymakers, consequently, market mismatches with severe shortages of alcohol, a rapid accumulation of gasoline stocks, and an inability to continue financing on that scale all surfaced (Barzelay, 1986). There were still problems with corrosion, lack of starting reliability, build up of carbons, and high fuel consumption, especially in the retrofitted vehicles. There were also concerns about tight alcohol supplies, inflationary pressures from
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the diversion of agriculture to fuel supplies, and the need to continue importing diesel fuel (which couldn’t be replaced by ethanol). The diesel left gasoline as a by-product, which then was re-exported. Moreover, world sugar prices began to increase. As a result, the government gradually lifted the price ceilings on ethanol in late 1980, raising the ethanol price from 40% to 65% of gasoline. This led to immediate drops in consumer demand for alcohol cars, from 73% of new car sales in December 1980 to just 9% in July 1981. Also, in June 1981, the government decided to suspend credit subsidies, as opponents labeled it a source of inflation with no real benefits in reducing oil imports. The cycle renewed again, as, from 1981–2, the government experimented with various policies to re-incentivize the sector, including reducing alcohol prices; reducing taxes on alcohol cars; assuring that alcohol prices would be at or below 59% of gas prices for 2 years; additional subsidies for the purchase of taxis and even lower alcohol prices for taxis. Not surprisingly, this resulted in a mushrooming of ‘‘part-time’’ cab drivers. In mid-1982, the price of owning and operating an alcohol-fueled car was roughly equivalent to a gas-powered one (Sperling, 1988; Barzelay, 1986). Petrobra´s also moved to support the Proa´lcool program as Brazil went into a full-scale debt and financial crisis. It offered to provide capital and purchase stocks from producers (Sperling, 1988). However, the previous year’s reversals had shaken consumer and producer confidence in the government’s commitment to the sector, and recovery was delayed (Barzelay, 1986). By year-end 1985, with 85–90% of all new cars being alcohol powered, over 2 million of Brazil’s 10 million car fleet was fueled entirely by ethanol. The generous subsidies drew major new private investment into the production of ethanol in autonomous distilleries (autonomas), i.e., ones not attached to sugar mills. Autonomous plants (as opposed to annexes on sugar mills) accounted for over half of all ethanol output (Demetrius, 1990). However, progress was cut short by external events. In 1986, in line with the collapse of world oil prices, research and development funding was cut and guaranteed purchase prices were set below average production costs. Fluctuating blend ratios further confused matters. Moreover, a significant rise in world sugar prices led the government to free sugar export market restrictions. This led directly to severe ethanol shortages and shook consumer confidence in alcohol-based vehicles, leading ironically to Brazil becoming the world’s largest importer of ethanol from 1989–96. In 1989, the government lowered tax rates for gasoline cars, leading to massive declines in alcohol-based cars (van den Wall Bake, 2006; Kojima and Johnson, 2005). With global oil prices dropping and financial crisis reigning, there was no longer political will to continue with massive subsidies for the program. The government had created the Program Nacional de Melhoramento de Cana-de Ac- ucar (Planalsucar) in 1970 to develop new sugarcane varieties, and supplement the work of the IAA (Sugar and Alcohol Institute) but both were closed down in the 1990s. An ethanol supply shortage in 1991 further dampened support for the program. The ProAlcool program was officially ended on February 15, 1991, and the CNP, CNAL, and CENAL were closed. Throughout the 1990s, subsidies and regulation were gradually removed. In 1993, in an attempt to arrest the deterioration of the sector, the government passed a law requiring all gas to be blended with 20–25% ethanol. Sugarcane prices, including freight to mills and distilleries, were deregulated from January 1, 1997, though the government also instituted a new tax (CIDE) that applied only to gasoline. The last government sugarcane harvest and ethanol plan was published in May 1997. Anhydrous ethanol was deregulated in May 1997, and hydrous ethanol in February 1999. Gasoline prices were liberalized in 1998. The 40% tariff quotas for sugar exports were eliminated and market-based prices for anhydrous ethanol become effective on
May 1, 1997. By 1997–98, just 1000 pure alcohol vehicles were sold. In response to the crisis, 181 alcohol producers formed a cartel in May 1999 that led to an exclusivity agreement over the next 3 years designed to control the supply of their output. As a result of the agreement, the price of anhydrous ethanol doubled and hydrous ethanol tripled over the next year, while petroleum prices rose by just 50% (Walter et al., 2006; Rosillo-Calle and Cortez, 1997; Rothkopf, 2007; Kojim and Johnson, 2005).
6. The comeback and current issues (2003-present) The industry became revitalized only with the introduction of flex fuel vehicles (FFVs) in March 2003. The government gave the emerging market a major spur when it reclassified FFVs as eligible for the same tax breaks as alcohol-based vehicles in August 2002 (Kojima and Johnson, 2005). FFVs can use various mixtures of alcohol and gas, thus allowing consumers to react to the different prices signals of the 2 markets. In early 2005, the sale of FFVs surpassed gas vehicles, accounting for 57% of all sales (Walter et al., 2006). The tax system still favors ethanol. As of January 2006, at the retail level, taxes for gasoline were 52.12%, 58% higher than pure hydrated ethanol. Anhydrous ethanol, mixed with gasoline, is untaxed, so it is clear the government favors this market (Martines-Filho et al., 2006). Fig. 1 illustrates that the production of alcohol appears to be taking on a new positive trajectory with the introduction of FFVs. Table 1 reinforces the rapid rise and decline of alcohol fuel vehicles, along with the stunning increase in FFVs in Brazil. The maturity of the industry is also marked by increases in economies of scale for mills and distillation plants, so that the industry is no longer a side business for sugar producers, and by the development of a new side business of cogeneration of power from ethanol plants (Goldemberg, 2007). The industry became increasingly vertically integrated over time (Conde´ de Carvalho et al., 1993). The Government regulates the sector through CINAL, the interministerial commission for alcohol, which includes representatives of the Ministries of: Industry, Commerce and Tourism; Mines and Energy; Finance; Agriculture, Division of supply and Agrarian Reform; Science and Technology; Environment, Water and Legal Amazon; Planning and Budget (Rosillo-Calle and Cortez, 1997). Government-supported research and development has been key to growth. Sa˜o Paulo has also made substantial investments in genetics research and improving sugarcane breeding. Productivity in every aspect of the industry has increased markedly over time. New varieties, biological pest control, improved management based on operations research, improved milling capacity, fermentation and distillation techniques, and greater soil selectivity have all contributed. The state of Sa˜o Paulo’s Instituto Agronoˆmico de Campinas (IAC) and Instituto Biolo´gico have complemented the long-standing efforts of CTC. The Centro Tecnologia Aerona´utica was also instrumental in helping to develop the ethanol-based auto engines. As a result, average sugarcane production yields increased from 3900 l/ha/year in the early 1980s to 5600 in 2001, or at an estimated annual growth rate of 2.3%/year from 1975–2004. Brazil is in a unique position for improvements on this scale because of agricultural availability and the fact that there is no need for irrigation of Brazilian sugarcane fields (Walter et al., 2006; Martines-Filho et al., 2006; van den Wall Bake, 2006). Sugarcane producers are paid through a price system based on the end use, either ethanol or sugar. The Organizac- a˜o dos Plantadores de Cana do Estado de Sa˜o Paulo (ORPLANA, Producers) and the Uniao da Agroindustriea Canavieira de Sa˜o Pauo (Unicamills) agreed in 1999 to a non-profit payment system called CONSECANA-SP (Conselho dos Productores de Cana-de-Ac- u´car,
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20 18 16 14
M^3
12 10 8 6 4 2
/9 2 92 /9 3 93 /9 4 94 /9 5 95 /9 6 96 /9 7 97 /9 8 98 /9 9 99 /0 0 00 /0 1 01 /0 2 02 /0 3 03 /0 4 04 /0 5 05 /0 6 06 /0 7
91
90
/9 1
0 Year Fig. 1. Brazil total alcohol production, 1990–2007. Source: UNICA, includes both hydrous and anhydrous production.
Table 1 Sales of Brazilian vehicles by fuel type, 1979–2005. Year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005(*) Total
Gasoline
Alcohol
906,885 627,050 344,490 365,520 78,816 33,563 26,675 62,020 31,240 77,327 260,881 542,862 526,600 476,409 706,487 964,555 1,234,254 1,432,656 1,554,116 1,103,210 981,508 1,188,720 1,273,930 1,206,664 1,108,537 1,077,945 614,751
3120 240,643 137,307 232,575 579,328 565,536 645,551 697,049 458,683 566,482 399,529 81,996 150,982 195,503 264,235 141,835 40,707 7647 1120 1224 10,947 10,292 18,335 55,961 39,707 50,949 27,081
18,807,671
5,624,324
Flex fuel
Total (Alcohol+Flex)
Total
48,178 328,379 755,810
3120 240,643 137,307 232,575 579,328 565,536 645,551 697,049 458,683 566,482 399,529 81,996 150,982 195,503 264,235 141,835 40,707 7647 1120 1224 10,947 10,292 18,335 55,961 87,885 379,328 782,891
910,005 867,693 481,797 598,095 658,144 599,099 672,226 759,069 489,923 643,809 660,410 624,858 677,582 671,912 970,722 1,106,390 1,274,961 1,440,303 1,555,236 1,104,434 992,455 1,199,012 1,292,265 1,262,625 1,196,422 1,457,273 1,464,010
1,132,367
6,756,691
25,630,730
Notes: 2005—through November. Source: UNICA from ANFAVEA statistics.
Asucar e A´lcool do Estado de Sa˜o Paulo-Consecana) that seeks to stabilize prices (Martines-Filho et al., 2006). Foreign interest and investment in the sector have increased rapidly in recent years, as foreign companies have begun to note the potential for Brazilian exports. Japan recently signed an agreement with Brazil to develop a pipeline for export of ethanol. A wide range of companies and investors from around the world have begun to purchase or create joint mergers with Brazilian
counterparts, including Goldman Sachs, Meryll Lynch, UBS Pactual, Louis Dreyfus, Bunge, Cargill, British Petroleum, Mitsui, Bharat Petroleum, and Hindustan Petroleum, leading to greater industry concentration (BNDES and CGEE, 2008). However, given the recent fallout of oil prices, it remains to be seen if the flurry of activity will die out until the world economy recovers. Certainly, Brazil’s grand designs for large ethanol pipeline infrastructure to ports for exporting with foreign investors are likely to be put on hold in the current environment. By contrast, there is considerable concern over conditions for sugarcane workers and regional disparities. These have been characterized as unsafe, poorly paid, and seasonal (Novaes, 2007). Sa˜o Paulo has long since surpassed the northeast as the centre of sugarcane and ethanol production. There are also concerns over water contamination from the waste ‘‘vinasse’’ of the distillation process. However, there seems little reason for concern over ethanol leading to large-scale substitution of food for fuel, at least in Brazil. Sugarcane covers 10% of cultivated land, but just 1% of all arable land in the country (Goldemberg, 2007). The Brazilian case also lends itself to a strong argument of net environmental improvement. Goldemberg states that ethanol ‘‘allowed the phasing-out of lead additives, MTBE, and sulfur, and reduced carbon monoxide emissions (2007)’’. The government has addressed one of the more harmful effects of harvesting, namely the controlled burning of fields which facilitates manual harvesting. In March 2000, the government moved to eliminate burning in areas where the slope is less than 12%, pushing forward the movement towards mechanized harvesting. Approximately 55% of the national harvest will now be mechanized. The law created massive unemployment among labourers in the industry of up to 1,00,000 of a total of 1.2 million workers, and incentives to move to new more remote areas where enforcement is difficult (Martines-Filho et al., 2006).
7. Conclusion Brazilian state policies were directly responsible for the success of the ethanol program. Essentially, there were three key aspects of state intervention for the success of the program: establishing and
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supporting the market in its infant industry phase and during its market crisis; investing in infrastructure and other long-term investments, including research and development to allow the ethanol markets to function with increasing efficiency; and weaning off state support once the market became viable. The government’s pushing of the industry led directly to the technological breakthrough of FFVs that has finally made the market viable in the long-run. Policies aimed at supporting the market included minimum blending requirements, price floors, and major subsidies. Goldemberg (2007) estimates overall subsidies to be around $30 billion over 20 years, but states that more than $50 billion in petroleum imports were saved over the same period as a result of the program. Kojima and Johnson (2005) estimate that the net-oftax price of ethanol more than halved between 1980 and 2001. BNDES and CGEE (2008) state that subsidies to the industry between 1975 and 89 were approximately $7.1 billion, with $4 billion coming from the Brazilian Government and the rest from private sources. They note that $195.5 billion in foreign exchange; $69.1 billion in avoided imports, and $126.4 billion in foreign debt interest were saved through the program. With petroleum prices likely to return to 2008 highs once the current economic recovery takes hold, the sky seems to be the limit in terms of the growth potential for ethanol markets over the long-term. There should be plenty of momentum for the establishment of an international biofuels market (Hira, forthcoming). There are certainly ample opportunities for domestic substitution of petroleum among other sugarcane growers, however export opportunities require a considerably more active state along the lines of what we have described here. Brazil should become a leading exporter, if certain barriers can be overcome. The main impediments at the moment are the need for infrastructure investment, such as pipelines for developing exports, and high levels of protectionism in the North. Regardless, sugar-based ethanol could be replicated in many other developing countries with great benefits. Brazil shows that there are viable alternatives to a purely petroleum-based economy, if the state is willing to shape markets and technologies into productive directions.
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