Brazil’s biofuel sector: What future?
For many years Brazil was the world’s largest biofuel producer, until it was overtaken by the US in 2006. Brazil’s biofuel production reached 28.5 billion litres in 2010, which according to International Energy Agency (IEA) estimates is 27% of world biofuel production, most of which is ethanol, only a small portion (2.4 billion litres) of that being biodiesel. For 2011, however, IEA estimates show a drop of more than 4 billion litres in Brazilian biofuel production compared with the previous year. But there is good reason to believe that this drop will prove temporary.
Brazil has been producing ethanol for fuel since the early 20th century, but it was not until 1975 that the Brazilian government launched the National Alcohol Program (PROALCOOL), driven by energy security concerns resulting from the first oil crisis in the 1970s and the low cost of sugar at the time. To achieve the programme’s key target–the domestic production of 3.5 billion litres of ethanol from sugarcane by 1980–the government introduced support mechanisms such as low interest loans for farmers and ethanol producers and a fixed, financially supported, price at the pump to ensure it could compete with petrol. In addition, a mandate for blending ethanol with regular petrol was adopted that has since ranged from E10 (10% ethanol) to E25, depending on sugar prices and ethanol supply prospects.
Thanks to this policy support, and the introduction of vehicles that could run on pure ethanol, the sector grew rapidly until the late 1980s when falling oil prices, rising sugar prices and a cutback of subsidies led to a decline in ethanol production. In 1997 the Brazilian fuel market was gradually liberalised, extinguishing all price controls. Since 2002, the ethanol price relative to petrol price fluctuates freely, though in several Brazilian states ethanol benefits from an excise-tax differential compared with petrol. In 2003 the introduction of flex-fuel vehicles (FFVs) that are capable of running on any given mix of ethanol and petrol gave a new boost to the ethanol sector. Since FFVs in Brazil sell basically at the same price as conventional cars, around 90% of all vehicle sales in Brazil today are FFVs. Brazil’s first National Biodiesel Production and Use Programme (PNPB), introducing a 2% biodiesel blend in regular diesel, was only launched in 2004. Thanks to the introduction of a 5% biodiesel mandate in 2008, this relatively small sector is set to grow.
The political responsibility for ethanol and biodiesel policy differs somewhat between the two sectors, though the common aim is for all the key players to be involved in the policy formulation process. So, while the National Energy Policy Council holds overall responsibility for biofuel policies, those that concern the sugarcane ethanol sector are developed in co-operation with the Interministerial Council for Sugar and Ethanol. This umbrella body is led by the Ministry of Agriculture and includes the Ministry of Mines and Energy, the Ministry of Finance, and the Ministry of Development, Industry and Trade. On the biodiesel side, policies are also being developed with the involvement of the Ministry of Mines and Energy, as well as the National Petroleum, Gas and Biofuel Agency, but they are implemented and supported largely through the Ministry of Agrarian Development, which also works to combat rural poverty and social exclusion. In other words, many players and interests are affected by the biofuel sector and have a stake in its future. The outlook is mixed. While biodiesel production is expected to grow, the ethanol sector is currently facing some serious challenges that were reflected in a drop in ethanol output from 2010 to 2011. The sector has been struggling since the financial crisis in 2008 that left many, in particular smaller, producers with little cash. This resulted in slower than expected investment in new distilleries and in sugarcane cultivation in general. At the same time, buoyant demand meant relatively high global sugar prices that encouraged many producers to postpone the replanting of established sugarcane crops beyond the usual rotational six years. As a result, the average age of the existing sugarcane crop has increased and average yields have fallen. Moreoever, unfavourable weather conditions have affected three subsequent harvesting periods, adding to the sector’s woes.
With Brazil and other sugar-producing countries suffering from poor sugarcane harvests, world sugar prices have recently risen to levels not seen since 1981. The high sugar prices, combined with a steady rise of the Brazilian real, have led to a roughly 40% increase in ethanol production costs compared to a few years ago, making producers switch from ethanol to sugar production. As ethanol production has dropped, so domestic prices have risen further still, and this has driven consumers away from ethanol and towards normal petrol, whose price is effectively capped by the government. Meanwhile, ethanol imports, primarily from the US, have increased, and the government has reduced the mandatory share of ethanol in petrol from 25% to 20%. The Brazilian ethanol sector should grow more slowly than expected a few years ago, not least because replanted and newly established sugarcane fields take several years to produce crops at an optimal yield. In the meantime, the government has introduced plans to offer tax reductions and access to low-interest loans in order to encourage producers to build up strategic stocks of ethanol for release in the off-season.
However, the medium-term outlook is brighter. Brazilian sugarcane is one of the highest-yielding biofuel feedstocks in the world today (up to 90 tons/ha/ year, resulting in more than 6 000 litres of ethanol) and can be produced at a relatively low cost. Moreover, converting sugarcane to ethanol is highly efficient, as the process is fuelled by the electricity and heat generated by burning the crop’s crushed residue, known as “bagasse”. In fact, sugarcane ethanol can provide lifecycle savings in greenhouse gas emissions of the order of 70%-100% compared with conventional petrol. These emissions savings are considerably higher than those achieved by most other biofuels produced from starch and vegetable oil. Corn ethanol, for instance, typically manages some 20%-50% in emissions savings compared with petrol. It comes as no surprise, therefore, that sugarcane ethanol from Brazil has become particularly attractive in markets such as the US and the EU, which are obliged to respect strict criteria on both the quality and quantity of the biofuels they use as part of their emissions reduction efforts. This suggests that import demand for sugarcane-based biofuel is likely to grow over time.
However, more demand means more land needs to be cultivated, which means risking more emissions as soil is turned over and prepared. On the plus side, sugarcane is not grown in the Amazon region, so it does not pose a direct threat to the rainforest. However, sugarcane can compete with other crops such as soy, which if displaced, could themselves cause deforestation pressure. To reduce this risk, the Brazilian government has introduced the Agro-Ecological Sugarcane Zoning programme (AEZ Caña). The programme identifies areas of underutilised pasture land that can be made available for sugarcane production in a sustainable manner, for instance, by increasing cattle densities on remaining pastures.
Several international companies are investing in Brazil’s ethanol sector and interest is growing in developing advanced biofuels, in particular cellulosic ethanol and technologies for the conversion of sugar to “drop-in” biofuels, such as those used in aviation. With growing domestic and foreign demand for ethanol and biodiesel–fuelled largely by governmentmandated blending requirements in the importing countries–Brazil’s biofuel sector is set to grow. Though future sugar and petrol prices will always add some uncertainty, the speed of the sector’s development will be determined by a variety of factors that policy can influence, including the access to funding and infrastructure investments in new sugarcane and soybean production areas.
IEA (December 2011), Oil Market Report.
Teixeira de Andrade, R. M. and A. Miccolis (2011), Policies and institutional and legal frameworks in the expansion of Brazilian biofuels, Working Paper 71, Center for International Forestry Research, Bogor.
Lichts, F. O. (2011), World Ethanol and Biofuels Report, Vol. 10, No. 6.
©OECD Observer No 287 Q4 2011
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