Hidden Ethanol Subsidies In Brazil Revisited

1. The Economics of Alternative Energy Sources and Globalization: The Road Ahead Professors Troy G. Schmitz, James Seale, and Andrew Schmitz Arizona State University and University of Florida Embassy Suites Hotel Orlando Airport November 15–17, 2009 Hidden Ethanol Subsidies In Brazil Revisited

2. Issues • Overview of Brazil’s Sugar and Ethanol Production • Brazil’s Hidden Subsidies • Brazil’s Ethanol/Gasoline Blend Ratios • Relative Oil, Sugar and Corn Prices • Comparison With the U.S.

3. TABLE__. Brazil’s sugar and ethanol Production

4. Brazil’s Sugar Production and Exports Brazil dominates world sugar production

5. Growth in ethanol production in brazil

6. Net oil imports and the Price of oil

7. Petrol is now the alternative fuel in brazil

8. FFv’S: MAIN DRIVER FOR ETHANOL CONSUMPTION

9. 2008/2009 Harvest and Projections for the Brazilian sugarcane industry

10. Sugar is today the best available feedstock

11. Ethanol Doesn’t Work Above $0.20/lb Sugar

12. Brazil’s Hidden SUbsidies Brazil is the pioneer of the ethanol industry: as well as being the world’s largest exporter, it is also its second-largest producer. At present, Brazil is also the only country that uses ethanol as a complete substitute for gasoline. At least four components have contributed significantly to the development of the Brazilian ethanol industry: governmental support, research and development, abundant raw materials (especially sugar cane) and labor. Brazil’s commanding position in the global ethanol industry is partly owed to its government’s support of the industry since the mid 1970’s. Although ethanol production in Brazil dates back to the 1920’s, it remained a minor industry until 1975 when Brasilia decided to establish a national ethanol program (PROALCOOL).

13. Brazil’s Hidden Subsidies (Continued) The main goal of the program was to reduce the country’s dependence on expensive oil imports, which were depriving Brazil of needed hard currency, while using the country’s sugar industry to produce a domestic fuel. The program initially consisted of incentives aimed at the supply side of the industry: quotas, marketing orders, price setting, subsidies interest rates and other measures that helped foster the ethanol industry. Later, in 1979, Brasilia enhanced the PROALCOOL program by legislating incentives aimed at the demand side of the industry: tax incentives to buyers of ethanol cars and consumer price fixing that pegged the price of ethanol to the price of gasoline (Latin Lawer).

14. Blend Ratio Model A significant relationship exists between the blend/ratio model set by the Brazilian government and such variables as sugar prices and ethanol exports. An empirical analysis of the factors determining the Brazilian blend ratio is given in: Determinants of Brazil’s ethanol sugar blend ratios. Andrew Schmitz, James L. Seale, Jr. and Troy G. Schmitz. ISJ 2004, Volume 106

15. Brazil’s ethanol production (Anhydrous and Hydrous)

16. Brazilian Sugarcane Production Mix

17. The ethanol/gasoline blend Ratios

18. The ethanol/gasoline blend Ratios (continued) Figure X. Theoretical model depicting an increase in ethanol blend ratios Source: Brazil’s ethanol program: The case of hidden sugar subsidies. Troy G. Schmitz, Andy Schmitz James L. Seale, Jr. ISJ 2003 Volume 105

19. FIGURE __. TRADE AND HIDDEN SUBSIDIES

20. U.s. ethanol production

21. Do Prices matter? Unless sugar prices drop significantly in the United States (which is highly unlikely based on current U.S. Farm Policy), corn will serve as a major input for ethanol production and for non-sugar sweeteners. Source: Sweetener-ethanol complex in Brazil, the United States and Mexico: Do prices matter? Andrew Schmitz, James L. Seale, Jr. and Troy G. Schmitz. ISJ 2003 Volume 105.

22. The united states (corn prices)

23. u.s.: index of monthly crude oil, gasoline, corn, and ethanol prices

24. U.s. and Brazilian ethanol industries compared

25. U.s. and Brazilian ethanol industries compared (Continued)

26. Ethanol Profits begin to return

27. TABLE__. U.S. ETHANOL PRODUCTION AND CORN AND FUEL PRICES

28. New energy directions in brazil • Bioelectricity—Brazil is emerging as a leader in the generation of bioelectricity (Emmanuel Desplechin, World Biofuels Conference, Seville- 5/28/2009) • Biodiesel—(Gabriella et al., Energy Policy 2007) • The use of biofuels is not only an economical and secure alternative to fossil fuels but it also has many favorable environmental and social aspects: (i) bioidiesel is biodegradable and harmless; (ii) it can be produced from renewable materials; (iii) ethyl or methyl fatty acid esters contain no sulfur; (iv) biodiesel decreases soot emission considerably (up to 50%); (v) biodiesel emits about the same amount of CO2 that is absorbed during cultivation of the oilseed; (vi) it does not contain any of the carcinogens found in diesel oil; (vii) biodiesel is not considered a hazardous material; (viii) there are numerous social and economic advantages from its use, particularly in developing countries such as Brazil; (ix) biodiesel represents a suitable outlet for vegetable oil industry, serving as an important tool for market regulation; and (x) it increases engine lifetime owing to a superior lubrication capability (Parente, 2003; Schuchardt et al., 1998; Ramos et al., 2003; NBB, 2004).