5.1 Biofuels in Brazil: How and Why
95
5.1.3 Brazil’s Biofuel Policy Framework
Commercial biofuel policy in Brazil dates back to the 1930s, when the first ethanol
blending mandates came to place. Sugar export was key for the country’s colonial
economy since the 16
th century. Although by the first half of the twentieth century
sugar was being used primarily for domestic consumption, this changed after the
Cuban Revolution in 1959 left the large US market without a major supplier. Upon
request from the private sector, there were significant public investments in the 1960s
and early 1970s on sugarcane breeding, yield improvement, and industrial processing
capacity, in addition to the subsidization of that sector (Moreira 2007; see Table 5.1).
By 1975, a crisis of overproduction led to record-low prices. Meanwhile, Brazil
was spending large amounts of foreign exchange to import oil at soaring costs.
These two factors led to a program of massive public financing for setting up
ethanol distilleries (the “Pro-Alcohol” program). Besides, new regulations mandated
the purchasing and blending of anhydrous ethanol at the rate of 22% in all gasoline (Szmrecsányi and Moreira 1991). In 1979, the government convinced—with
fiscal incentives—the automobile industry to manufacture cars running on “pure”
(hydrated) ethanol. This initiative diverted even more of the sugarcane overproduction and helped raise sugar prices. Brazil then lived its first ethanol boom, with record
sales of ethanol-fueled cars in 1985.
By the late 1980s, however, oil prices had decreased, sugar prices increased,
and many producers shifted away from ethanol, leading to supply shortages and
massive consumer dissatisfaction. In addition, subsidies to (then more expensive)
ethanol created a government budget deficit, which led to significant reform and
the near dismantling of the program in a broad deregulation phase in tune with
the neoliberal zeitgeist of the 1990s. Sugar and ethanol production and trade were
liberalized, and sales of ethanol-fueled cars plummeted. Only the mandatory blending
was maintained (Shikida et al. 2011; see Table 5.2).
The 2000s saw the resurgence of ethanol and new governmental engagement.
The new approach (Law 10.453/2002) no longer relied on state-controlled prices
and production but liberalization combined with economic incentives through tax
breaks and public credit from Brazil’s major development bank (BNDES). Fiscal
incentives stimulated the introduction of flex-fuel cars in 2003, giving new traction
to the commercialization of “pure” ethanol (Di Giulio 2006). Since its price is no
longer set by the government but still should remain competitive with that of gasoline,
the new policy became to tune the rate of ethanol blending (18–27%) as a market
regulation tool. If “pure” ethanol prices are too high, the government can reduce the
rate of anhydrous ethanol blended in gasoline to release supplies and lower them.
5
Since 2015 the blending rate has been fixed at 27%, but the government keeps that
as a lever.
All these measures became part of the 2006 National Agroenergy Plan and were,
for the first time, presented under a sustainable development rationale (see MAPA
5 It was estimated that each percentage point down meant additional 250 million liters of ethanol
that could be released in “pure” form in the market, bringing prices down (Reuters 2011).
95
5.1.3 Brazil’s Biofuel Policy Framework
Commercial biofuel policy in Brazil dates back to the 1930s, when the first ethanol
blending mandates came to place. Sugar export was key for the country’s colonial
economy since the 16
th century. Although by the first half of the twentieth century
sugar was being used primarily for domestic consumption, this changed after the
Cuban Revolution in 1959 left the large US market without a major supplier. Upon
request from the private sector, there were significant public investments in the 1960s
and early 1970s on sugarcane breeding, yield improvement, and industrial processing
capacity, in addition to the subsidization of that sector (Moreira 2007; see Table 5.1).
By 1975, a crisis of overproduction led to record-low prices. Meanwhile, Brazil
was spending large amounts of foreign exchange to import oil at soaring costs.
These two factors led to a program of massive public financing for setting up
ethanol distilleries (the “Pro-Alcohol” program). Besides, new regulations mandated
the purchasing and blending of anhydrous ethanol at the rate of 22% in all gasoline (Szmrecsányi and Moreira 1991). In 1979, the government convinced—with
fiscal incentives—the automobile industry to manufacture cars running on “pure”
(hydrated) ethanol. This initiative diverted even more of the sugarcane overproduction and helped raise sugar prices. Brazil then lived its first ethanol boom, with record
sales of ethanol-fueled cars in 1985.
By the late 1980s, however, oil prices had decreased, sugar prices increased,
and many producers shifted away from ethanol, leading to supply shortages and
massive consumer dissatisfaction. In addition, subsidies to (then more expensive)
ethanol created a government budget deficit, which led to significant reform and
the near dismantling of the program in a broad deregulation phase in tune with
the neoliberal zeitgeist of the 1990s. Sugar and ethanol production and trade were
liberalized, and sales of ethanol-fueled cars plummeted. Only the mandatory blending
was maintained (Shikida et al. 2011; see Table 5.2).
The 2000s saw the resurgence of ethanol and new governmental engagement.
The new approach (Law 10.453/2002) no longer relied on state-controlled prices
and production but liberalization combined with economic incentives through tax
breaks and public credit from Brazil’s major development bank (BNDES). Fiscal
incentives stimulated the introduction of flex-fuel cars in 2003, giving new traction
to the commercialization of “pure” ethanol (Di Giulio 2006). Since its price is no
longer set by the government but still should remain competitive with that of gasoline,
the new policy became to tune the rate of ethanol blending (18–27%) as a market
regulation tool. If “pure” ethanol prices are too high, the government can reduce the
rate of anhydrous ethanol blended in gasoline to release supplies and lower them.
5
Since 2015 the blending rate has been fixed at 27%, but the government keeps that
as a lever.
All these measures became part of the 2006 National Agroenergy Plan and were,
for the first time, presented under a sustainable development rationale (see MAPA
5 It was estimated that each percentage point down meant additional 250 million liters of ethanol
that could be released in “pure” form in the market, bringing prices down (Reuters 2011).