ELLA AREA: ENVIRONMENTAL MANAGEMENT| ELLA THEME: BRAZIL’S ETHANOL PROGRAMME
Moraes, Rodrigues 2006, above n 2, 3.
. BNDES, Rio de Janeiro.; Xavier, M.R. 2007.
.Issues Analysis n3. Competitive Enterprise Institute, Washington, DC.
STRENGTHENING AND CONSOLIDATING ETHANOLPRODUCTION
The second phase o
began in 1979, and ocused onthe production o hydrous ethanol to be used as uel in carsthat ran exclusively on this biouel, reinorcing incentives orproducers and consumers alike. In general, the combination oincentives behind both stages o
or producers andconsumers were as ollows:
For the producer
: ethanol production was stimulated byreducing ethanol-sugar price parity rom 44 litres o ethanolper 60 kg o sugar to 38 litres;
establishing higher minimumlevels o anhydrous ethanol in gasoline, which progressivelyincreased to 25%; guaranteeing remuneration through astate trading enterprise that began purchasing ethanol atavourable prices; and creating credit lines with avourableconditions, such as low interest rates or mills to increase theirproduction capacity. Finally, Petrobras, the state-owned oilcompany, made investments to acilitate ethanol distributionthroughout the country.
For the consumer
: automakers designed vehicles to runon 100% ethanol. The government-supported measures toencourage consumption included: a guaranteed maximumselling price which was lower than the price o gasoline(66% o the gasoline price); gas stations had to sell hydrousethanol at the pump; 50% price reduction on the Flat Road Taxor those using ethanol driven vehicles; exemption or taxisrom the Tax on Manuactured Goods (Imposto sobre ProdutoIndustrializado - IPI); and 5% IPI reduction or ethanol-drivencars.
Finally, though not an incentive, but a guarantee osupply, the government established the maintenance ostrategic reserves out o season.
Again, these initiatives were successul: ethanol productiongrew rom 3.7 billion to 11.6 billion litres per year between1980 and 1988, showing an average annual growth o 15%.
One actor that contributed to production increases wasthe parity o sugar and ethanol prices. At that time, thegovernment regulated everything, right down to the amountthat each plant could produce. Until 1985, Brazil’s governmentwas both a central player in the nation’s economy and amilitary dictatorship. So, when the gasoline price increased,the government adjusted the price o sugar and ethanol inorder to preserve competitiveness between them.All these policies behind
were developedthrough large investments and subsidies rom the FederalGovernment. In the beginning o the programme, the Brazilianeconomy was in a period o high growth, also known as ‘theeconomic miracle’, boosted by government expenditureand investments. In other words, this high economic growthwas achieved through domestic and external inancing,contributing, along with both international oil crises, to asignicant increase in Brazilian oreign and public debt. In the1980s, the scenario changed. The country ell into a seriouspublic debt crisis, infation rates exceeded 100% per year,
and nally, the economy stagnated.
DECLINING GOVERNMENT SUPPORT: THE END OFPROÁLCOOL
During the early 1980s, the Brazilian ethanol programmefourished with the help o government pricing policies anda World Bank loan to cover the programme’s costs; by themid-1980s, ethanol had grown to make up roughly hal oBrazil’s liquid uel supply. However, in 1985,
beganto experience problems. World oil prices dropped sharplyin the period 1985-86, reducing the immediate beneit oreplacing oil imports with ethanol. Huge iscal deicits andhigh inlation led Brazil to implement economic reormsthat included a cutback on ethanol production subsidies. Aspart o a broader reduction o subsidies, the price dierentialbetween ethanol and gasoline was eliminated, sot loans orthe construction o new reneries were cut, and support orthe ethanol programme rom state trading companies slowed,then stopped completely.
In addition to the drop in world oil prices, world sugar prices