Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
BRIEF: Government Intervention to Strengthen the Ethanol Sector: Lessons from Brazil

BRIEF: Government Intervention to Strengthen the Ethanol Sector: Lessons from Brazil

Ratings: (0)|Views: 36|Likes:
Published by ELLA Programme
The development of Brazil’s ethanol sector - its expansion, commercialisation, up-take, competitiveness and profitability - can largely be attributed to government policies. Strategies to make ethanol production more attractive, practices to enable the use of ethanol in automobiles, tax breaks and price fixing, are just some of the policies underpinning ethanol’s early commercial development in Brazil. Since the beginning of the Próalcool programme, the ethanol sector has depended upon government support, making a series of demands to which the government has responded. Even given these public efforts to boost and stabilise the ethanol market, there have been gains and losses in terms of competitiveness and profitability due in part to dynamic interactions with the gasoline and sugar markets. Other factors, including an increase in production costs and reduction in investments, also affected ethanol’s competitiveness. The lessons learned by Brazil about managing these ups and downs could be useful for policymakers and private sector leaders from other regions facing the same challenges. In particular, these key lessons learned might allow other countries to avoid losses, such as investments in technologies now deemed redundant, and provide guidance about how and when to introduce - or reduce - government support like subsidies and tax breaks.
The development of Brazil’s ethanol sector - its expansion, commercialisation, up-take, competitiveness and profitability - can largely be attributed to government policies. Strategies to make ethanol production more attractive, practices to enable the use of ethanol in automobiles, tax breaks and price fixing, are just some of the policies underpinning ethanol’s early commercial development in Brazil. Since the beginning of the Próalcool programme, the ethanol sector has depended upon government support, making a series of demands to which the government has responded. Even given these public efforts to boost and stabilise the ethanol market, there have been gains and losses in terms of competitiveness and profitability due in part to dynamic interactions with the gasoline and sugar markets. Other factors, including an increase in production costs and reduction in investments, also affected ethanol’s competitiveness. The lessons learned by Brazil about managing these ups and downs could be useful for policymakers and private sector leaders from other regions facing the same challenges. In particular, these key lessons learned might allow other countries to avoid losses, such as investments in technologies now deemed redundant, and provide guidance about how and when to introduce - or reduce - government support like subsidies and tax breaks.

More info:

Categories:Types, Research
Published by: ELLA Programme on Apr 18, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

10/11/2013

pdf

text

original

 
ELLA AREA: ENVIRONMENTAL MANAGEMENT| ELLA THEME: BRAZIL’S ETHANOL PROGRAMME
1
ELLA Area: Environmental ManagementELLA Theme: Brazil’s Ethanol Programme
The development o Brazil’s ethanol sector - its expansion,commercialisation, up-take, competitiveness and proitability- can largely be attributed to government policies. Strategies tomake ethanol production more attractive, practices to enablethe use o ethanol in automobiles, tax breaks and price ixing,are just some o the policies underpinning ethanol’s earlycommercial development in Brazil. Since the beginning o the
Próalcool 
programme, the ethanol sector has depended upongovernment support, making a series o demands to which thegovernment has responded. Even given these public eorts toboost and stabilise the ethanol market, there have been gains andlosses in terms o competitiveness and protability due in part todynamic interactions with the gasoline and sugar markets. Otheractors, including an increase in production costs and reductionin investments, also aected ethanol’s competitiveness. Thelessons learned by Brazil about managing these ups and downscould be useul or policymakers and private sector leaders romother regions acing the same challenges. In particular, thesekey lessons learned might allow other countries to avoid losses,such as investments in technologies now deemed redundant, andprovide guidance about how and when to introduce - or reduce -government support like subsidies and tax breaks.
SUMMARY
Policy Brief
The scale of Brazil’s ethanol production, demandand competitiveness is largely attributableto government initiatives. The varyinglevels of success of such initiatives canprovide interesting lessons for othercountries.
THE CHALLENGE OF BOOSTING ETHANOL DEMAND
Brazil embarked upon its national ethanol programme in aneort to decrease its dependence on imported energy and reduceeconomic constraints caused by international oil crises. Thecountry encountered several considerable barriers, in particularthe need to enhance both production and consumption o ethanol,though it did enjoy the advantage o an existing sugarcane industry.However, even ater overcoming these challenges, the ethanolmarket demonstrates high volatility, requiring policies to boostdemand and production. Brazil’s ethanol sector has been unableto achieve sustainable growth in supply without government
GOVERNMENT INTERVENTIONTO STRENGTHEN THE ETHANOLSECTOR: LESSONS FROM BRAZIL
LESSONS LEARNED
KEY
Government intervention was fundamental for boosting Brazil’snational ethanol programme, in particular policies requiringmandatory blending and promoting the Flexible Fuel Vehicle.The government’s active support of the ethanol programmeattracted private investment, which encouraged producers to
focus on efciency and productivity gains.
Flexibility to choose between producing ethanol or sugar
increases producer protability, but may jeopardise national
energy security.
 
2
ELLA AREA: ENVIRONMENTAL MANAGEMENT| ELLA THEME: BRAZIL’S ETHANOL PROGRAMME
1
To learn more about the story o the programme’s launch, read the ELLA Guide to Brazil’s Ethanol Programme. 
2
Moraes, M., Rodrigues, L. 2006.
. Piracicaba.
3
Ibid.; For more inormation, see also the Brazilian Government’s ocial websiteabout biouels.
support, due to both international and domestic actors.On the international side, luctuations in the prices o oil,gasoline and sugar contributed to destabilising the market.From the domestic point o view, lack o three importantactors - investments, inrastructure and long-term planning- decreased competitiveness throughout the ethanol chain.For other developing countries, eectively managingdomestic market volatility is made even more dicult due tolack o unding and adequate capacity in biouel production,distribution and use. In many cases, local demand is quite low,thereore exporting ethanol may encourage higher productionlevels on a scale which would allow ethanol to compete withossil uels. Taking examples rom the problems aced andstrategies implemented by Brazil to increase production mayenable other countries to plan and prepare or expandingbiouel production with smoother management o the ups anddowns that Brazil experienced.This Brie describes the government’s eorts to promoteand support the ethanol industry as well as the results osuch policies. The irst section analyses the government’slagship policy or the development o the ethanol sector,
Proálcool 
, then moves on to discuss declining supportor the programme and the period o relatively lowgovernment intervention in the sector. It also discusses oneo the government’s most important incentives to bolster theethanol industry: promotion o the fexible uel vehicle. Thenal section presents the current panorama acing the sector.
 KICK-STARTING ETHANOL’S EXPANSION
As a reaction to the 1970s oil crisis, the Brazilian governmentocused on establishing an ethanol industry as a strategyto reduce its economic and energy vulnerability caused byhigh dependence on imported oil. In other words, promotingethanol became a policy to strengthen national energysecurity and reduce balance o payments deicits. In 1975,the Brazilian government launched its large-scale nationalsugarcane ethanol programme,
Proálcool 
, through decree76.593.
1
The government decided to produce ethanol rom sugarcanebecause o the low cost o sugar at the time and the country’sample tradition and experience with this eedstock. Anadditional impetus came rom the act that sugar priceswere alling as a result o international market saturationat that time. The
Proálcool 
programme was able to bail outthe sugarcane sector, shiting part o the crop to ethanolproduction and taking advantage o the idle productivecapacity o mills and distilleries.The basic provision o
Proálcool 
was to mandate that gasolinebe blended with 20% anhydrous ethanol (see Text Box 1).Public sector subsidies to ensure competitive compensationor the producer, along with tax breaks in the sale and licensingo ethanol vehicles, helped kick-start the programme.In addition, the government gave incentives to ethanolproducers, such as ‘sot’ agricultural and industrial loans andguaranteed purchase o their product through the Sugar andEthanol Institute (
Instituto do Açúcar e do Álcool 
- IAA). Theyalso xed prices, taking into account sugar prices and settingthe ethanol price so that producers would be indierent tomanuacturing sugar or ethanol rom the same raw material,sugarcane. This was set at a parity o 44 litres o ethanol orevery 60 kg o sugar, which was in eect between 1975 and1979.
2
Many o these early initiatives were nanced by hightaxes on gasoline, complemented by a World Bank loan.This initial push proved quite successul: armers plantedmore sugarcane and investors built distilleries to convert thecrop into ethanol. Between 1975 and 1979, ethanol productiongrew approximately 350%, rom 555.6 million to 2.49 billionlitres per year.
3
TEXT BOX 1: Types of Fuels Available in Brazil
Hydrous Ethanol – the liquid fuel generated from ethanol. It canbe used as fuel in pure ethanol driven engines or in Flex FuelVehicles (FFVs).Anhydrous Ethanol – pure ethanol made through the process ofdehydrating the hydrous ethanol, taking out 4% of the watercontent. Is it used as an additive to be blended with pure gasoline.It is not sold in pure form at the pump.Gasoline A – pure gasoline. While gasoline A is produced inBrazil, it is only used for blending, and is not sold in pure form tocustomers at petrol stations.Gasoline C – Blended gasoline that is made up of between 75%and 82% gasoline A and 25% to 18% anhydrous ethanol. It canbe used in gasoline cars or FFVs.
 
3
ELLA AREA: ENVIRONMENTAL MANAGEMENT| ELLA THEME: BRAZIL’S ETHANOL PROGRAMME
4
Moraes, Rodrigues 2006, above n 2, 3.
5
BNDES, 2008. 
. BNDES, Rio de Janeiro.; Xavier, M.R. 2007. 
.Issues Analysis n3. Competitive Enterprise Institute, Washington, DC.
6
7
8
9
STRENGTHENING AND CONSOLIDATING ETHANOLPRODUCTION
The second phase o
Proálcool 
began in 1979, and ocused onthe production o hydrous ethanol to be used as uel in carsthat ran exclusively on this biouel, reinorcing incentives orproducers and consumers alike. In general, the combination oincentives behind both stages o
Proálcool 
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;
4
establishing higher minimumlevels o anhydrous ethanol in gasoline, which progressivelyincreased to 25%; guaranteeing remuneration through astate trading enterprise that began purchasing ethanol atavourable 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.
5
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 Taxor those using ethanol driven vehicles; exemption or taxisrom the Tax on Manuactured Goods (Imposto sobre ProdutoIndustrializado - IPI); and 5% IPI reduction or ethanol-drivencars.
6
Finally, though not an incentive, but a guarantee osupply, the government established the maintenance ostrategic reserves out o season.
7
 Again, these initiatives were successul: ethanol productiongrew rom 3.7 billion to 11.6 billion litres per year between1980 and 1988, showing an average annual growth o 15%.
8
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
Proálcool 
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 asignicant 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,
9
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 oBrazil’s liquid uel supply. However, in 1985,
Proálcool 
beganto experience problems. World oil prices dropped sharplyin the period 1985-86, reducing the immediate beneit oreplacing oil imports with ethanol. Huge iscal deicits andhigh inlation led Brazil to implement economic reormsthat included a cutback on ethanol production subsidies. Aspart o a broader reduction o subsidies, the price dierentialbetween ethanol and gasoline was eliminated, sot loans orthe construction o new reneries were cut, and support orthe ethanol programme rom state trading companies slowed,then stopped completely.
10
In addition to the drop in world oil prices, world sugar prices

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->