Lessons From Brazil

Brazil has the world’s second largest ethanol program and is capitalizing on plentiful soybean supplies to expand into biodiesel. More than half of the nation’s sugarcane crop is processed into ethanol, which now accounts for about 20 percent of the country’s fuel supply.

Initiated in the 1970s after the OPEC oil embargo, Brazil’s policy program was designed to promote the nation’s energy independence and to create an alternative and value-added market for sugar producers. The government has spent billions to support sugarcane producers, develop distilleries, build up a distribution infrastructure, and promote production of pure-ethanol-burning and, later, flex-fuel vehicles (able to run on gasoline, ethanol-gasoline blends, or pure hydrous ethanol). Advocates contend that, while the costs were high, the program saved far more in foreign exchange from reduced petroleum imports.

In the mid- to late 1990s, Brazil eliminated direct subsidies and price setting for ethanol. It pursued a less intrusive approach with two main elements—a blending requirement (now about 25 percent) and tax incentives favoring ethanol use and the purchase of ethanol-using or flex-fuel vehicles. Today, more than 80 percent of Brazil’s newly produced automobiles have flexible fuel capability, up from 30 percent in 2004. With ethanol widely available at almost all of Brazil’s 32,000 gas stations, Brazilian consumers currently choose primarily between 100-percent hydrous ethanol and a 25-percent ethanol-gasoline blend on the basis of relative prices.

Approximately 20 percent of current fuel use (alcohol, gasoline, and diesel) in Brazil is ethanol, but it may be difficult to raise the share as Brazil’s fuel demand grows. Brazil is a middle-income economy with per capita energy consumption only 15 percent that of the United States and Canada. Current ethanol production levels in Brazil are not much higher than they were in the late 1990s. Production of domestic off- and on-shore petroleum resources has grown more rapidly than ethanol and accounts for a larger share of expanding fuel use than does ethanol in the last decade.