Professors Troy G.

Schmitz, James Seale, and Andrew Schmitz

Arizona State University and University of Florida

The Economics of Alternative Energy

Sources and Globalization: The Road
Ahead

Embassy Suites Hotel Orlando Airport

November 15–17, 2009
•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.
Year Sugar Ethanol Oil Price World Raw Sugar / Ethanol Sugar / Oil
Production Production Sugar Price Ratio Price Ratio

(1000 (million gallons) ($/barrel) (¢pound)

tonnes)
2003/2004 3910 27.69 8.01 0.29
2004/2005 4068 37.66 7.85 0.21
2005/2006 26,850 4174 50.04 10.46 6.4 0.21
2006/2007 31,450 4719 58.30 15.78 6.7 0.27
2007/2008 32,100 5916 64.20 11.67 5.4 0.18
2008/2009E 30,427 7054 99.65 13.67 4.3 0.14
2009/2010E 33,559 15.94
2010/2011E 39,015
2011/2012E 42,669
E = Estimates
Brazil dominates world sugar production
 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).
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).
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
Table X Brazil: Ethanol/Gasoline Blend Ratios (Selected Years)

Year Ratio Year Ratio

1976 10% 2005 25%

1982 20% 2006 20%

1988 22% 2007 25%

1990 12% 2008 25%

2002 25% 2009 25%

Figure X. Theoretical model depicting an increase in ethanol blend ratios
Domestic Sugar Market Foreign Sugar Market
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Source: Brazil’s ethanol program: The case of hidden sugar subsidies. Troy G. Schmitz,
Andy Schmitz James L. Seale, Jr. ISJ 2003 Volume 105
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.
Characteristic Brazil United States Units/Comments

Feedstock Sugarcane Corn/Maize Main cash crop for ethanol

production; U.S. has less than 2%
from other crops
Total ethanol fuel 6,472 9,000 Million U.S. liquid gallons
production (2008)
Total arable land 355 270 Million hectares
Total area used for ethanol 3.6 10 Million hectares (% total arable)
crops (2006) (1%) (3.7%)
Productivity per hectare 6,800−8,000 3,800−4,000 Litres of ethanol per hectare; Brazil
is 727 to 870 gal/acre (2006) and
U.S. is 321 to 424 gal/acre (2003)
Energy balance (input 8.3 to 10.2 1.3 to 1.6 Ratio of the energy obtained from
energy productivity) ethanol/energy expended in its
production
Estimated GHG emissions 86−90% 10−30% % GHGs avoided by using ethanol
reduction instead of gasoline, using existing
cropland (No ILUC)
Characteristic Brazil United States Units/Comments
Full life-cycle carbon intensity 73.40 105.10 Grams of CO2 equivalent released per MJ of
energy produced, includes indirect land use
changes
Estimated payback time for 17 years 93 years Brazilian cerrado for sugarcane and U.S.
GHG emissions grassland for corn; land use change
scenarios by Fargione
Flexible-fuel vehicle fleet 8.2 million 8.0 million Automobiles and light trucks only; Brazil as
of July 2009 (E100 FFVs) and U.S. as of
early 2009 (E84 FFVs)
Ethanol fueling stations in the 35,017 1,963 % of total gas stations in the country; Brazil
country (100%) (1%) as of April 2008 and U.S. as of December
2006
Ethanol’s share in the gasoline 50% 4% % of total consumption on a volumetric
market basis; Brazil as of April 2008 and U.S. as of
December 2006
Cost of production (USD/gallon) 0.83 1.14 2006/2007 for Brazil (22¢/litre) and 2004
for U.S. (35¢/litre)
Government subsidy (USD) 0¢ 45¢/gallon Brazilian ethanol production is no longer
subsidized; U.S. tax credit since January
2009
Import tariffs (USD) 0¢ 54¢/gallon As of June 2009, Brazil does not import
ethanol, but U.S. does
Year Ethanol Ethanol Corn Price Oil Price Unleaded Gas Corn / Oil
Production Prices Price Price Ratio
(million ($/gallon) ($/bushel) ($/barrel) ($/gallon)
gallons)
2000/2001 1.51
2001/2002 1.46
2002/2003 1.36
2003/2004 2,800 2.42 27.69 1.59 0.09
2004/2005 3,400 2.06 37.66 1.88 0.05
2005/2006 3,900 2.00 50.04 2.30 0.04
2006/2007 4,900 2.14 3.04 58.30 2.59 0.05
2007/2008 6,500 1.94 4.20 64.20 2.80 0.07
2008/2009E 3.72 4.06 99.65 3.27 0.04
2009/2010E
2010/2011E
2011/2012E
E = Estimates
•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).