Transcript Hidden Ethanol Subsidies In Brazil Revisited

HIDDEN ETHANOL SUBSIDIES IN BRAZIL
REVISITED
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
ISSUES
•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.
TABLE__. BRAZIL’S SUGAR AND ETHANOL
PRODUCTION
Year
Sugar
Production
(1000
tonnes)
Ethanol
Production
(million gallons)
Oil Price
World Raw
Sugar Price
($/barrel)
(¢pound)
Sugar / Ethanol Sugar / Oil
Ratio
Price Ratio
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
2010/2011E
39,015
2011/2012E
42,669
E = Estimates
15.94
BRAZIL’S SUGAR PRODUCTION AND EXPORTS
Brazil dominates world sugar production
GROWTH IN ETHANOL PRODUCTION IN BRAZIL
NET OIL IMPORTS AND THE PRICE OF OIL
PETROL IS NOW THE ALTERNATIVE FUEL IN
BRAZIL
FFV’S: MAIN DRIVER FOR ETHANOL
CONSUMPTION
2008/2009 HARVEST AND PROJECTIONS FOR
THE BRAZILIAN SUGARCANE INDUSTRY
SUGAR IS TODAY THE BEST AVAILABLE
FEEDSTOCK
ETHANOL DOESN’T WORK ABOVE $0.20/LB
SUGAR
BRAZIL’S HIDDEN SUBSIDIES
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).
BRAZIL’S HIDDEN SUBSIDIES (CONTINUED)
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).
BLEND RATIO MODEL
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
BRAZIL’S ETHANOL PRODUCTION (ANHYDROUS
AND HYDROUS)
BRAZILIAN SUGARCANE PRODUCTION MIX
THE ETHANOL/GASOLINE BLEND RATIOS
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%
THE ETHANOL/GASOLINE BLEND RATIOS
(CONTINUED)
Figure X. Theoretical model depicting an increase in ethanol blend ratios
Domestic Sugar Market
Foreign Sugar Market
c
PsUS
d
m
1
Pw
0
Pw
Pc1 j
g
e
r
s
a
h
f
ES1
s
n
Sc
EDs
b
Pc0
ESs0
l
i
D1
c
o
D0
a
Dc0
1
Da
0 Q1
Qd
d
Qs0 Q1
s
X1 X 0
Source: Brazil’s ethanol program: The case of hidden sugar subsidies. Troy G. Schmitz,
Andy Schmitz James L. Seale, Jr. ISJ 2003 Volume 105
FIGURE __. TRADE AND HIDDEN SUBSIDIES
U.S. ETHANOL PRODUCTION
DO PRICES MATTER?
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.
THE UNITED STATES (CORN PRICES)
U.S.: INDEX OF MONTHLY CRUDE OIL, GASOLINE,
CORN, AND ETHANOL PRICES
U.S. AND BRAZILIAN ETHANOL INDUSTRIES
COMPARED
Characteristic
Feedstock
Total ethanol fuel
production (2008)
Total arable land
Total area used for ethanol
crops (2006)
Productivity per hectare
Energy balance (input
energy productivity)
Estimated GHG emissions
reduction
Brazil
United States
Sugarcane
Corn/Maize
6,472
9,000
355
3.6
(1%)
6,800−8,000
270
10
(3.7%)
3,800−4,000
8.3 to 10.2
1.3 to 1.6
86−90%
10−30%
Units/Comments
Main cash crop for ethanol
production; U.S. has less than 2%
from other crops
Million U.S. liquid gallons
Million hectares
Million hectares (% total arable)
Litres of ethanol per hectare; Brazil
is 727 to 870 gal/acre (2006) and
U.S. is 321 to 424 gal/acre (2003)
Ratio of the energy obtained from
ethanol/energy expended in its
production
% GHGs avoided by using ethanol
instead of gasoline, using existing
cropland (No ILUC)
U.S. AND BRAZILIAN ETHANOL INDUSTRIES
COMPARED (CONTINUED)
Characteristic
Full life-cycle carbon intensity
Brazil
73.40
United States
105.10
17 years
93 years
8.2 million
8.0 million
Ethanol fueling stations in the
country
35,017
(100%)
1,963
(1%)
Ethanol’s share in the gasoline
market
50%
4%
Cost of production (USD/gallon)
0.83
1.14
Government subsidy (USD)
0¢
45¢/gallon
Import tariffs (USD)
0¢
54¢/gallon
Estimated payback time for
GHG emissions
Flexible-fuel vehicle fleet
Units/Comments
Grams of CO2 equivalent released per MJ
of energy produced, includes indirect land
use changes
Brazilian cerrado for sugarcane and U.S.
grassland for corn; land use change
scenarios by Fargione
Automobiles and light trucks only; Brazil as
of July 2009 (E100 FFVs) and U.S. as of
early 2009 (E84 FFVs)
% of total gas stations in the country; Brazil
as of April 2008 and U.S. as of December
2006
% of total consumption on a volumetric
basis; Brazil as of April 2008 and U.S. as of
December 2006
2006/2007 for Brazil (22¢/litre) and 2004
for U.S. (35¢/litre)
Brazilian ethanol production is no longer
subsidized; U.S. tax credit since January
2009
As of June 2009, Brazil does not import
ethanol, but U.S. does
ETHANOL PROFITS BEGIN TO RETURN
TABLE__. U.S. ETHANOL PRODUCTION AND
CORN AND FUEL PRICES
Year
2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009E
2009/2010E
2010/2011E
2011/2012E
E = Estimates
Ethanol
Production
(million
gallons)
2,800
3,400
3,900
4,900
6,500
Ethanol
Prices
($/gallon)
2.14
1.94
3.72
Corn Price
Oil Price
($/bushel)
($/barrel)
Unleaded Gas
Price
($/gallon)
27.69
37.66
50.04
58.30
64.20
99.65
1.51
1.46
1.36
1.59
1.88
2.30
2.59
2.80
3.27
2.42
2.06
2.00
3.04
4.20
4.06
Corn / Oil
Price Ratio
0.09
0.05
0.04
0.05
0.07
0.04
NEW ENERGY DIRECTIONS IN BRAZIL
•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).