Thiago Defensor de Castro Menezes
Abstract from the Master Thesis in Business Economics at the Freie Universität Berlin (Diplomarbeit im Fach Volkswirtschaftslehre), 7th of October, 2010.
Title: “Analysis and Evaluation of the Production of Ethanol versus Sugar in Brazil” (from the original in German: Analyse und Bewertung der Produktion von Ethanol versus Zucker in Brasilien)
Purpose of the work:
Brazil has an over 100 year’s long history of using sugarcane ethanol as fuel in motor vehicles. This procedure was strongly emphasized during the oil shocks of 1973 and 1979, where oil prices went up dramatically. The program of oil substitution from the Brazilian Government was called PROÁLCOOL (Programa Nacional do Álcool) and it was in some perspectives very successful. For example, during almost the entire 1980s about 60% of all SUVs in Brazil was using ethanol instead of gasoline. Although, in the late 1980s and during the whole 1990s, the consumption of ethanol for fueling purposes stagnated in Brazil (since oil prices went down again), ethanol production and consumption have been growing again (since 2003) due to the development of new motors (Flex-fuel). This new technology allowed consumers to decide to which proportion of ethanol/gasoline he want to tank, in dependence on the price/energy efficiency relation.
As written above, the PROÁLCOOL was only in some perspectives successful. Many studies have been published, where the social, economical and ecological effects from PROÁLCOOL have been analyzed and criticized. This was a strongly subsidized program, which did not achieve the goals of buffering the majority of the Brazilian society against the oil shocks, generating and distributing wealth based on the developing of a national technology, etc. In many situations, it was preferable to use the given resources (land, sugarcane, labour and capital) to produce and export sugar (thus, importing oil) rather than producing ethanol for internal consumption. During the implementation of PROÁLCOOL ecological aspects were not a big concern for the Brazilian government.
The present work analyses under macro-economical, political, social and ecological perspectives the new developments of the sugarcane sector in Brazil. The structure of this work is based on the existing literature about PROÁLCOOL. A comparison between those two periods (PROÁLCOOL and 2003) also takes place here. At last, new and probable developments for the near future are pointed out, based on governmental plans and historical experiences.
Methodology:
The analysis of the PROÁLCOOL phase is based on Borges et al, 1988[1]. The structure is as follows: (1) Historical Background of PROÁLCOOL; (2) The Economical Advantages of PROÁLCOOL; (3) Social-Economical Effects of PROÁLCOOL; (4) Changes in the Brazilian Industrial and Transport Structures; (5)The Contribution of PROÁLCOOL to the Brazilian Energy Supply; (6) Improving of Agrarian Techniques; and (7) The Costs of PROÁLCOOL to the National Budget.
For the second period (2003 - 2009), new factors were added to the structure used for the PROÁLCOOL analysis (i.e. the possibility of Co-generation of electricity, the implementation of bio-refineries due to technological improvement, and the carbon-credits-market).
Macro-economically, an annual analysis between 2003 and 2009 was made, to see what would have been the best strategy for Brazil in order to save as much international devise as possible, given the factor sugarcane. This is a static analysis, where the influence of an eventual increase of the exported quantity of a given product doesn’t affect world prices.
So, the structure of this second analysis (2003 - 2009) is as follows: (1) It is analyzed if the ethanol consumption (oil substitution) in the Brazilian market is economically rational. This substitution is economically rational only if the production cost for ethanol is lower than the price for oil import (after calculations of energy efficiency); (2) It is analyzed if the export of ethanol is micro-economically rational. The export of ethanol is micro-economically rational if the international price for ethanol is higher than its production costs; (3) It is analyzed if the export of sugar is micro-economically rational. The export of sugar is micro-economically rational if the international price for sugar is higher than its production costs; (4) Comparing the three steps above, it will be defined which strategy Brazil should have followed in order to save as much devise as possible. Step (5) consists of building an indifference curve between ethanol, sugar and other agrarian products, in order to delimitate in which oil price and sugar price constellation a given economical strategy would have been better.
Results and Conclusion:
Macro-Economically, the analysis shows that from 2003 until 2009 (with exception of 2007 and 2008), Brazil should have prioritized, firstly, the export of sugar, and, secondly, the export of ethanol. Only in the years 2007 and 2008 would have been the best strategy to consume ethanol in the internal market.
Despite the growth of the ethanol industry in Brazil, its share on the Brazilian industrial production remains since 2002 constant on the level between 1% and 1.3%. The share of the automobile industry remains also constant on about 5%. So, it cannot be said that the revival of the ethanol sector in Brazil has changed Brazilian industrial sector significantly.
About the contribution of ethanol to Brazilian energy supply, the consumption of ethanol in Brazil has had a strong impact on the dependence of oil deliveries from abroad. In 2009, Brazil produced 243.7 million tons BOE (Barrels of Oil Equivalent), or 2% of worldwide energy production. From those 234.7 million tons BOE, 47.2% came from renewable sources (32% biomass and 15.2% hydropower). From the biomass share, sugarcane is responsible for 56.25%, or about 16% of the whole Brazilian energy production.
In terms of agrarian technology, it was shown that about 1 million people work in the ethanol sector in Brazil, and their incomes are on average higher than the incomes from workers in different agrarian productions. A movement towards mechanization is taking place in Brazil, where about 60% of the production is already mechanized. There still are related cases of workers exploration (cases of slavery condition).
Ecologically, there are problems related with expansion of the sugarcane fields and deforestation, monoculture and hydro resources. It has not yet been found a good methodology to calculate the indirect land use changes caused by the expansion of sugarcane. Although, some positive aspects are to be pointed out, as the mechanization increases in Brazil, and, thus, the burning of the sugarcane fields decrease. In São Paulo Estate, the burning must be completely abolished until 2017. Furthermore, the US American EPA (Environmental Protection Agency) calculates that the burning of ethanol in motor vehicles emits 44% less GHG (Greenhouse Gases) than the burning of gasoline. Brazilian experts calculate a reduction of 64%.
The Brazilian Federal Government supports the ethanol program through subsidies. Although, the total amount of money injected by the Brazilian government hasn´t been found, it is to be assumed that this amount is much lower than the subsidies to the PROÁLCOOL in the 70s.
Co-generation of electricity, bio-refineries and carbon credits market do represent great opportunities for Brazilian companies. The construction of new hydropower plants in Brazil has become very difficult due to increasing ecological, social and even anthropological pressure. Besides that, the harvest of sugarcane coincides with the dry season in Brazil, where the water level in the dams is low. Thus, co-generation represents a good back-up (or complementary) structure to the Brazilian hydropower based electricity production. Bio-refineries are still very recent in Brazil, but they show a promising future. BRASKEM has already begun with the production of bio-plastic, and it already has contracts with international companies. According to ABEMC (Associação Brasileira das Empresas do Mercado de Carbono), in 2009 there were 373 CDM-projects[2] in Brazil. About 50% of these 373 projects were related to co-generation of electricity in sugarcane power plants. Thus, Brazil is the third country in the world in terms of CDM-projects (only behind China and India).
The Brazilian government, through the MCT (Ministério da Ciência e Tecnologia), hired the CGEE (Centro de Gestão de Estudos Estratégicos) in order to develop a project, which would study the possible impacts of a substitution of 10% of the worldwide consumption of gasoline through Brazilian ethanol by 2025. This study detected regions in Brazil, where the expansion of sugarcane fields could take place and which changes should occur in the ethanol sector, in order to achieve this goal. It is still not clear if this study became a governmental policy. Assuming it has become an official policy, there will be very interesting developments in the Brazilian ethanol sector in the next years.
Berlin, 07.03.2011
[1] PROÁLCOOL- Economia Política e Avaliação Sócio-Econômica do Programa Brasileiro de Biocombustíveis
[2] Clean Development Mechanism