The Sugarcane Industry and the Use of Fuel Ethanol in Brazil: History, Challenges, and Opportunities

Brazil is an international pioneer in biofuels, with more than 40 years of experience in the production and use of sugarcane ethanol. This paper describes institutional factors that contributed to the development of the biofuel industry, including the military regime and state-owned Petrobras in the 1970s and 1980s, the post-deregulation period in the 1990s, and changes in the 2000s, including new institutions targeting feedstock pricing arrangements and the growth in demand for flex-fuel cars, which allowed for market-based incentives. State intervention allowed the industry to overcome barriers of infrastructure, a transportation network, development of ethanol-powered vehicles, and output price stability and credit support. The paper concludes with key lessons from Brazilian ethanol production. While Brazil initially supported ethanol production in an effort to replace petroleum, it is now incentivizing expansion of a consumer market to address environmental and climate problems. Government support has allowed for efficient allocation of byproducts and positive impacts on the labor market, and agricultural sector in general. Still improvements in stability and predictability of the institutional environment are important for future growth. The lessons from Brazil provide insight into the challenges of biofuels in other countries attempting to replace fossil fuels with renewable resources.