An economic analysis of transportation fuel policies in Brazil

Brazil uses taxes, subsidies, and blending mandates as policy instruments to manage its transportation fuel markets. Despite all the market stabilization efforts, the fuels sector has been very dynamic in recent years. In response to ethanol supply fluctuations, the ethanol blending rate is adjusted at times and complemented with fuel tax rates changes. In this paper, we analyze the impacts of such policy adjustments and market disturbances in the world ethanol and sugar markets on Brazilian producers’ supply responses, consumers’ driving demand and fuel choice, ethanol trade with the rest of the world, greenhouse gas (GHG) emissions, and social welfare. As the analytical tool, we use a large-scale spatially explicit price endogenous mathematical programming model which simulates the resource utilization in agriculture and finds the simultaneous equilibrium in food and fuel markets. The model results show that reducing the ethanol blending rate would reduce the driving demand by conventional vehicles while lowering the tax rate on gasoline would encourage flex fuel vehicle users to switch from pure ethanol to gasohol resulting in larger GHG emissions due to the consumption of a more carbon intensive fuel blend.