Brazil’s Ethanol Experience and Its Transferability Masami Kojima & Todd Johnson April 25, 2006

Introduction Brazilian experience: –Private-sector led ethanol from sugarcane for gasoline substitution –Hybrid distillery/mill complexes for flexibility –Flex-fuel vehicles capable of using both 100% ethanol and E20 –Little competition for land Where is ethanol likely to be most competitive? How to cover the incremental costs in early stages of sector development? Conclusions: What can other countries learn from Brazil?

Equator Trop. Capricórnio 30 o S Trop. Câncer 30 o N Cane Production Potential

Brazil’s production cost in mid-2005 of US cents per liter is equivalent to $35-50 per barrel of oil, depending on vehicle fuel economy Sugarcane accounts for 58-65% of the cost of ethanol production in Brazil International price of sugar in February 2006 was US$415/ton

Economics of ethanol production including molasses

Incremental cost recovery Financing via carbon finance –First CDM methodology for ethanol approved –Value of carbon finance (US$ /liter for $5-20/ton of CO 2 equivalent) Fully capture local environmental externalities in gasoline pricing – another US$ /liter? Financing via tax exemptions – weigh the losses in gasoline tax revenue Let consumers choose and pay more for gasoline/ethanol blends

Gasoline pricing policy Gasoline is the most heavily taxed fuel in most developing countries. Tax on gasoline is often used to cross-subsidize “social” fuels: diesel, kerosene, LPG In , a number of governments reduced gasoline tax to reduce retail price increases Reducing gasoline taxes and fees further would have important socioeconomic consequences

Gasoline price structure

Special case of landlocked oil-importing countries Assume $100 per ton to take sugar to the nearest port for export Assume $200 per ton to import gasoline Assume fuel economy penalty of 20% when ethanol is substituted for gasoline Ethanol production for domestic consumption to replace imported gasoline

Economics in landlocked countries: $250/ton, including molasses

What Can We Learn From Brazil? Lessons on how to achieve efficiency gains on the agricultural production and industrial processing; how to promote private-sector led ethanol industry, and what changes in hardware at retail level are needed for ethanol use are useful for all countries considering a fuel ethanol program Increased use of bagasse can be a cost- effective and renewable fuel for heat and electricity in sugar producing countries

Conclusions Ethanol may deserve consideration in: –low-cost sugar producing countries – Brazil is the undisputed leader –landlocked countries with high delivered costs of gasoline. Ethanol should be evaluated on economic merits and the risks should be clearly understood. Ethanol trade liberalization will benefit efficient producers and all consumers. Farmers should compare the economics of biofuel production with alternative uses of the same crop. Long-term impact on land availability for food production may be important in low-income food-deficit countries.