1. 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

2. 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.

3. Year Sugar Production Ethanol Production Oil Price World Raw Sugar Price Sugar / Ethanol Ratio Sugar / Oil Price Ratio (1000 tonnes) (million gallons)($/barrel)(¢pound) 2003/2004391027.69 8.010.29 2004/2005406837.66 7.850.21 2005/200626,850417450.0410.466.40.21 2006/200731,450471958.3015.786.70.27 2007/200832,100591664.2011.675.40.18 2008/2009E30,427705499.6513.674.30.14 2009/2010E33,55915.94 2010/2011E39,015 2011/2012E42,669 E = Estimates

4. Brazil dominates world sugar production

12. 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).

13. 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).

14. 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

17. Table X Brazil: Ethanol/Gasoline Blend Ratios (Selected Years) YearRatioYearRatio 197610%200525% 198220%200620% 198822%200725% 199012%200825% 200225%200925%

18. Figure X. Theoretical model depicting an increase in ethanol blend ratios Source: Brazil’s ethanol program: The case of hidden sugar subsidies. Troy G. Schmitz, Andy Schmitz James L. Seale, Jr. ISJ 2003 Volume 105

19. FIGURE __. TRADE AND HIDDEN SUBSIDIES

21. 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.

24. CharacteristicBrazilUnited StatesUnits/Comments FeedstockSugarcaneCorn/Maize Main cash crop for ethanol production; U.S. has less than 2% from other crops Total ethanol fuel production (2008) 6,4729,000Million U.S. liquid gallons Total arable land355270Million hectares Total area used for ethanol crops (2006) 3.6 (1%) 10 (3.7%) Million hectares (% total arable) Productivity per hectare6,800−8,0003,800−4,000 Litres of ethanol per hectare; Brazil is 727 to 870 gal/acre (2006) and U.S. is 321 to 424 gal/acre (2003) Energy balance (input energy productivity) 8.3 to 10.21.3 to 1.6 Ratio of the energy obtained from ethanol/energy expended in its production Estimated GHG emissions reduction 86−90%10−30% GHGs avoided by using ethanol instead of gasoline, using existing cropland (No ILUC)

25. CharacteristicBrazilUnited StatesUnits/Comments Full life-cycle carbon intensity73.40105.10 Grams of CO 2 equivalent released per MJ of energy produced, includes indirect land use changes Estimated payback time for GHG emissions 17 years93 years Brazilian cerrado for sugarcane and U.S. grassland for corn; land use change scenarios by Fargione Flexible-fuel vehicle fleet8.2 million8.0 million Automobiles and light trucks only; Brazil as of July 2009 (E100 FFVs) and U.S. as of early 2009 (E84 FFVs) Ethanol fueling stations in the country 35,017 (100%) 1,963 (1%) % of total gas stations in the country; Brazil as of April 2008 and U.S. as of December 2006 Ethanol’s share in the gasoline market 50%4% % of total consumption on a volumetric basis; Brazil as of April 2008 and U.S. as of December 2006 Cost of production (USD/gallon)0.831.14 2006/2007 for Brazil (22¢/litre) and 2004 for U.S. (35¢/litre) Government subsidy (USD)0¢45¢/gallon Brazilian ethanol production is no longer subsidized; U.S. tax credit since January 2009 Import tariffs (USD)0¢54¢/gallonAs of June 2009, Brazil does not import ethanol, but U.S. does

27. TABLE__. U.S. ETHANOL PRODUCTION AND CORN AND FUEL PRICES Year Ethanol Production Ethanol Prices Corn PriceOil Price Unleaded Gas Price Corn / Oil Price Ratio (million gallons) ($/gallon)($/bushel)($/barrel)($/gallon) 2000/20011.51 2001/20021.46 2002/20031.36 2003/20042,8002.4227.691.590.09 2004/20053,4002.0637.661.880.05 2005/20063,9002.0050.042.300.04 2006/20074,9002.143.0458.302.590.05 2007/20086,5001.944.2064.202.800.07 2008/2009E3.724.0699.653.270.04 2009/2010E 2010/2011E 2011/2012E E = Estimates

28. 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 CO 2 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).