The Brazilian Sugarcane Ethanol Experience
Issue Analysis 2005 No. 3
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Biofuels are attracting increasing interest around the world. Governments have announced strong commitments to biofuel programs as a way to both reduce greenhouse gas emissions and diversify energy sources. Advocates of biofuel subsidies and mandates frequently cite Brazil´s experience with sugarcane-based biomass ethanol as a success story and model for increasing energy security. Today, Brazil is the world’s largest biofuel market and Brazilian ethanol from sugarcane is arguably the first renewable fuel to be cost-competitive with petroleum fuel for transport. The United States, where most ethanol is produced from corn, is the second largest biofuel market.
However, ethanol production is more economical in Brazil than in the United States. This is due to several factors, including the superiority of sugarcane to corn as an ethanol feedstock, Brazil’s large unskilled labor force (sugarcane production is very labor intensive), and a climate ideally suited to growing sugarcane. While the U.S. and Brazil make about the same volume of ethanol, the U.S. uses almost twice as much land to cultivate corn for ethanol as Brazil does to cultivate sugarcane for the same purpose, and ethanol fuels a greater share of Brazil’s cars—there are simply a lot more cars in the United States.
Given Brazil’s natural and acquired advantages for ethanol production, it is difficult to imagine the United States matching Brazil’s level of ethanol consumption—40 percent of the motor fuel market—at a reasonable economic cost. In the U.S., corn-based ethanol would be viable only if it were to compete in the market on the same basis as other fuels. American taxpayers today pay twice for ethanol: once in crop subsidies to corn farmers and again in a 51-cent subsidy for every gallon of ethanol. Without such a subsidy, ethanol simply would not be cost-competitive with gasoline.
Moreover, corn-based ethanol produced in quantities large enough to displace a significant percentage of U.S. petroleum consumption could have significant environmental impacts. According to the Worldwatch Institute, ethanol may damage the environment when it is produced on a large scale from low-yielding crops such as corn. In these cases it may generate as much or more greenhouse gas emissions than do petroleum fuels. Also, corn-based ethanol production process consumes more non-renewable fuels compared to the production of sugarcane ethanol.
Finally, Brazil’s ethanol infrastructure model did not arise from free market competition: It required huge taxpayer subsidies over decades before it could become viable. The ethanol program became uneconomical when petroleum prices fell in the late 1990s. The country’s Congress even resorted to drastic measures by passing a law forcing oil companies to add small quantities of ethanol to their gasoline (in Brazil, gas sold at the pumps is 25 percent ethanol). Even today, during a period of high oil prices, ethanol volatile prices have not freed Brazilians from losing money on the E20 blend mandated by their government. And depending on the price fluctuations, sugar growers prefer to make even more money by selling their product as sugar on the world market rather than fermenting it into alcohol. Therefore, the Brazilian ethanol program is not a suitable model for U.S. energy policy reform.