Brazil’s Ethanol Experience and Its Transferability

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

2. 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?

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

5. Brazil’s production cost in mid-2005 of 23-29 US cents per liter is equivalent to $35-50 per barrel of oil, depending on vehicle fuel economy International price of sugar in February 2006 was US$415/ton Sugarcane accounts for 58-65% of the cost of ethanol production in Brazil

6. Economics of ethanol productionincluding molasses

7. Incremental cost recovery • Financing via carbon finance • First CDM methodology for ethanol approved • Value of carbon finance (US$0.01-0.03/liter for $5-20/ton of CO2 equivalent) • Fully capture local environmental externalities in gasoline pricing – another US$0.01-0.02/liter? • Financing via tax exemptions – weigh the losses in gasoline tax revenue • Let consumers choose and pay more for gasoline/ethanol blends

8. 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 2004-2005, a number of governments reduced gasoline tax to reduce retail price increases • Reducing gasoline taxes and fees further would have important socioeconomic consequences

9. Gasoline price structure

10. 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

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

12. 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

13. 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.