The History of Sugarcane Ethanol in Brazil

Nearly 500 years ago, the Portuguese introduced sugarcane to Brazilian agriculture. Soon Brazil became the world’s largest exporter of sugar – a crop so lucrative and in demand that it surpassed the income from gold mines in colonial times and was known as “white gold.”

Ford Model T adapted by INT for demonstrations of ethanol use in 1925

Ethanol from leftover molasses -- a byproduct of the sugar milling process – was first used to make alcoholic beverages. Today, sugarcane is sweetening the Brazilian economy in yet another way. Brazil is the world’s largest sugarcane ethanol producer and home to one of the most important renewable energy programs in the world.

In Brazil, no light vehicle has run on pure gasoline for decades. About 50 percent of the Brazilian fleet of light vehicles (27.5 million cars in 2011) are flex-fuel, capable of using any blend of ethanol and gasoline, while the rest of the fleet uses gasoline with 18 to 25 percent of anhydrous ethanol. 

Brazil’s biorefineries produce the organic equivalent of 930,000 barrels of oil per day, taking into account both liquid biofuel plants and cogenerated electricity.  The sugarcane sector in Brazil employs 70,000 sugarcane farmers and has an annual economic output of $50 billion,* providing 1.34 million direct jobs and accounting for 16 percent of the domestic supply energy. 

But today the ethanol industry is facing new challenges, including dwindling investment in sugarcane ethanol (See “Brazil at a Crossroads." left). As the industry tries to regain its footing, a look at the past may help show the way forward.

Since the early days, ethanol has helped fuel motorized transport in Brazil. In 1903, Brazil’s First National Congress on Industrial Applications of Alcohol recommended the development of infrastructure to produce automotive ethanol. While Henry Ford was promoting ethanol in the US, the Brazilian National Technology Institute was conducting vehicle tests aimed at substituting imported gasoline with a domestic fuel. In demonstration tests, Ford Model Ts using ethanol rambled through different regions of the country in 1925.

In 1931 the Brazilian government took a big step forward by implementing a compulsory blend of at least 5% anhydrous ethanol in gasoline (a mandate known as Decree 19.717). The move aimed to reduce dependence on petroleum-derived fuels and take advantage of excess production in the sugar industry. Initially, the mandate was applied only to imported gasoline, but later it was also extended to gasoline made in Brazilian refineries with imported oil. Over the years, the ethanol content varied depending on biofuel availability and sugar prices.

Evolution of ethanol light vehicle fleet and ethanol consumption in Brazil (ANFAVEA, 2010)

The oil shock of 1973, which increased Brazil’s foreign debt and spiked inflation, inspired a newfound interest in ethanol. The government launched the National Alcohol Program in 1975, and the country became committed to reducing its dependence on imported oil, a commitment with many consequences. The government started spurring ethanol production by controlling prices. For example, the newly created National Alcohol Commission (CNA) set price parity between ethanol and raw sugar. Benefiting from this support, ethanol production increased from 580 million liters in 1975 to 3.676 billion liters in 1979, surpassing the target established for that year by 15 percent.

Ethanol has helped fuel motorized transport in Brazil since 1903. In demonstration tests in 1925, Model Ts using ethanol rambled through different regions of the country.

In 1979, with the oil crisis worsening and prices reaching new levels, the ethanol program gained new strength, and ethanol played an increasingly important role as a transportation fuel.  At that time, imported oil was around 85 percent, accounting for 32 percent of all Brazilian imports, a burden to the national economy that justified the ambitious goal of producing 10.7 billion liters of ethanol in 1985. To this end, the federal government increased its support for alcohol production by creating the National Alcohol Council and the National Executive Commission for Alcohol, respectively, to oversee and implement the program. Under this scenario, ethanol production reached 11.7 billion liters in 1985, exceeding the planned goal by 8 percent.

Around 1985, support of ethanol started to fade in the face of falling crude oil prices and strengthening sugar prices. The government scaled back incentives in 1986, ushering in a period of stagnation for the ethanol agroindustry. The absence of specific policies and government attention to support ethanol production led to sporadic supply shortages in 1989. As supply dried up, the government had to turn to emergency measures, such as reducing the level of ethanol in gasoline, using gasoline-methanol mixes as a substitute for ethanol, and even importing ethanol from other countries.

In Brazil, no light vehicle has run on pure gasoline for decades.

Ironies abounded. Not only was ethanol supposed to help Brazil wean itself from imported fuel, it was supposed to be a near limitless resource. The national advertising campaign said it directly: “Use what you need because there will be no shortage.” The shortages shook the confidence of Brazilian consumers, which then led to the inevitable fall in sales of pure-ethanol-powered cars. Having accounted for 85 percent of new car sales in 1985, sales of ethanol-powered vehicles represented only 11.4 percent in 1990.

Yet even during the period of reduced government interest on the ethanol, independent analysts recommended maintaining the program. They proposed scaling back production but ensuring continuity, not only for social and environmental reasons but also for economic benefits: At $30 a barrel, productivity gains had made ethanol competitive with crude oil. The State responded: In a process of liberalization, old agencies were closed, and the Inter-ministerial Sugar and Alcohol Council, the National Energy Policy Council, the National Agency for Petroleum, Natural Gas and Biofuels were created. This institutional reshaping revived the industry and helped Brazil regain its place as a world leader in ethanol.

Sugarcane stalks after harvest/Credit: Dreamstime

After controlling the price of ethanol for decades, the government moved towards free-market pricing in the sugar-alcohol sector in 1991, progressively removing subsidies and implementing a new regulatory framework to organize the relationships between sugarcane producers, ethanol producers, and fuel distributors. Since then, ethanol has been traded freely between producers and distributors. The only feature that remained of the original supporting scheme was the differential tax on hydrated ethanol and ethanol vehicles, an attempt to make hydrated ethanol more attractive to consumers.

In 2003 a new line of cars with flex-fuel engines appeared in the Brazilian market, to great customer acclaim. Car owners had the option of using gasoline (with 25% anhydrous ethanol), hydrated ethanol, or both. As a result, hydrated ethanol made a comeback in the domestic market. This opened new possibilities for the expansion of the sugarcane industry in Brazil as well as the international market for anhydrous ethanol.

Detailed studies in Brazil suggest that the sugarcane crop has little to do with the deforestation of the rainforest.

It is important to note that growth in ethanol production was not due solely to expanded cultivation but also to significant gains in productivity and efficiency. Between 1975 and 2005, productivity per acre increased 3.5 percent each year on average. As a result of this advance, the area currently dedicated to the production of sugarcane for energy is about 3.6 times smaller than the area that would be required at the productivity levels observed in the 1970s

The expansion of the Brazilian ethanol agroindustry stalled again in 2008, essentially because the government had artificially lowered the price of gasoline, making ethanol much less competitive in comparison.  Motivated by inflation control, the Brazilian government (which holds the control of Petrobras, the main oil products supplier) has held the gasoline price at approximately $70 a barrel for the last 5 years, significantly below of the international parity prices formerly adopted.

By all measures, the Brazilian ethanol program has made huge strides during the last decades

Taxes have historically represented more than 40 percent of the final price of gasoline, but the Federal government has been gradually reducing its tax in recent years. In June 2012, the main Federal tax on gasoline was set to zero. Currently, the gasoline price at gas stations is approximately 30 percent below the value that would be expected if taxes were applied. Because the Brazilian fleet is predominantly flex-fuel, increased gasoline blending has decreased demand for ethanol. As a result, ethanol production in 2010 was 30 percent less than in 2008. In 2012, until November, Brazil exported 2.88 billion liters of cane ethanol and imported 219,970 thousand liters of corn ethanol.  Up to now, the Brazilian government has taken little effective action to change this situation, which highlights the relevance of public policies in the framework of bioenergy.   

It’s worth noting that ethanol isn’t the only sugar-based source of energy. Electricity produced by combustion of bagasse, the excess plant material left over from sugar extraction, generates significant renewable electricity in Brazil. There are currently in operation 370 cogeneration systems in sugar and ethanol mills, with an installed capacity of 8,900 megawatts (MW) -- 7.2 percent of total electricity generation capacity in the country. These generated 25 terawatt-hours (TWh) –or 25 billion units of energy -- in 2012, 4.5 percent of the total domestic electricity generation. The potential for production of bioelectricity is still limited since only 129 plants (30 percent of 432 plants) are interconnected, allowing them to sell their surplus electricity to the grid.

About 80 percent of sugarcane workers have a formal contract, twice the average of agricultural workers.

The bioenergy agroindustry in Brazil also creates much more employment than other energy industries and requires less investment per job created. About 10.9 jobs per ton of oil equivalent produced are created by the ethanol agroindustry, while the oil and natural gas industry creates approximately 0.47 jobs per ton of oil equivalent produced. In other words, the ethanol industry creates about 23 times more jobs per unit of energy than oil or natural gas.

Jobs created in the sugarcane industry, according to several indicators (wages, educational profile, level of formalization, seasonality, and so on) are better than those observed in typical agricultural activities. For example, about 80 percent of sugarcane workers have a formal contract, twice the national average for agricultural workers. The steady trend of mechanization of sugarcane harvesting has partially reduced the number of workers, but it has also increased the wages paid to employees.

Native trees nursery at the Sao Manoel Sugar Mill in central Sao Paulo. The  company planted 200,000 native trees in 2012 as part of a reforestation program/ Credit: EBI

Critics of the sugarcane ethanol industry have alleged that sugarcane ethanol drives up food prices and causes deforestation. Such consequences strike an intuitive chord in people and, if true, would call into question the long-term sustainability of this biofuel. So far, the evidence supports neither allegation. An examination of the food crisis of 2008-2012—a period of high prices and relative scarcity—indicates multiple causes, among them, rapid expansion of demand in Asian countries, increased oil prices, global financial instability, and climatic problems. No significant correlation between staple food prices and ethanol production has been demonstrated In fact, the development of marginal areas for bioenergy production can reduce hunger and food availability.

Costa Pinto sugar/ethanol production plant, Piracicaba, Sao Paulo, Brazil/ Credit: Wikipedia Commons

Likewise, the process of deforestation in the Brazilian rain forest cannot be simplistically associated with ethanol production. To store sugar in its stem, sugarcane requires a dry and relatively cold season that is not existent in the Amazon region. The more feasible areas for expanding sugarcane culture in Brazil are closer to the South-Central part of the country, several thousand kilometers from the Amazon. Agricultural and environmental organizations in Brazil are adopting Agro-ecological zoning—using maps of soil, climate and rainfall, topography and land use in classifying and defining the areas of highest potential yield while respecting environmental regulations and areas that should be preserved—to ensure that sensitive lands aren’t lost to sugar cane fields. According to estimates, there are about 65.0 Mha suitable for expanding sugarcane. This land is currently occupied by low-productivity pastures without native vegetation. Detailed studies in Brazil suggest that the sugarcane crop has little to do with the deforestation of the rainforest.

By all measures, the Brazilian ethanol program has made huge strides during the last decades, showing strong signs of sustainability. There is still room for improving  bioenergy production--- increasing electricity production from bagasse, precision agriculture, advances in sugarcane breeding, vinasse biodigestion and biogas, and use of lignocelullosic residues, to name a few.

Public policies played a decisive role in the past in creating a strong biofuel industry in Brazil by reducing risks and encouraging investment and innovation. Today, the Brazilian ethanol agroindustry depends on a fair playing field in its competition with gasoline. The government has stepped in before to revitalize the ethanol industry. And once again, it may be government action and support that determine the future of this vital and historic industry.

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