20, March, 2013

Government Intervention to Strengthen the Ethanol Sector: Lessons from Brazil

The scale of Brazil’s ethanol production, demand and competitiveness is largely attributable to government initiatives. The varying levels of success of such initiatives can provide interesting lessons for other countries.

The development of Brazil’s ethanol sector – its expansion, commercialisation, up-take, competitiveness and profitability – can largely be attributed to government policies. Strategies to make ethanol production more attractive, practices to enable the use of ethanol in automobiles, tax breaks and price fixing, are just some of the policies underpinning ethanol’s early commercial development in Brazil.  Since the beginning of the Próalcool programme, the ethanol sector has depended upon government support, making a series of demands to which the government has responded. Even given these public efforts to boost and stabilise the ethanol market, there have been gains and losses in terms of competitiveness and profitability due in part to dynamic interactions with the gasoline and sugar markets. Other factors, including an increase in production costs and reduction in investments, also affected ethanol’s competitiveness. The lessons learned by Brazil about managing these ups and downs could be useful for policymakers and private sector leaders from other regions facing the same challenges. In particular, these key lessons learned might allow other countries to avoid losses, such as investments in technologies now deemed redundant, and provide guidance about how and when to introduce – or reduce – government support like subsidies and tax breaks.   

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Key Lessons:

  • Government intervention was fundamental for boosting Brazil’s national ethanol programme, in particular policies requiring mandatory blending and promoting the Flexible Fuel Vehicle.
  • The government’s active support of the ethanol programme attracted private investment, which encouraged producers to focus on efficiency and productivity gains.
  • Flexibility to choose between producing ethanol or sugar increases producer profitability, but may jeopardise national energy security.

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