The oldest example of widespread biofuel development is found in Brazil, which produces bioethanol from sugar- or starch-based material in the form of sugarcane and sugarcane residues. Because of Brazil’s optimal climate, two seasons of sugarcane growth can be achieved, adding greatly to the poten­tial production of both sugar and bioethanol products. In response to the first oil crisis of the 1970s, Brazil invested heavily in fuel alcohol primarily as a means of increasing fuel security and saving foreign currency on petroleum purchases. The original policy choice was to create direct funding sources to create biofuel capacity. In 1975, a diversification program for the sugar in­dustry called Proalcool was created with large public and private investments supported by the World Bank, allowing expansion of the sugarcane plantation area and construction of alcohol distilleries, either autonomous or attached to existing sugar plants [19].

The second group of policies introduced in Brazil provided a subsidy for bioethanol use. Two related financing schemes were organized to guarantee fuel sale price; the FUPA program guaranteed US $ 0.12 L-1 for E22 (a blend of 22% ethanol in gasoline), while the FUP program provided US$ 0.15 L-1 for E100 (or pure, anhydrous ethanol) fuel. By 1996/97, the total subsidy de­livered via these programs reached about US $ 2 billion year-1 [19].

The presence of a renewable fuel standard and of strong subsidies to E100 production, combined with the second oil shock of the early 1980s, resulted in the successful adaptation of engines to E100 fuel use. By 1984, E100 vehicles accounted for 94.4% of domestic automobile manufacturers’ production, and in 1988 participation in the E100 program reached 63% of total vehicle use in the country [20]. The upward trend ended, however, when high global sugar prices led to a crash in availability of fuel alcohol, resulting in a consumer shift away from E100 vehicles.

From 1989 to 1996, the sugar export market was very strong, and thus the cost of sugar to the bioethanol industry soared and fuel bioethanol short­ages resulted. In response, the Brazilian government made a failed attempt to restrict sugar exports, and then announced that the fuel market would be deregulated as of 1997. While deregulation began with E100 fuels, subsi­dies for blended fuels remained in place for an additional period, which had the effect of increasing overall alcohol production at the time. When price controls on E22 were removed in 1999, however, the prices for bioethanol collapsed [19].

Faced with an excess of bioethanol and collapsed prices at home, major producer groups joined together to form Brasil Alcool SA in March 1999, and made the decision to export excess bioethanol at any price. Later that year, a mechanism to create a monopoly on fuel bioethanol named Bolsa Brasileira de Alcool Ltda was created by the founders of Brasil Alcool. This monopoly drove a dramatic increase in bioethanol export prices for a period after its inception, with prices doubling within a year [20]. Since 1999, the total production of bioethanol in Brazil has risen; this trend has been driven by the expansion of export markets for bioethanol, rising world prices for oil, and an increase in domestic oil supply. The Brazilian industry today follows a simple biorefinery model, where the production of a combination of prod­ucts, including refined sugar, bioethanol, and energy from the combustion of sugarcane residues (bagasse) improves both economic and environmen­tal performance. Brazil controls more than 75% of the world’s export market, with primary exports going to the USA, Europe, Korea, and Japan; Brazil’s es­timated total exports will be approximately 3.1 billion L in 2006 [12]. Many countries that lack significant biomass resources, such as Japan, have made Brazilian bioethanol a part of their renewable fuel strategies.

Brazil’s domestic market still utilizes the single largest portion of fuel bioethanol capacity in the country. The presence of a Renewable Fuel Stan­dard means that all Brazilian gasoline has a legal alcohol content requirement that has ranged between 20% and 25% (currently 23%, as of 20 November 2006) [21]. Most vehicles are being run on E20 or E22, but sales of flex-fuel vehicles capable of operating on E85 blends are strong. Brazil has developed a unique distribution infrastructure for this fuel, with a network of more that 25 000 gas stations with E20 pumps.

Today, Brazil remains a dominant bioethanol producer and the single larg­est exporter of this fuel, with shipments expected to hit a record 3 billion L in the 2006-07 harvest. Rising demand for bioethanol — in part caused by poli­cies in other countries — has created an impetus for new product capacity. Recently, it was reported that UNICA plans to open 77 new bioethanol plants by 2013, adding to the existing 248 plants. When complete, this will raise the country’s production capacity to about 35.7 billion L [21].

2.2