1.1 Ethanol Policy Scenario

With the growing concern around climate and environment, the viable alternatives to replace fossil fuels with biofuels provided Brazil the possibility of an array of interests among the agents involved in the ethanol production chain. This arrange­ment allowed the creation of the National Alcohol Program (PROALCOOL) in 1975, in which the main objective was to leverage the Brazilian ethanol produc­tion through incentives and subsidies. It is pointed out that, even after the discon­tinuation of the Program in the early 1990s, it has continued acting in institutional arrangements formed with its creation allowing expansion of ethanol production (Shikida and Perosa 2012).

The Brazilian government started subsidizing ethanol production with the beginning of PROALCOOL, and even at the end of this program, the subsidies are indirectly maintained by the Federal Law 8723/1993, which enforce the 20-25 % proportion of ethanol in gasoline. However, there are no subsides of gasoline in the strict sense. There are cross-subsidies between petroleum derivatives such as variation in the tax burden of the ethanol and control of prices of petroleum products (because this prices affect transportation) due to anti-inflationary policy. Indirectly, the variation in the percentage of ethanol in gasoline can also encourage or discourage the gasoline consumption. The international sugar and oil prices also affect ethanol consumption. According to the Sugarcane Industry Union (UNICA) (2011: 11), ‘gasoline pricing remains artificial, with cross-subsidies between petroleum derivatives. In addition to causing problems to the industrial sector, this also distorts the market where hydrous ethanol competes directly with gasoline.’

In the last decade, the alcohol sector began a new phase of expansion with the permission of the European Union to import Brazilian sugar. However, the increase in exportation of sugar caused an increase in ethanol’s price and a decrease in its consumption, since both use the same raw material. Another fact is the appearance of flex-fuel cars in Brazil, which allows the use of any combination of ethanol and gasoline on the same engine.

In recent years, the decrease in sugar prices in the international market has reduced the stimulus for expansion of this sector. The price control policy adopted by the Brazilian government, which is stimulated by the lobbying of the alcohol sector, has raised the interference in the ethanol market. In addition to offering low interest loans to sugarcane production, the percentage of ethanol in the gasoline was increased and it promoted greater tax relief in the sector.