Bioenergy and the Rise of Sugarcane-Based Ethanol in Brazil

Brazil’s rise to be the world’s preeminent bioenergy producer provides three important lessons. The first lesson is about the complex task for developing countries balancing government intervention with market forces as they try to develop an industry. The second is how critical research and development (R&D) is for lowering costs to allow for market entry of an infant industry. The third is about the new challenges for bioenergy as it increasingly competes with the food industry for the same raw materials. The Industry Increases in petroleum prices and demand are creating pressure to develop new sources of renewable energies. Biofuel will represent 30% of the global energy used by 2020 compared with only 2% today (International Energy Agency, 2005). In 2004, the global ethanol market was US$30-40 billion, of which $4 billion involved international trade. Brazil, China, India, Malaysia and South Africa, the United States (US), and the European Union (EU) are important players in the burgeoning global market. Brazil is one of the world’s most competitive biofuels producers because of its comparative advantage in producing ethanol and soybeans. The US, the 2 nd leading ethanol producer in the world, has variable costs of production of corn-based ethanol of US$0.96 per gallon. Fixed costs range from US$1.05 to US$3.00 per gallon. While in Brazil the total cost of production was approximately US$1.10 per gallon during the 2005 crop year, with variable costs of US$.89 per gallon and fixed costs of US$.21 per gallon. In early 2006, the wholesale price paid to the mills for anhydrous ethanol was US$2.05 per gallon, while the retail price at the time for ethanol-gasoline blends was US$3.41 (including taxes). Total world ethanol production (all grades) in 2005 was 12.2 billion of gallons, with 70% of this total produced by the US and Brazil (Figure 1). Other significant producers are China, the EU, and India. Production in the