ETHANOL IN BRAZIL
ETHANOL IN BRAZIL Author: Andreas Papageorgiou (CERTH/HIT) October 2005
PREMIA – International AMF activities: Ethanol in Brazil
PREMIA is a Specific Support Action in 6th Framework Programme of the European Commission. The aim of PREMIA is to assess the effectiveness of measures to support alternative motor fuels - in the EU-25, - based on international experiences, - in relation to the market maturity of AMF, - short term: biofuels, - mid/long term: hydrogen, - in national context. Project duration: June 2004 – May 2007 Partners: VITO (Belgium), JRC-IPTS (Spain), CERTH/HIT (Greece), VTT (Finland), SETREF (Greece) Sponsored by the European Commission, DG TREN, Contract TREN/04/FP6EN/S07.31083/503081
http://www.premia-eu.org
Title: Ethanol in Brazil Authors: Andreas Papageorgiou (CERTH/HIT) Keywords : Ethanol, Alcohol, Brazil, Energy, Transport, Fuel Date: October 2005 Report within PREMIA WP2: International activities on alternative motor fuels LEGAL NOTICE Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. The views expressed in this publication are the sole responsibility of the authors and do not necessarily reflect the views of the European Commission. Reproduction is authorised provided the source is acknowledged. © PREMIA, October 2005
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PREMIA – International AMF activities: Ethanol in Brazil
List of Public PREMIA Reports (available at www.premia-eu.org) Ref # D1 D2
D3.2 D3.3 D3.4
D4 D4.1
D4.2 D5 D6 D7 D8.3 D9.4
Deliverable name State-of-the-art and market-maturity of alternative motor fuels International initiatives on AMF Biofuels in the US Bio-ethanol in Brazil Biofuels in India Natural gas in Argentina Hydrogen in North-America Transport-related hydrogen activities in Asia Common assessment framework for review of AMF initiatives Assessment of long-term options and their impact on the market introduction of AMF’s Reports of int. workshops and discussion forums 2nd Int. Fuel Cell Bus Workshop - Porto, Nov 04 3rd Int. Fuel Cell Bus Workshop - Vancouver, Dec 05 4rth Int. Fuel Cell Bus Workshop - Yokohama, Oct 06 Overview of incentive programmes on AMF’s and review of their impact on the market introduction of AMF’s Country reports Bioethanol and biogas in Sweden Biodiesel from used frying oil in Austria Biodiesel in Germany Biofuels in France Biofuels in Spain Natural gas in Italy Biofuels in East Europe Reports of int. workshops and discussion forums Biofuel Discussion Forum - Brussels, 26 May 2005 Towards introduction of alternative motor fuels: country specific situations Results of the scenario calculations and the cost-benefit analysis Synthesis report - key policy issues and policy suggestions for the large-scale market implementation of bio-fuels and hydrogen on EU level Report on national and EU-level policy workshops Final project report
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Lead editor VTT VITO VITO HIT VITO HIT IPTS VTT VITO
Application Bio CNG H2 x
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PREMIA – International AMF activities: Ethanol in Brazil
TABLE OF CONTENTS Abstract ......................................................................................................................... 4 1. INTRODUCTION..................................................................................................... 5 1.1 Scope and Objectives of the Report ........................................................................... 5 1.2 Methodology and Structure of the Report........................................................................ 5 2 General Description of Brazil .................................................................................... 6 2.1 Basic information and importance of the country............................................................ 6 2.2 Ethanol Production in the world market and in Brazil..................................................... 8 2.3 Alcohol Production and Trading Profile .......................................................................... 9 2.4 Alcohol driven vehicles.................................................................................................. 13 North..................................................................................................................... 13 3. Brazil as the World Leader in Ethanol .................................................................... 15 3.1 Brief historical overview................................................................................................ 15 3.1.1 Proalcool.................................................................................................................. 15 3.1.2 The weaknesses of Proalcool .................................................................................. 17 3.2 Government incentives................................................................................................... 18 3.3 Technology Issues .......................................................................................................... 20 3.4 Competition - Ethanol Cost vs. Gasoline ....................................................................... 21 4. Effects in society ..................................................................................................... 23 4.1 Impacts on the Energy balance....................................................................................... 23 4.2 Impacts on the National Economy ................................................................................. 24 4.3 Labour ............................................................................................................................ 25 4.4 Land usage – Agriculture boost ..................................................................................... 26 4.5 Environmental impacts................................................................................................... 27 5. Prospects for the Brazilian ethanol market ............................................................. 30 6. Conclusion............................................................................................................... 33 7. Appendix ................................................................................................................. 35 Alcohol Standards in Brazil ............................................................................................. 35 Fuel ethanol Specifications in Brazil ............................................................................... 38 8. References ............................................................................................................... 39
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PREMIA – International AMF activities: Ethanol in Brazil
ABSTRACT Ethanol in Brazil is one of the most important biofuels related cases worldwide. The reasons that pushed the introduction and the development of ethanol in Brazil are all interrelated. The vision that was set more than 30 years ago was Brazil to be able to produce its own energy for transportation resulting into economic, social and environmental benefits. The steps towards the realization of the ambitious program went through several difficulties resulting from both national (availability of ethanol) and international factors. The incentives that were given by the Brazilian government supported the introduction of ethanol into the market with great success. Several problems arose when ethanol was to stand in the market with incentives diminishing. The changes that ethanol created in Brazil are noticeable. The country increased its energy security and the economic indices showed that Brazil is now more competitive in economical terms. Furthermore the new jobs that were created and the environmental benefits of the use of the sustainable fuel resulted into the increase of quality of life. Nowadays ethanol in Brazil is considered as a promising industrial commodity with great potential and bright future.
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PREMIA – International AMF activities: Ethanol in Brazil
1. INTRODUCTION 1.1 Scope and Objectives of the Report As the oil prices have increased dramatically in 2005, fuel-ethanol has become a very attractive alternative and its expansion in the energy marketplace happens to be basically a matter of economic competitiveness and supply. This increase of price (if remains) will generate great economical and consequently social obstacles that will have to be faced from governments by taking drastic measures. Furthermore, the production peak for oil will create a more difficult situation since this will initiate the point where the production of oil will not be able to meet the market’s demand. The above difficulties and threats concerning the world oil market are basically the main opportunities for biofuels and at that case for ethanol. More are: -
specifically, some of the most important reasons, supporting the biofuels exploitation Energy diversification and security Renewability of energy feedstock Mitigation of air pollution The greenhouse effect Expansion of agribusiness Opportunities for rural workers.
Developing counties, which rely in a respectable percentage in agriculture, consider “energy farming” as a measure to improve the quality of life and the economy in a sustainable way. Furthermore the support that developed countries can provide creates a win-win situation as fuel-ethanol produced in a developing country and used in a degree in the developed world offers the opportunity of environmental and energy benefits to one side, while on the other side it creates a new source of income and improvement of life conditions.
1.2 Methodology and Structure of the Report This report depicts the case of Ethanol in Brazil, mainly used for transportation purposes. The information that contains has been collected from several sources explaining and at some cases analysing facts and data. Personal views and opinions showing a trend in favour or against an action or a programme were planned to be avoided as the scope was to present the information based on the historical actions and results that took place. The main idea of this report was to show why Ethanol Brazil is considered such an important case, present the data that support this statement and show the effects that this initiative had. In this context, at the first part of the report some basic information concerning Brazil is listed, with emphasis on alcohol production and trading as well as on the time evolution of alcohol driven vehicles. Accordingly, the major activities characterizing Brazil as the world leader in ethanol production are cited.
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PREMIA – International AMF activities: Ethanol in Brazil
Subsequently, the effects of the ethanol production program in Brazil (Proalcool) on the local society are explained. Finally, the report finishes with an analysis of the prospects for the Brazilian ethanol market.
2 GENERAL DESCRIPTION OF BRAZIL 2.1 Basic information and importance of the country Nowadays ethanol is becoming a very important alternative fuel. The geographical region of which Brazil belongs notes a significant activity that can be added to the overall large number of activities that many countries have started with initiatives that boost the development of ethanol and can be seen in table 1. In fact the Brazilian National Alcohol Policy (Proalcool) is one of the world’s most ambitious efforts to produce a renewable biomass fuel as an oil substitute. Ethanol Production in South America Location Feedstock Ethanol Production
Brazil
Sugarcane
Peru
Sugarcane
Colombia
Sugarcane
Central America
Sugarcane
The Brazilian government launched its National Fuel Alcohol Program in the mid-1970s, and by 1980 ethanol use had overtook gasoline. Since price liberalization in 1999, ethanol has maintained prices a third lower than gasoline. Brazil is the world's leading ethanol producer and exporter, distilling nearly 15.1 million m3 in 2004. In 2002 Peru announced the "Mega-Project," a plan to build up to 20 distilleries and an ethanol pipeline from the interior to the port of Bajovar. Up to 600,000 acres of sugarcane will be planted in forest areas now used for coca leaf production. The government hopes to export 1.13 million m3 of ethanol by 2010. From 2006 the use of 10 percent ethanol in fuel will be mandated in cities with populations over 500,000, requiring the cultivation of an additional 370,000 acres of sugar cane and nine new ethanol plants to produce the necessary 984 thousand m3 a year. El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica project total output to reach 500 thousand m3 by 2010, enough to allow for a 10 percent ethanol blend in gasoline. Costa Rica, Jamaica and El Salvador export ethanol fuel blends to the United States duty-free under the Caribbean Basin Economic Recovery Act, and are looking to increase exports.
Table 1. Ethanol initiatives in South America [11]
Brazil is the largest South-American country. The basic figures presenting the identity of this country can be found in table 2.
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PREMIA – International AMF activities: Ethanol in Brazil
Figure 1: Map of Brazil
BRAZIL Area Terrain Land use
Environment - current issues
Population GDP GDP - real growth rate GDP - composition by sector Labor force:
total: 8,511,965 sq km land: 8,456,510 sq km water: 55,455 sq km mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt arable land: 6.96% permanent crops: 0.9% other: 92.15% (2001) deforestation in Amazon Basin destroys the habitat and endangers a multitude of plant and animal species indigenous to the area; there is a lucrative illegal wildlife trade; air and water pollution in Rio de Janeiro, Sao Paulo, and several other large cities; land degradation and water pollution caused by improper mining activities; wetland degradation; severe oil spills 186,112,794 purchasing power parity - $1.492 trillion (2004 est.) 5.1% (2004 est.) agriculture: 10.1% industry: 38.6% services: 51.3% (2004 est.) 89 million (2004 est.)
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PREMIA – International AMF activities: Ethanol in Brazil
Labor force - by occupation Unemployment rate: Population below poverty line: Budget: Public debt: Agriculture - products: Industries: Electricity production Electricity - consumption: Oil - production: Oil - consumption: Oil - proved reserves: Natural gas - production: Natural gas - consumption: Natural gas - imports Natural gas - proved reserves: Exports - commodities Imports - commodities: Debt - external:
agriculture 20%, industry 14%, services 66% (2003 est.) 11.5% (2004 est.) 22% (1998 est.) revenues: $140.6 billion expenditures: $172.4 billion, including capital expenditures of NA (2004) 52% of GDP (2004 est.) coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment 339 billion kWh (2002) 351.9 billion kWh (2002) 1.788 million bbl/day (2004 est.) 2.199 million bbl/day (2001 est.) 13.9 billion bbl (2004 est.) 5.95 billion cu m (2001 est.) 9.59 billion cu m (2001 est.) 3.64 billion cu m (2001 est.) 221.7 billion cu m (2004) transport equipment, iron ore, soybeans, footwear, coffee, autos machinery, electrical and transport equipment, chemical products, oil $219.8 billion (2004 est.)
Table 2. General information for Brazil [28]
2.2 Ethanol Production in the world market and in Brazil The great potential that biofuels have is a fact that is accepted by most scientists. However, bioethanol still plays a minor role in the energy market. Compared to the world gasoline consumption that is 1.2 billion m3/year (7.7 billion barrels/year)1, it becomes clear that fuelethanol consumption only represents about 2.5% of current gasoline consumption. However, it is worth noting that a growing number of countries have recently either expanded existing domestic fuel-ethanol production programs or established new ones. Cases of Brazil, the USA, China, Thailand, Colombia, Peru, Canada and Sweden are indicating that activity has started taking place while continuously more and more countries consider ethanol one of the most important short-term alternative fuels that can substitute gasoline. [11] Brazil and the USA are currently the major fuel-ethanol producers and consumers representing approximately 85% of total global demand. Moreover, it is known that when Henry Ford designed the model T Ford, it was his expectation that ethanol made from renewable biological materials would be the major automobile fuel. Brazil is currently responsible for the production of more than 1/3 of the total ethanol produced in the world and is also the main exporter of ethanol. Figure 2 shows the historical 1
US Energy Information Agency, 2001 data projected to 2003
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PREMIA – International AMF activities: Ethanol in Brazil
data for ethanol production globally compared to the amount that Brazil and U.S.A. have produced.
Ethanol Production 45 12000 37.5 10000
Million m3
30 8000 World production Brazilian production USA production
22.5 6000
4000 15 7.5 2000
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Figure 2: World ethanol production in comparison with Brazilian and USA ethanol production
2.3 Alcohol Production and Trading Profile The Brazilian Transport Sector is responsible for the total gasoline consumption of the country. Moreover, 81 % of the diesel oil, 97% of the kerosene, 1.4% of the natural gas, 6.5% of the fuel oil and 92% of the alcohol are consumed within the transportation sector. The uniqueness of this sector in Brazil is however the amount of ethanol that is consumed, which exceeds 15.1 million m3 per year. In Brazil, ethanol is used in one of two ways: - as octane enhancer in gasoline in the form of 20 to 25% anhydrous ethanol at 99.6 GayLussac (GL) and 0.4% water (a mixture called gasohol), - or in neat-ethanol engines in the form of hydrated ethanol at 95.5 GL. Therefore, the gas stations in Brazil provide two types of substitutes for gasoline. - the hydrated alcohol used as pure fuel in the engines (Alcohol Fleet), - and the anhydrous one used in a mixture with gasoline in a percentage of 20 to 25% (Gasoline Fleet). [6] Figure 3 shows a comparison between the two uses of fuel alcohol. The annual production of ethanol in Brazil (Fig 3) has an increasing general trend, but it is dependant upon factors such as: - climate, 9
PREMIA – International AMF activities: Ethanol in Brazil
-
competitiveness of ethanol versus sugar, market situation, gasoline prices.
Figure 3: Ethanol production in Brazil
The climate plays an important role to the production of ethanol as it is closely related to harvest quantities. Severe climatic conditions can result into great reduction in harvested quantities of sugarcane at some areas having as a final result the reduced ethanol quantity. Another factor that can control the quantity of ethanol produced is the price of sugar that can sometimes be more attractive that ethanol. Finally, the oil prices and consequently the gasoline prices worldwide are one of the key aspects in making the ethanol competitive or not. According to the sugar industry union of Sao Paolo in Brazil, the Ethanol production in Brazil during 2004 was around 15.1 million m3. The potential and the future are believed to be promising. If transformed into reality, the Brazilian Energy Initiative proposed in 2002 at the Rio+10 Summit held in Johannesburg would boost the supply of bio-fuels. The proposal recommends “increase in renewable energy to 10% as a share of world total by 2010”. If the referred 10% goal will be adopted for gasoline, the fuel-ethanol market will reach in 2010 the volume of 130 million m3 (considering vegetative growth in consumption). Expansion of energy crops would be necessary to produce this larger volume. This will certainly result in tremendous increase of ethanol produced by Brazil. Brazil has a very volatile and unique ethanol market. It can, for a period, be a strong exporter of ethanol and on the other hand, for another period it can be a large importer. As it is depicted in figure 4, in the 90’s Brazil was the largest importer of ethanol in the world. The main reasons of this unique instability are:
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PREMIA – International AMF activities: Ethanol in Brazil
-
-
Climatic influence; the country's cane growing region in the Centre/South has been subject to the El Niño and La Niña phenomena, which usually go along with drought and below average sugar cane yields. The last time that a serious drought occurred in the region was in 2000/01 when cane production fell by around 15%. Sugarcane market; sugarcane serves as a raw material in two different markets. In this context, fluctuations in the production of ethanol may very well be explained with the concept of opportunity costs. Ethanol trade in Brazil 3000 2500 1500 1000
export
500
import
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
-1000
19 88
19 82
-500
19 86
0 19 84
Million litres
2000
-1500
Figure 4: Brazilian ethanol trade [8]
The Brazilian experience showed that methods for minimising causes that bring instabilities exist. The geographical spreading of sugar cane plantations all over the country can minimize the weather factor and in fact the government has started applying this strategy. The spreading of plantation over the vast expanses of Brazil allow for spreading of risk. The solution for the structural volatility factor may be decoupling ethanol from sugar production. This can be achieved by the construction of dedicated plants that produce ethanol for export. Another way for ensuring sufficient supplies for the export market would be longterm contracts for large volumes, which allow for significant economies of scale at the plant. Subsequently, this could compensate for a possibly lower profitability when compared with sugar. [24] During the last years the ethanol market shows characteristics of a mature and well-structured market. Brazilian exports of fuel alcohol to the United States have been at record levels in 2004 and, for the first time, the country was able to ship ethanol directly to that market despite a stiff tariff. The EU, the third largest fuel ethanol market after Brazil and the US, has made a proposal which would allow duty free or at least reduced duty imports from Mercosur countries. In addition, several countries in the Far East have either started to import fuel alcohol or have announced plans to do so over the next couple of months. 11
PREMIA – International AMF activities: Ethanol in Brazil
In 2004, the volume of ethanol traded worldwide in several industrial sectors grew to around 4878 mln litres. This number represents almost 10 % of total world production. Regarding alcohol fuel, about 700 million liters (4.4 million barrels) were traded in 2004 representing less than 20% of the trading market and this is still a very low volume considering market potential. Although it is true that this market is in an infant stage and therefore is not well structured yet the protectionist barriers that exist in important energy markets such as the European Union, the USA and Japan certainly limit its evolution and inhibit its consolidation. [29] Compared to 2003 there was an increase of aprox. 33% in global ethanol export. The rise was almost entirely due to record exports from Brazil, which increased its export market share to around 50% compared to 2003. The higher Brazilian exports also boosted the market share of the Americas to around 64% compared to 42% in 2003. All other continents reported declines in absolute as well as relative terms with Europe having a share of 22% (30%) followed by Asia/ Pacific with 11% (23%) and Africa with 3% (5%). [7] However, the numbers of 2004 for Brazil are unlikely to increase in 2005 as ethanol exports from Brazil are expected to fall again following the strong recovery in prices over the last couple of months coupled with the changing supply situation on the US and Indian markets. The following table clearly depicts the world ethanol production state as it was by the end of 2004. Although the values for ethanol production are not the same in all sources, a general trend shows that the world ethanol industry is a very fast developing market with the potential to become a competitive global market.
World Ethanol Production, 2004 Country Brazil United States China India France Russia Others Total
Million m3 15,1 13,38 3,65 1,75 0,83 0,75 5,31 40,77
Table 3: World Ethanol Production [7]
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PREMIA – International AMF activities: Ethanol in Brazil
2.4 Alcohol driven vehicles Brazil has a huge fleet of cars, increasing with a high rate and a population of about 160 million people. The number of cars in different regions of Brazil is shown in table 4. It can be seen that alcohol driven cars were more than one fifth on the overall fleet in 1998.
North Northeast Southeast South Middle-west TOTAL Total
Alcohol fleet Gasoline Fleet % of Alcohol fleet 18,6 80,827 352,819 23,1 496,269 1,650,624 22,3 2,903,367 10,072,724 17,2 731,938 3,508,007 23,1 351,316 1,165,460 21,4 4,563,717 16,749,634 21,313,351
Table 4: Brazilian Car Fleet- 1998, from Geipot 1999, [3]
Another factor that has to be considered is not only the percentage of ethanol cars or just the absolute values of ethanol cars. As in most developing countries, the number of inhabitants per vehicle decreases from year to year. If this number is to be compared with similar numbers for Europe or U.S.A.(fig. 5) it can be noticed that a great expansion of the number of cars is expected to take place in Brazil during the next years or decades. In h a b ita n ts p e r v e h ic le in s e le c te d c o u n tr ie s 12 10 8
USA
Italy
Japan
Spain
Argentina
4 2 0
Brazil
6
1997 1988
Figure 5: Inhabitants per vehicle in selected countries, ANFAVEA, 1999 [1]
During the 1980’s, ethanol dedicated vehicles were dominating the market. It is important to notice that, over the 1990’s, the gasoline-powered vehicle sales have steadily increased as is depicted in figure 6. Alcohol-powered vehicles actually diminished in a rapidly rate, due to the high costs of alcohol production compared to gasoline costs and certainly due to availability issues of alcohol that created instabilities in the alcohol market and vehicle market. Furthermore, technical problems of the past, made the situation for alcohol vehicles even more difficult. Having in mind all the above parameters, the interest on alcohol-powered
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PREMIA – International AMF activities: Ethanol in Brazil
vehicles has been "reheated" with the introduction of Flexible Fuel Vehicles on the Brazilian market and the future of ethanol appears quite promising. The reliability of fuel supply is one of the main reasons why FFVs are currently very successful in Brazil, as it creates the possibility to switch over to gasoline in times of ethanol shortages. FFV technology will be discussed in more detail in the next chapters.
Types of cars sold in Brazil 1800000
New registrations
1600000 1400000 1200000 1000000
Gasoline powered vehicles Ethanol powered vehicles
800000 600000 400000 200000
Figure 6: Production of Gasoline and alcohol powered vehicles [1]
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2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
PREMIA – International AMF activities: Ethanol in Brazil
3. BRAZIL AS THE WORLD LEADER IN ETHANOL 3.1 Brief historical overview Brazil is probably the country that has furthest gone with regard to large scale use of alcohol in the automobile fuel sector. Alcohol as a fuel has a long history in Brazil. The first official alcohol policy was established in 1931, and since then, several attempts were made to mix alcohol (anhydrous) with gasoline to fuel Brazilian automobiles [31]. However, the oil crises in the 1970s led the military government (Brazil had a nationalist military government between 1964 and 1985) to start promoting the use and production of alcohol intensively. Initially, in the 1970s, the government created the Brazilian National Alcohol Program (Proalcool) and intensified the use of gasohol (a mixture of ethanol and gasoline) to fuel common gasoline cars. Then, since 1980, automobile factories have produced alcohol-fueled cars. This makes Brazil one of the few countries in the world that has managed to separate a significant part of the automobile industry from petroleum dependency. This big transformation of the Brazilian fuel structure was the result of enormous efforts of the state [32]: (i) by shaping the agricultural and industrial policies for achieving the goals of the program; (ii) by investing public resources in research; (iii) by regulating and giving incentives to the private sector to pursue innovation and invest in alcohol related activities; (iv) by giving incentives to car owners to shift to alcohol fueled cars, thus increasing the demand for alcohol.
3.1.1 Proalcool The Proalcool was created in 1975 to concentrate all the national efforts to increase the alcohol production and use. It basically consisted of two phases. During phase one (1975– 1979), the government policies searched to facilitate both distillery expansions and higher conversion rates in the mixture gasoline–alcohol. In phase two, from 1980, the Brazilian government kept authorizing and subsidizing the vast expansion of sugarcane production capacity and industrial investments in mills and in distilleries. Also, automobile factories started to produce only-alcohol-fueled cars with the technology developed in the universities and research centers. In phase one, the alcohol program was a response to high oil prices, sugar low prices and surplus production. More anhydrous alcohol was mixed to gasoline. The Brazilian long experience with mixed fuel showed that conventional gasoline engines could efficiently operate using a mixture of up to 20% of anhydrous alcohol. Also, the government started giving subsidies to expand distilleries. In this phase, there was no rigid commitment to supplying alcohol intensively, since the proportion of alcohol in the mixture could vary without affecting car efficiency and alcohol production was still low. It would be only a question of tradeoff between sugar and alcohol production. If the sugar prices fell, sugar production could be shifted to alcohol, or vice-versa, without affecting the consumers and without large adjustment costs.
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PREMIA – International AMF activities: Ethanol in Brazil
Different from phase one, phase two introduced the use of alcohol-fueled cars. In 1980, Brazilian car factories started to release the first models of alcohol-powered cars. The technology for these cars was primarily developed at public research centers in the 1970s, and then passed to the private sector, which keeps developing it. Moreover, autonomous alcoholonly processing plants were built using government subsidies to achieve the agricultural output necessary to fulfill future demand for alcohol. These plants cannot produce sugar as an alternative end product. Therefore, at this point, the situation of the alcohol program became irreversible, once part of the market depended exclusively on alcohol to fuel their cars, and the alcohol production could not be completely shifted to sugar. On the other hand, the sugarcane industry in Brazil has had strong dependency to the unstable international sugar market. One of the measures used to stabilize domestic production and to cope with the years of excess production was to convert part of the sugar into alcohol, close to the mills. This anhydrous alcohol could be blended with gasoline in a proportion up to aprox. 24%. In 1975 the main objectives of the Brazilian ethanol program were: - to increase the national energy security, - to help stabilize sugar production – with all the effects that this could have (employment, stable market, etc.). The continuation of the oil crisis in 1979 forced the Brazilian government to take more drastic actions and promoted the development of new plantations and new alcohol-powered vehicle fleet. Incentives where given to finance the creation of a great number of distilleries in order to meet the forecasted high demand for alcohol. Also all the necessary actions took place in order to overcome distribution problems considering fuel station and pumps. It is a fact that Brazil introduced ethanol as an alternative motor fuel with great success. The response from the public was very strong resulting to an ethanol production in 1987 that was 30 times more than that of the late 70’s. By the mid-'80’s, most cars that were produced in Brazil where running on ethanol. At that period ethanol was competing fully with gasoline. The trend of ethanol changed in 1989 when a shortage in ethanol could not meet the demand of the consumers. Proalcool was about to terminate, when the Gulf war created again an opportunity for ethanol. Nevertheless, the public lost its confidence with ethanol while vehicles dedicated for ethanol fuel could not operate due to the shortage. In the 90’s the declension started taking place for ethanol. The main initial reasons were: - a poor cane harvest - higher sugar prices that led to a shortage - large number of alcohol driven cars The instability that was created to the market resulted to: - the creation of bad ‘reputation’ for ethanol - and led people back to the conventional fuels.
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PREMIA – International AMF activities: Ethanol in Brazil
3.1.2 The weaknesses of Proalcool It is widely believed that Proalcool had several problems. Amongst them are the governmental control of the fuel production, and the concession of federal incentives that reached a total of US$ 11 billion. Other factors contributed to the crisis of Proalcool are the lowering of the prices of crude oil, and the increase of Brazilian extraction of off shore oil that reduced dependency on foreign energy imports. Furthermore, in 1998 subsidies were gradually extinguished and alcohol prices were set to fluctuate in the free market. During the last years alcohol price has reached a point where it is competitive over gasoline. Of course the program evolved through the years and adaptations according to the market demands were made whenever this was necessary and possible. Proalcool may be considered for some people as a “failure”, but it surely demonstrated actions that had never been experienced in such large scale before. Looking back at the main objectives, not only the energy security was increased, but also Brazil proved to its people and to the rest of the world what can be done through programmed and organized actions. Moreover, the creation of new jobs (both skilled and unskilled) had as a result the decrease of the unemployment rate. Another important factor that finally resulted to the overall success and the sustainability of the program was that that the program was almost entirely based on domestic manufactured equipment. The market and consequently the new jobs that were created from that program cannot be neglected. This market has showed many technological developments, in both agriculture and cane processing, resulting into lower ethanol cost and a huge potential for large surplus in biomass-based (bagasse and trash) electricity. Apart from all the more positive side effects that this could have, the importance of the environmental benefits cannot be neglected. Nowadays, three (3) decades after the initiation of the program the clear results are: - reduction of oil imports – energy security, - more stable agriculture (sugarcane), - employment increase, - CO2 reduction, - technology transfer and know how expertise. The Brazilian ethanol case showed and confirmed the effect these kinds of programs have to the creation of new jobs. Furthermore, it is not only the number of new jobs that are created, but it is also the quality that increased. The general trend in most of the agricultural countries is toward better technology and quality, but due to the technological advances, fewer jobs. In a very great percentage it is due to the ethanol program that people have moved to many small villages in order to work around there, thus giving life and economical development to many small towns and villages. It is clear that the Brazilian ethanol case is one of the most important biofuel cases in the world and can be considered as a main ‘pilot project’ for other countries that examine the possibility to start actively get involved with biofuels and especially with ethanol.
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PREMIA – International AMF activities: Ethanol in Brazil
The fuel nowadays that vehicles are using in Brazil is either pure ethanol (94% ethanol and 4% water) or a more “fossil fuel oriented” version gasohol (78 % gasoline, 22 % ethanol).
3.2 Government incentives Proalcool was a support program to increase sugar cane alcohol production to use as a substitute of gasoline. The initial objective of this program was to increase the number of mills producing alcohol. The incentives that were offered at the initiation of the program by the Brazilian government helped to introduce fuel alcohol into the market. The circumstances over the global oil market resulted into the necessity of more incentives. New plantations were developed along with the increase in car fleet. The government supported economically investors in order for more distilleries to produce ethanol. The support measures also involved the systematic approach of the distribution system that included fuel stations and pumps. The incentives and subsidies of the main alcohol program in Brazil (Proalcool) were planned to be the transitory step in order for ethanol to become competitive over gasoline which would face ‘problems’ resulting from the high price that it was planned to reach. ‘Economy of scale’ was another factor forecasted that would assist the development of ethanol, as it happened. Low oil prices during the second half of the 80’s created serious problems to the Brazilian government. The discontinuation of government incentives in the form of subsidies would result in a serious problem in the market as millions of people were relying on ethanol that at that time could not compete without support over gasoline. The subsidy to cover the difference between alcohol costs and prices was kept with declining proportions until the end of 1998, when major changes in fuel pricing policy took place. Gasoline prices, until then regulated, were allowed to get stable by the market. Alcohol subsidies were also gradually extinguished and alcohol prices were also allowed to fluctuate with the market. This resulted to the reduction of alcohol prices that got almost half the price of gasoline (price/km). Proalcool came as a mix of distributive and regulatory policies [33]. On the one hand, the government distributed several incentives to alcohol related activities, satisfying the demands of many interest groups that influenced the adoption and implementation of an alcohol policy. On the other hand, regulations were adopted to make automobile industries to produce alcohol-fueled cars and to make fuel distribution companies to work with alcohol. The primary purposes of these incentives and regulations were to create and keep a market for alcohol, to increase alcohol production and to foster technological development in the alcohol sector. Thus, the government was trying both to increase demand and supply of alcohol related activities. Briefly, the main incentives in the Proalcool program have been [32] the following:
Subsidies to the industrial and agricultural sectors. Cheap credit was a very important subsidy to alcohol activities. The Brazilian government offered credit for agricultural and industrial investments in alcohol production at interest rates well below the market rate. Other features of credit contract, such as a sizable grace period, made the incentives even greater. 18
PREMIA – International AMF activities: Ethanol in Brazil
Protection against alcohol imports. The Brazilian government secured that all production of alcohol was commercialized at a price above the minimum price, and imports are not allowed in normal situations. Thus, sugarcane entrepreneurs had guaranteed that if they invested in the expansion of alcohol production, they would have a market for it. Subsidies to consumers. To ensure that alcohol production was absorbed by the market, alcohol pumps had to be installed at all gas stations, and the government guaranteed, through price control, alcohol prices per mileage much lower than the gasoline prices. These factors stimulated sales of alcohol-powered cars and ensured car owners that they would have a secure supply of cheap fuel for a long period. Incentives to research on alcohol related fields. Many universities, research institutes and companies were given incentives to undertake research on alcohol related activities, mainly concentrated from biotechnology for genetic improvement to mechanical engineering for the development of engines.
More precisely, the increase in the production and use of ethanol as a fuel was made possible [34] by three government actions: i.
The decision that the state-owned oil company, PETROBRAS, purchased a guaranteed amount of ethanol;
ii.
The provision of economic incentives for agro-industrial enterprises willing to produce ethanol, offering low interest rates from 1980 to 1985 and nearly US$ 2.0 billion in loans (historical dollars), which represented 29% of the total investment needed to reach present installed capacity;
iii. Several steps to make ethanol attractive to consumers by selling it at the pump for 59 percent of the price of gasoline. This was only possible because the gasoline price was established by Government at a value approximately double the price in USA. Some years later ethanol sells for 80-85% of the price of gasoline at the pump station. To preserve this ratio and simultaneously guaranteeing a remuneration of US$ 400/m3 of ethanol to producers, requires a cross subsidy from the sales of conventional fuels. Since its inception the fuel price policy adopted to open the way for the use of ethanol was the following: the government indexed the consumer price of alcohol to the price of gasoline and charged for gasoline a price which was approximately double the price in the United States. The proceedings of this "tax'' on gasoline were used to reduce the cost of other petroleum derivatives (LPG and nafta), and in the case of ethanol to cover its higher production costs. The justification for such a policy was the beneficial environmental and social consequences of the program. For example, each liter of gasoline sold by PETROBRAS to distributing companies is overcharged US$ 0.14, while diesel oil is overcharged US$ 0.01. Through this mechanism it has been possible to pay producers US$ 0.40/l and sell ethanol in the retail market by US$ 0.65/l. On the other hand, gasoline is sold to the distribution companies by US$ 0.34/l (0.20 which is its real price plus 0.14 which is the intrasectorial fuel subsidy) and commercialized at US$ 0.75/l in the pump station. Such cross-subsidies have the disadvantage that it is tightly controlled by the Government through the sales price of ethanol, gasoline and diesel oil. Apart from this cross-subsidy, which was created to subsidize ethanol through taxation in gasoline and diesel oil other economic incentives -either to producers or consumers- are
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PREMIA – International AMF activities: Ethanol in Brazil
practically nonexistent today. In the Northeast region, however, incentives are still offered to producers within the context of regional development policies.
3.3 Technology Issues Technology played and continues to play a major role to the success of the ethanol program and its capability to stay in the competitive market. Harvesting technology In terms of technology, the mechanisation of harvesting is a very important aspect. The number of available unskilled manpower in Sao Paulo would not be enough for the manual cutting of unburnt cane if mechanisation did not exist. In some countries, it may be possible to keep manual cutting; however, it is the increased seasonality coefficient (and necessarily low wages) that would ultimately result in low-quality jobs. Secondly, mechanization would not be as simple as the use of today's green cane harvesters; it would include trash recovery, transportation, and conditioning. Also, the power generation sector of the cane processing units would operate for at least eleven months per year (the accepted standard for this industry). Seasonality would be reduced; jobs would be created for bagasse/trash handling, storing, and power station operation. Recently, one analysis of job losses due to mechanical harvesting concluded that if mechanization increases from its current level of 15 % to 46 % in Sao Paulo, it would result in a 15 % loss of jobs. One specific region (Ribeirao Preto), already 30 % mechanized, would lose 31 % of the jobs if mechanization reaches 60 % of the total. Again, no consideration is given to higher quality job creation. It was estimated in 1991 that if 85 % of the total sugar cane area in Sao Paulo is mechanized, the number of jobs in the harvesting sector would drop 25 to 30 %. An unburnt cane harvester could replace 50 workers (with 1990 technology and an average productivity of 7 tonnes per person per day in Sao Paulo). In the estimate, the permanent higher quality jobs created in the power generator sector or the indirect jobs for equipment production and maintenance were not included. Although these figures are preliminary and based on hypotheses that are changing with new technology inputs, they provide a useful first estimate. [8] Vehicle technology In terms of technology regarding vehicles, Flexible Fuel Vehicles (FFV’s) were recently introduced in Brazil. Volkswagen launched the fuel-flex Golf, which can operate by using gasoline or ethanol, or any blend of the two fuels. GM, Ford and FIAT responded by releasing at the market new fuel-flex models. This technology is considered to boost sales of vehicles that use ethanol. This industry is booming in a very fast pace. A very important factor that may even influence the future of ethanol is the performance of the cars that use it. Current models of with fuel-flex engines perform as good as with gasoline than in ethanol. Cold engine starting problems have been overcome due to systems that cooperate with the engine control units and allow Fuel Flex Vehicles (FFV’s) to operate as normal gasoline cars. Moreover, the car industry worldwide is heavily interested to possibly invest in FFV’s and therefore considers Brazil not only as a potential market, but also as a terrain that will allow to make some practice in order to expand FFV’s in the rest of the world. Sales in the first nine
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PREMIA – International AMF activities: Ethanol in Brazil
months of 2004 reached 220,000 cars. This number represents almost a quarter of new car sales and is expected to jump to 40% in 2005. In general most of the technical barriers of the past have been solved nowadays, and people care more about the price that they pay than anything else. The cars that use ethanol are starting to regain their position into the market. While the current gas prices are soaring again, alcohol looks all the more attractive and together with FVV’s the ‘guilty’ past of ethanoldedicated vehicles is progressively wiped out.
3.4 Competition - Ethanol Cost vs. Gasoline The term competitiveness is one of the most important key aspects not only in the case of ethanol but also in every new product that enters a market. Competitiveness in the world of ethanol has at least two aspects: - inter-sectorally: the competition of ethanol vs. gasoline, - intra-sectorally: the competition between the various suppliers of ethanol Considering the increase in world oil prices and although the gap between the cost of production of gasoline and ethanol has narrowed considerably, it has not quite been reversed. Both sugar and maize prices have developed in a much more stable manner than oil prices have. This gives a benefit to the ethanol industry and it is expected that it will play a very important role within the next years. After all, oil prices are volatile and there are many analysts who expect quotations to fall back soon. This has been seen extensively during the last years. Moreover, the build up of ethanol production capacity represents a considerable investment, which requires long planning horizons. This is translated into the fact that subsidies will remain necessary for the near future even though it may be argued that the overall level should be reduced if oil and petrol remain high. During the period until early 2003, sugar for the domestic market was only marginally more profitable than anhydrous alcohol. However, that situation changed in late 2002, when prices on the domestic sugar market took off and consequently lifted the value for sugar cane in this category. The prices of anhydrous alcohol also rose at the end of 2002, but not by the same margin. The situation eased in throughout most of 2003 but reversed again towards the end of the year. Given this opportunity cost structure a miller would have, for most of the time, preferred sugar production for the domestic market over anhydrous alcohol distilling. For most of 1999 and 2000, anhydrous alcohol production has been more profitable than the production for the world sugar market. However, in 2002, the price rise on the world sugar market as well as the repeated devaluation of the Brazilian real turned the situation around and sugar exports were more profitable than anhydrous alcohol. The returning weakness on the world sugar market towards the end of 2002 and the increasing tightness on the domestic ethanol market turned around the situation again and anhydrous alcohol production was more profitable than sugar exports. The sharp fall in alcohol prices in early 2004 meant that sugar exports were once again more profitable. [24]
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PREMIA – International AMF activities: Ethanol in Brazil
Furthermore, in order to gain insights into the sources of competitiveness of the various suppliers of ethanol against gasoline, the following costs should be reduced. Before ethanol can leave the distillery, the following cost components have to be taken into account: - Feedstock costs - Operating costs Various research studies conducted in 1990 showed that, on average, direct labour and social taxes made up 21 to 24 % of the total cost of sugar cane production (including land, capital charges, and other fixed and variable costs). After including all the costs (capital, commercial, labour, and social taxes) associated with processing the cane into ethanol, direct labour and social taxes account for 20 to 25 % of the cost of producing ethanol (both growing and processing it). Agricultural labour and social taxes account for more than 60 % of total labour costs. With the liberalization of hydrous alcohol prices in 1999, government intervention largely stopped. Today, authorities regulate the market through changes in the blending rate for anhydrous alcohol and occasional purchases for or sales from strategic reserves and credits for storing ethanol. [12] In ethanol, feedstock makes up the largest part of the overall cost. Brazil has the advantage of having the lowest feedstock costs of all fuel ethanol producers. In the first half of 2004, the sugar cane costs of ethanol were less than 15 cents per litre in the Centre/South of the country. One litre of ethanol in Brazil costs 0.44 $, while a litre of gasoline costs 1.85 $.
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PREMIA – International AMF activities: Ethanol in Brazil
4. EFFECTS IN SOCIETY 4.1 Impacts on the Energy balance The Brazilian government succeeded, despite all the difficulties and barriers that it faced, to make ethanol an important substitute for gasoline. Depending on the year, ethanol reached percentages of more than 50% (fig. 7) of the “gasoline” segment. The fluctuations of the percentage of ethanol in the energy mix as discussed previously may be a problem but efforts for stabilisation are promising a more stable future. Nevertheless, over the period from 1975 to 2002, fuel ethanol use helped to replace around 210 bln litres of gasoline.
Market Share of Ethanol and Gasoline 100 90 80 70 60 % 50 40 30 20 10 0 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02
Gasoline Ethanol
Year Figure 7: Market share of ethanol and gasoline in energy mix of “gasoline sector”
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PREMIA – International AMF activities: Ethanol in Brazil
4.2 Impacts on the National Economy Brazil saved up to 55 billion U.S dollars on oil imports from 1975 to 2003 as a result of the strategy that it followed [23]. Such figure is quite impressive. It represents 85% of the total present country hard-currency reserves and 50% of the total government secured external debt. The present annual amount of money saved offsets the amount of subsidy paid by liquid fuel users to support ethanol. As an example, in 1996 liquid fossil fuel consumers paid approximately US$ 2 billion overprice to cover the ethanol's higher cost than gasoline. Nevertheless, total annual saving for the country has been US$ 4.9 billion. In this sense we can say that ethanol production is an effective mechanism to use soft money to control international debt. Net imports of oil vs. production of crude oil (Mtoe) 80
77,23
70
Net imports
68,85 65,68
60
Production
(Mtoe)
50
45,34
40 30
20,96
20 10
36,48 34,12 33,09 28,6 28,17 22,21
33,46
27,28 23,45
1976
1982
2 per. Mov. Avg. (Production)
12,8
9,5
8,6 8,6
0 1970
2 per. Mov. Avg. (Net imports)
1988
1994
2000
2006
year
Figure 8: Net imports of oil vs. Production of crude oil between 1971 and 2002
Furthermore the economical benefit expands to the fact that Brazil is currently exporting ethanol, thus improving several economic indices. The attractiveness of the price that Brazil is exporting ethanol, has made Brazil to become the largest exporter of this commodity. At present, exports are mostly in the form of beverage and industrial alcohol. However, the country is hoping that it will be the principal supplier of fuel ethanol to Japan, should this country introduce fuel alcohol mixes. The other indirect impact on the economy came to Brazil through the decrease of the unemployment rate that is discussed further. Finally the creation of new markets allowed for new investments in terms of agriculture, production facilities and vehicle technology.
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PREMIA – International AMF activities: Ethanol in Brazil
4.3 Labour As in agriculture, in ethanol industry the number of jobs and their quality are strongly influenced by the technology level. Consequently, the matter of job creation and job quality in large-scale ethanol production is similar to agribusiness units. In ethanol industry, a much larger number of jobs than in conventional oil-based industries are created. These jobs are also more diversified and decentralized than jobs in the oil sector. [8] Official unemployment rates for Brazil were kept at quite low levels for some years. The average for the 80’s was 5 % (in 1989 it was 3% and in 1989 it was 8%). However, the concealed unemployment rate during that period was high: in 1988, 44% of workers in agriculture, 6 % in industry, and 15 % in services received less than the official (reference) minimum wage was (at that time, US$53 per month). Only 20 % of workers in industry and services, and 5 % of agricultural workers, received more than US$265 per month. [8, 18] Furthermore, there are significant regional differences as well. Amongst the main sugar cane producing areas, Sao Paulo, which produces approximately 60 % of Brazil's sugar cane, has the highest salaries. As a rule of thumb it can be stated that every 1 million tonnes of sugar cane processed per year generates 2,200 direct jobs (1,600 in agriculture, and 600 in industry) and around 660 indirect jobs. Agricultural supervisors and skilled industrial workers account for 30 % of total labour force; medium-skill workers (e.g., truck and tractor drivers) account for 10 %; and unskilled labourers (doing planting, cultivating, and harvesting, and low-level industrial work) account for the remaining 60 %. The 660 indirect jobs that are created are related to equipment manufacture, engineering, repair and maintenance in external shops, and chemical supplies manufacture. In Sao Paulo, where 140 million tonnes of sugar cane are processed every year, this leads to the creation of a total of 380,000 jobs. It is estimated that sugar cane agribusiness in Brazil as a total created 800,000 direct jobs and 250,000 indirect jobs in 1990; two thirds - or 700,000 - of these jobs can be attributed to ethanol production. To be able to estimate the quality of the jobs in Brazil one must bare in mind other employment sectors as well. In Sao Paulo, the job that was responsible for the largest proportion of unskilled labour (cane cutting) generated an average income of US$140 per month. This figure is higher than the average salary of 86 % of agricultural workers, 49 % of industrial workers, and 56 % of workers in the service sector in Brazil as a whole. Moreover, it has been assessed that the family income of cane cutters is $220 per month, which is 50 % higher than the average family wage in Brazil. However, it is the seasonal nature of the jobs that causes severe instability to the family income. This means that during the harvesting season the average family wage is $280 per month, whereas during the offseason, it is only $160 per month. It has been made mandatory by special legislation that 1 % of the net sugar cane price and 2 % of the net ethanol price be used for assistance in improving services for sugar cane workers (e.g., medical, dental, pharmaceutical, better sanitary conditions). In the years to come, one very important issue that will play a key role in the evolution of the ethanol industry is the balance between mechanization and the number and quality of new jobs created. A law requiring the cutting of unburnt sugar cane could accelerate mechanical 25
PREMIA – International AMF activities: Ethanol in Brazil
harvesting. Already, in the state of Sao Paulo, the labour market cannot supply the required amount of unskilled workers.
4.4 Land usage – Agriculture boost Sugarcane grown for ethanol production occupies only 4.8% of the land devoted to primary food crops in Brazil, and uses less area than corn (24.0% of the area), soybeans (19.2%), beans (10.7%), and rice (10.8%) ([35]). The land used for all sugarcane crops (sugar plus ethanol) represents only 7.5% of the area used for all crops or 0.4% of the Brazilian territory. This is also approximately true for the State of Sao Paulo, where the largest areas dedicated to sugarcane production (and the highest use of cultivable land) is found. Sao Paulo has 15million hectares of agricultural land, of which only 50% is currently being used for this purpose. Thus, competition between land for food, export crops, and energy crops is not significant at the moment. Compared to other countries, this percentage is considered to be low and therefore the potential that exists cannot be neglected. The country’s sugar and alcohol industry had been constantly changing over the past 15 years and was likely to continue to do so in the future. While in the early 1990s the North/Northeast regions accounted for almost 35% of the area under cane, their share fell to less than 21% in 2004 as many milling companies moved to the Centre/South. There, the growing conditions for sugar cane are much better than in the North/Northeast, resulting in the country’s rise to its position as the world’s lowest cost producer. Nowadays, sugar cane production is concentrated in the Southeast, South and Centre/West of the country where the crop has gradually displaced coffee and orange groves From the 70’s until the 90’s, the development in technology and the increase of intensity of production resulted to ethanol yield from 0,367 to 0,904 m3 / hectare. The Brazilian ethanol production system is composed of approximately 400 separate industrial units. Each unit has a range for exploiting canes that vary from 5,000 to 50,000 hectares. Approximately 60,000 producers supply sugar cane to the industrial units. External suppliers produced approximately 38 % of the sugar processed in the year 1986, with mill owners themselves providing approximately 62 % According to data from the Agriculture Ministry, the 2005/06 (May/April) sugar cane crop in the Centre/South is expected to increase by 6 to 8% to 346 to 353 mln tones. Moreover, the amount of sugar and ethanol produced in the 2005/06 harvest is likely to increase proportionately. In 2004/05, the Centre/South produced 22.05 mln tones of sugar, up 7.8% over 2003/04. Ethanol production rose by 3.6% to 13.54 blv litres. The 2005/06 sugar cane estimate is slightly below earlier industry forecast which were in the 350 to 360 mln ton range. [6, 7]
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PREMIA – International AMF activities: Ethanol in Brazil
4.5 Environmental impacts The common practice of burning sugar cane fields prior to harvesting in order to improve productivity has been severely questioned for environmental reasons. Although there seems to be no real reason for concern, since carbon dioxide from burning is entirely recycled, the environmental problem that is created has to do with particles in local scale. The renewable energy lost in burning could be used if suitable harvesting and transportation systems could be designed to handle the green cane and trash economically. A more efficient use of biomass for power generation could impact larger areas besides Brazil and would have important consequences for job creation and quality in many places. As mentioned before, car ownership and use are increasing fast, causing higher emission levels of CO2. Consequently, ethanol production and use in Brazil may prove to be an important alternative supporting the efforts to greenhouse gas emissions. Ethanol in the transport sector of Brazil offers almost complete absorption of carbon dioxide emitted during the combustion of fuel alcohol. This sustainable system allows, in principle, to increase the energy supply, essential for economic growth, with less hazards to the environment. In order to assess the net CO2 emissions from ethanol extracted from sugar cane, it is important to include all aspects of the agricultural and industrial stages of production and consumption, where fuel alcohol is used instead of fossil fuels. Therefore, other aspects must be considered: - There is a large energetic potential of not used sugar cane bagasse, that if utilized with more efficiency can generate sufficient electrical energy not only to its own consumption but also for sale, which would bring a substitution for the fuel oil, large emitter of CO2; [30] - The emission of carbon due to the substitution of the vegetal cover can be positive or negative, depending on if the sugar cane substitutes other crops, natural covers or pastures with biomass density per lesser hectare. Deforestation for sugar cane dedicated areas should not be an option as the total CO2 produced from an area that has been deforested and planted with sugar cane can result negatively in CO2 reduction. [30] For comparison of the total CO2 emissions of the Brazilian fuel alcohol program with equivalent emissions for gasoline some assumptions where made taking into account blend properties and engines in Brazil. One litre of hydrated alcohol (for alcohol-powered νehic1es) substitutes 0.8 litre of gasoline and one litre of anhydrous alcohol (to blend with gasolinepowered vehicles) substitutes 1.04 lit of gaso1ine mainly due to efficiency reasons (Fig. 8) [30].
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PREMIA – International AMF activities: Ethanol in Brazil
Figure 9: Total consumption of gasoline and substituted part. [6]
The Nationa1 Energy Ba1ance and The IPCC Methodology were used in the literature to determine the Carbon (C) and CO2 emissions of the gasoline. The following results were found: - From 1975 to 1984: 0.61 kg C/lit gasoline - From 1985 to 1998: 0.63 kg C/lit gasoline Table 5 and figure 9 show the avoided emissions of CO2 through the substitution of gasoline from ethanol from 1975 to 1998. The share of avoided CO2 emissions through ethanol constitutes approximate1y 85% of the total emissions resulting from the combustion of all light vehicles fleet in the Brazilian Transport Sector, for the last decade. This substitution is equivalent to withdrawing an average of 20,360 103 t CO2/year from the atmosphere. Consumption (103 m3 ) Anhydrous Alcohol 53,106 Hydrated Alcohol 140,236 Total Alcohol 193,342
Substituted Gasoline (103 m3 ) 55,230 112,189 167,419
Avoided CO2 Emissions (103 t ) 126,484 258,484 384,993
Table 5: Avoided CO2 Emissions through the Use of Ethanol- Alcohol Brazilian Program- 1975 to 1998
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Avoided CO2 emissions (10^3 t) 30000 25000
Tons
20000 CO2 emissions
15000 10000 5000
Figure 10: Avoided Carbon Dioxide from 1975 [1, 6]
29
97 19
95 19
93 19
91 19
19
89
87 19
85 19
83 19
81 19
79 19
77 19
19
75
0
PREMIA – International AMF activities: Ethanol in Brazil
5. PROSPECTS FOR THE BRAZILIAN ETHANOL MARKET The future for ethanol in Brazil seems to be promising as the combination of technological developments, increased oil prices in the market and the experience that has been gained throughout the 30 years of ethanol production and use in Brazil offer an opportunity for new investments which will push the market to even better results. Production ‘Grupo Graciano’ will invest BRL 70 mln in a new sugar and alcohol plant in the county of Mendonca, Sao Paolo state. The plant will come online in 2006/07 and will double the group’s production capacity by 2009. Santa Isabel’s first plant is located in Novo Horizonte, Sao Paolo state. ‘Grupo Unialco’, which operates the Unialco plant in Guarapes and the Alcoolvalve plant in Aparecida, is to invest $40 mln in a new plant in Suzanapolis. The Usina Sopesa will start crushing cane in 2007. Under phase 1 of the project the plant will process one mln tons of cane by 2008 for the production of alcohol. Phase 2 of the project includes the production of sugar. The investment has been made possible by the involvement of a foreign investor, the name of which has not been disclosed yet. ‘Nova America’ is to increase cane-crushing capacity at its plant in Maracai after the end of the 2005/06 campaign. Crushing capacity is to rise from 14,000 tons a day at present to 16,500 tons. At the same time the plant will install a 32 MW cogeneration facility. Total investments are in region of BRL80mln, of which 80% come from the National Development Bank (BNDES). Vehicles - Market Accordingly, the National Association of Vehicle Manufactures (Anfavea) sales of flex-fuel vehicles overtook sales of conventional gasoline cars for the first time in May 2005. Total sales in May amounted to 67,500 units (49.5% of total light vehicle sales. In April of this year 55,100 flex-fuel cars were sold, accounting for 40.4% of sales. Sales of vehicles powered by pure ethanol amounted to 2,760 units (May 2005), down from 4,047 units in April and also below the 5,510 units seen in May 2004. The renewed interest in flex-fuel vehicles after a slump earlier in the year may be explained with the weakening ethanol prices on the local market in the wake of the record cane crop. Also, the rising real has meant that Brazilian ethanol has become less competitive on the export markets thus raising domestic supplies. A Volkswagen Brazil representative brought the audience in a recent convention up to date to the most recent developments in the market for total flex-fuel vehicle, a technology which allowed cars to run on any mixture of hydrous alcohol, anhydrous alcohol and gasoline. The basic idea behind this development entails making the decision among different types of fuel whenever consumers refuel their vehicles and certainly not when they purchase their cars. Volkswagen was the first to introduce this new technology back in March 2003, since when sales of flex-fuel vehicles had developed very briskly. In 2003, total sales of flex-fuel vehicles amounted to 48,000 units rising to 329,000 in 2004. At the same time, sales of pure alcohol vehicles had also been quite buoyant, reaching 36,000 units in 2003 and 51,000 units in 2004. 30
PREMIA – International AMF activities: Ethanol in Brazil
Overall, trade had remained much stronger than initially expected. Stakeholders in the car industry initiated a study of the market for flex-fuel vehicles in order to determine future ethanol demand. The analysis, which was published in 2003, foresaw the market share of flex-fuel vehicles reaching 17% in 2004, rising to 30% in 2005, 50% in 2006 and 67% from 2007 onwards. In the reality, the actual development of the market proved to be much more rapid. In 2004, the share of flex-fuel vehicles achieved 22% while in 2005 this could increase to 40% rising to 60% in 2006. [14, 15]
FFV market share in Brazil - January 2003 to October 2005 100%
80%
60%
40% FFV Introduction 20%
p
05
05 se
ju l
05
05
04
05
m ay
m ar
ja n
04 p
no v
04 se
ju l
04
04
03
04
m ay
m ar
ja n
03 p
no v
03 se
ju l
03
03
m ay
m ar
ja n
03
0%
Figure 11: Market share of FFV’s in Brazil between January 2003 and October 2005 [Source: ANFAVEA]
The outlook for the sales of flex-fuel vehicles in the Brazilian market continues to be bright. Both Fiat and Volkswagen will start offering cars with 1.0 litre engines with the new technology in the first half of this year. Volkswagen expects that by the end of this year between 75-80% of its cars sold will have a flex-fuel engine. At present more than 50% of VW’s cars offer this technology. With Fiat and VW offering 1.0 litre engines with flex-fuel technology, a new boost may be expected. After all, 57.3% of all vehicles sold last year belonged to this category. The popularity of the 1.0 litre engine is partly explained with the lower sales tax on these cars which amounts to just 9%. 1.0-2.0 litre engines are levied a 15% tax if the engine runs on alcohol or if it is a flex-fuel vehicle. Bosch’s Flex Fuel System, introduced in 1994 in Brazil, was certainly a pioneering development. This system, which enables the use of alcohol-gasoline mixtures as fuel, is currently in very high demand. Furthermore, in expanding the number of alternative fuels in its product line-up, Bosch do Brasil presented the first concept car with Tri-Fuel technology utilizing alcohol, gasoline and natural gas in 2003.
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PREMIA – International AMF activities: Ethanol in Brazil
The driving forces for the creation of a system that goes further than the conventional FlexFuel system were not only of environmental origin, but it is understood that Brazil learned a lot from the experience of more than 3 decades in the ethanol industry. The uncertainty of the availability and also the price fluctuations at a specific fuel should not anymore alter the decision for choosing to buy a car that will run with ethanol.
Figure 12: A concept car accommodating Tri-Fuel technology. [27]
Other transport means One great example of the sizeable growth in the Brazilian ethanol industry is a Brazilian company named Neiva (subsidiary of Embraer). The company has unveiled the world’s first commercially produced, ethanol-burning aircraft, opening the way for more ethanol planes. Neiva Aeronautic Industry has just delivered the first single-engine, single seta EMB 202 Ipanema to a crop-spraying company. Neiva also hopes to convert the 150 six-passenger Sertanejo and Minuano aircraft in the country, which have engines similar to the Ipanema's. [26]
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PREMIA – International AMF activities: Ethanol in Brazil
6. CONCLUSION The importance of the Brazilian alcohol program can be divided into two main aspects. The Brazilian case is surely a reference for every government that wishes to invest in ethanol in order to see strengths, weaknesses, opportunities and threats of the program that was implemented. It can be considered as a complete program with first stages, peaks and decline. Finally it is visible that strong foundations can be the means for overcoming obstacles such as low competition prices or availability. The decrease of ethanol fleet number in the 90’s proved to be as one of the main threats. It was showing indications and warning for ethanol market crisis resulting to the evanescence of this market. FFV’s came at the right time. The uncertainty that ethanol-dedicated vehicles created is now over and there is no chance for citizens who buy an FFV to face the problems of availability of the past. Parallel to that, the governments decision to let the market set ethanol and gasoline prices proved to be the right choice. This confirmed the statement that initiatives and incentives should be given at the initiation of such programs baring in mind that these incentives will allow the new market or the new product to place it self in the competition after some years without any direct financial support. The ethanol program in Brazil not only created opportunities for development of a new market but it also reduced imports, created new jobs, reduced CO2 emissions and raised the morality of the Brazilian people. All these factors along with the current situation with ethanol are a proof that finally we can talk about a ‘successful’ program. Recapitulating, several benefits were obtained by the use of ethanol as a liquid fuel, i.e: (a) creation of more than 700,000 rural jobs with very modest investment cost (US$ 20,000 each); (b) development of sugarcane crop technology and their processing to sugar and ethanol, increasing Brazil's capacity to act as a major player in the international sugar market; (c) demonstration at worldwide level that a massive alternative and renewable fuel program can be carried out and implemented in less than 10 years; (d) significant savings in hard currency. As a general conclusion one may state that the Brazilian government started building up some competitive advantages to sugarcane alcohol use as an automobile fuel by investing in technology research, creating an alcohol industrial policy and offering incentives for the private sector. In the short term, with low oil prices, the alcohol program could be seen as one more “undesirable government intervention in the fuel market”. However, the economic context of the 1970s can justify Proalcool as a reasonable policy to attempt to deal with oil crisis. Also, as the world has become more environmentally conscious and oil becomes scarce and expensive in the future, alcohol is a real option for worldwide substitution of liquid fossil fuel and can be an important alternative to achieve reductions in CO2 emissions [36]. Brazil has built some competitive assets that can put it in a privileged situation in the market of alcohol production and technology in the long term. This case shows the importance of public policies in allowing the creation of a market for renewable energy. Proalcool reveals that mechanisms for implementing economic and technology policies, though significantly 33
PREMIA – International AMF activities: Ethanol in Brazil
complex and uncertain, can lead the private sector, and society in general, towards the accomplishments of planned national or environmentally sustainable goals. On the other hand, Proalcool’s decline in economic competitiveness due to the fall in oil prices in the 1990s illustrates the difficulties of long-range planning, which is one of the key points for planning sustainable development strategies. Nowadays, as environmental interests and values are much stronger, public policies towards the use of renewable energy policies are likely to receive much support.
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PREMIA – International AMF activities: Ethanol in Brazil
7. APPENDIX Alcohol Standards in Brazil 1.
Industrial Alcohol Regardless of its origin and method of production, industrial alcohol is classified as: (a) Anhydrous, where the dehydration is practically complete. (b) Rectified, when it is the product of a rectification process. (c)
2.
Crude ("bruto"), resulting from distillation and partial rectification of fermented material.
Fuel Alcohol An anhydrous product which may be mixed with petroleum derivatives for use as a motor fuel. It should satisfy the following requirements: (a) Alcohol content, minimum
99.5 % v/v
(b) Non-volatile residues, in mg/litre, maximum
5.0 (5 p.p.m)
(c)
3.0 (30 p.p.m)
Total acids, in mg/100ml, maximum
(d) Chlorides, in mg/100 ml, maximum
3.
1.0 (10 p.p.m)
Technical Anydrous Alcohol A product of dehydration, having a minimum alcohol content of 99.5 ° GL (% v/v)
4.
Analytical Reagent Grade Alcohol A type of hydrous or anhydrous alcohol satisfying the following requirements: (a) Non-volatile residue, in mg/litre, maximum
zero
(b) Total acids, in mg/100 ml, maximum
3 (30 p.p.m)
(c)
10
Permanganate time, in minutes, minimum
(d) Reactions for fusel oils, aldehydes, acetone, furfural and benzene
35
negative
PREMIA – International AMF activities: Ethanol in Brazil
5.
Pharmaceutical Grade Alcohol Rectified alcohol which satisfies the following requirements:
6.
(a) Alcohol content, range
92.7 - 95.2 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
6 (60 p.p.m)
(c)
1
Alkalinity in mg of 0.1 N H2SO4 required to neutralize 100 ml, maximum
(d) Non-volatile residue (ash) at 100°C, in mg/kg, maximum
122 (p.p.m)
(e) Reactions for fusel oils, aldehydes, methanol and benzene
negative
Potable Alcohol A rectified product, (free of copper) having the following characteristics (as specified in Decree 9688 of 11-4-1949): (a) Alcohol content, minimum
95 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
6 (60 p.p.m)
(c)
500 (p.p.m)
Non-volatile residue, in mg/litre, maximum
(d) Coefficient of impurities (total congeners) in mg/100 ml, maximum
7.
50 (500 p.p.m)
Fine Alcohol ("Alcool Fino") A rectified product which satisfies the following requirements:
8.
(a) Alcohol content, minimum
96 ° GL (% v/v)
(b) Permanganate time, in minutes, minimum
5
(c)
1.8 (18 p.p.m)
Total acids, in mg/100 ml, maximum
Rectified Alcohol A rectified product which satisfies the following requirements:
9.
(a) Alcohol content, minimum
95 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
3.0 (30 p.p.m)
(c)
3.6 (36 p.p.m)
Total esters, as ethyl acetate, in mg/100 ml, maximum
Ordinary Alcohol
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PREMIA – International AMF activities: Ethanol in Brazil
An alcohol which meets the following requirements: (a) Alcohol content, range
92 - 94.9 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
5.0 (50 p.p.m)
(c)
55 (550 p.p.m)
Total esters, as ethyl acetate, in mg/100 ml, maximum
10. Crude Alcohol ("Bruto") An alcohol which meets the following requirements: (a) Alcohol content, range
90 - 91.9 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
15 (150 p.p.m) 55 (550 p.p.m)
(c)
Total esters, as ethyl acetate, in mg/100 ml, maximum
Table 6: Alcohol standards in Brazil [21]
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PREMIA – International AMF activities: Ethanol in Brazil
Fuel ethanol Specifications in Brazil
Characteristics
Units
AEAC (Anhydrous)
1. Appearance
__
Clear and free of suspended matter
2. Total acids, as acetic acid
mg/litre 30 max (30 p.p.m)
30 max (30 p.p.m)
MB-2606 (NBR-9866)
3. Electrical conductivity
µS/m
500 max
500 max
MB-2788 (NBR-10547)
4. Chlorides, as Cl.
mg/kg
__
1 max (1 p.p.m)
MB-3055 (NBR-10894)
5. Sulphate, as SO4
mg/kg
__
4 max (4 p.p.m)
MB-3055 (NBR-10894)
6. Specific gravity at 20°C, (at point of production)
kg/m³
791.5 max
809.3±1.7
MB-1533 (NBR-5992)
7. Specific gravity at 20°C, denatured with 3% v/v gasoline (at point of sale)
kg/m³
__
808.0±3.0
MB-1533 (NBR-5992)
8. Material non-volatile at 105°C, (at point of production)
mg/litre 30 max (30 p.p.m)
30 max (30 p.p.m)
MB-2123 (NBR-8911)
9. Copper, as Cu.
mg/kg
0.07 max (0.07 p.p.m)
__
MB-3054 (NBR-10893)
10. Iron, as Fe.
mg/kg
__
5 max (5 p.p.m)
MB-3222 __
11. Sodium, as Na.
mg/kg
__
2 max (2 p.p.m)
MB-2787 (NBR-10422)
12. Acidity/alkalinity
pH
__
7.0±1.0
MB-3053 (NBR-10891)
13. Residue on evaporation, (at point of sale)
mg/litre __
50 max (50 p.p.m)
MB-2053 (NBR-8644)
14. Ethanol content, (at point of production)
°INPM
99.3 min
93.2±0.6
MB-1533 (NBR-5922)
__
92.6 to 94.7
MB-1533 (NBR-5922)
30 max (3.0% v/v)
CNP/DIRAB No. 209/81
15. Ethanol content, when °INPM denatured with 3% v/v gasoline, (at point of sale) 16. Gasoline content, (at point of sale)
mg/litre __
Table 7: Fuel ethanol specifications in Brazil [12]
38
AEHC (Hydrous)
Methods Visual
PREMIA – International AMF activities: Ethanol in Brazil
8. REFERENCES 1. ANFAVEA. Anuario Estatistico (1999) 1957/1998. Sao Paolo, Brazil. 2. BEN 1999 – Balanco Energetico Nacional (1999)/Ministerio das Minas e Energia, Brazilia, Brasil 3. GEIPOT (1999) :Ministerio dos Transportes, Anuario Estatistico- Brasilia, Brazil 4. IPCC (1996) – Greenhouse Gas Inventory Reporting Instructions- Ipcc Guidelines for Nacional Greenhouse Gas, Inventories, Vol 1,2,3- IPCC, IEA, OECD 5. Macedo I.,C. (1997): Greenhouse Gas Emissions and Bio-Ethanol Production/ Utilization in Brazil, IR/CTC- 05/97, Piracicaba, Brazil 6. Ribeiro S., K., D.Sc. Thesis, COPPE, Federal University of Rio de Janeiro, (1995), Brazil 7. F.O. Licht Gmbh- World Ethanol and Biofuels Report, November 2004- March 2005, April 2005. 8. Isaias de Carvalho Macedo, Converting Biomass to Liquid Fuels: Making Ethanol from Sugar Cane in Brazil, Energy as an Instrument for Socio-Economic Development, Sao Paolo, Brazil 9. T.B. Johansson, H. Kelly, A.K.N. Reddy, and R.H. Williams, “Renewable Fuels and Electricity for a Growing World Economy”, in Renewable Sources for Fuels and Electricity (Washington, D.C.: Island Press, 1993) 10. Bellona Foundation, Brazil Launches Alcohol Powered Plane, April 2005. 11. Earth Policy Institute from Renewable Fuels Association, Homegrown for the Homeland: Ethanol Industry Outlook 2005 (Washington, DC: 2005), pp.8-14 12. Christoph Berg, World Fuel Ethanol Analysis and Outlook (Ratzeburg, Germany: F.O. Licht, April 2004) 13. Stephane His, “Biofuels Worldwide,” technical report, Panorama 2005: Energy, Transport, Environment (Paris: Institute Francais de Petrol, 25 November 2004) 14. Peter Apps, "South Africa Maize Farmers See Ethanol Plant In 18 Months," Reuters, 15 March 2005 15. "Use of Ethanol Fuel for Cars," Energy Saving Now website, viewed 26 June 2005, http://energysavingnow.com/biomass/carsbiofuel.shtml. 16. David Cullen, “EU Says Won’t Meet 2 Percent Biofuel Target This Year,” Reuters, 3 March 2005
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PREMIA – International AMF activities: Ethanol in Brazil
17. Lucy Hornby, “Asia Pushes Ahead on Biofuel, Despite Cost,” Reuters, 28 February 2005 18. Melissa Alexander, "Coarse Grains," World Grain, January 2005 19. James Thompson, Ethanol’s Booming in Brazil, December 2004 20. National Department of Fuels –Technical Regulation DNC- 01/91, Specifications for Anhydrous fuel Ethanol (“AEAC”) and Hyrdous Fuel Ethanol (“ AEHC”) 21. Associacão Brasileira de Normas Tecnicas (A.B.N.T.)- (Brazilian Association for Technical Standards), Standard EB 121, Classification of various types and qualities of alcohol 22. http://www.canegrowers.com.au 23. www.cornandsoybeandigest.com/mag/soybean_ethanols_booming_brazil/ 24. http://www.distill.com/World-Fuel-Ethanol-A&O-2004.html 25. www.iangv.org/ 26. http://www.bellona.no/en/energy/37677.html 27. Robert Bosch – Company newspaper 6-2005. 28. www.cia.gov 29. Carvagho E., The whereabouts of a fuel – ethanol world market. UNICA 30. www.ivig.coppe.ufrj.br/doc/paper-suzpau.pdf 31. De Castro Santos MH, 1985, "Alcohol as fuel in Brazil: an alternative energy policy and politics. PhD dissertation. Department of Political Science, MIT, Cambridge. 32. Puppim de Oliveira J.A., 2002, "The policymaking process for creating competitive assets for the use of biomass energy: the Brazilian alcohol programme", Renewable and Sustainable Energy Reviews 6 (2002) 129–140. 33. Lowi T., 1964, "American business, public policy, case studies, and political theory", World Politics, 1964; July:677–715. 34. Moreira JR, Goldemberg J., 1999, "The alcohol program", Energy Policy 1999;27(4):229–45. 35. Fundacao Instituto Brasileiro de Geografia e Estatistica, 1989, Rio de Janeiro. 36. Ribeiro SK, Rosa LP. 1998, "Activities implemented jointly and use of fuel alcohol in Brazil for abating CO2 emissions", Energy Policy 1998
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PREMIA – International AMF activities: Ethanol in Brazil
PREMIA is a Specific Support Action in 6th Framework Programme of the European Commission. The aim of PREMIA is to assess the effectiveness of measures to support alternative motor fuels - in the EU-25, - based on international experiences, - in relation to the market maturity of AMF, - short term: biofuels, - mid/long term: hydrogen, - in national context. Project duration: June 2004 – May 2007 Partners: VITO (Belgium), JRC-IPTS (Spain), CERTH/HIT (Greece), VTT (Finland), SETREF (Greece) Sponsored by the European Commission, DG TREN, Contract TREN/04/FP6EN/S07.31083/503081
http://www.premia-eu.org
Title: Ethanol in Brazil Authors: Andreas Papageorgiou (CERTH/HIT) Keywords : Ethanol, Alcohol, Brazil, Energy, Transport, Fuel Date: October 2005 Report within PREMIA WP2: International activities on alternative motor fuels LEGAL NOTICE Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. The views expressed in this publication are the sole responsibility of the authors and do not necessarily reflect the views of the European Commission. Reproduction is authorised provided the source is acknowledged. © PREMIA, October 2005
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PREMIA – International AMF activities: Ethanol in Brazil
List of Public PREMIA Reports (available at www.premia-eu.org) Ref # D1 D2
D3.2 D3.3 D3.4
D4 D4.1
D4.2 D5 D6 D7 D8.3 D9.4
Deliverable name State-of-the-art and market-maturity of alternative motor fuels International initiatives on AMF Biofuels in the US Bio-ethanol in Brazil Biofuels in India Natural gas in Argentina Hydrogen in North-America Transport-related hydrogen activities in Asia Common assessment framework for review of AMF initiatives Assessment of long-term options and their impact on the market introduction of AMF’s Reports of int. workshops and discussion forums 2nd Int. Fuel Cell Bus Workshop - Porto, Nov 04 3rd Int. Fuel Cell Bus Workshop - Vancouver, Dec 05 4rth Int. Fuel Cell Bus Workshop - Yokohama, Oct 06 Overview of incentive programmes on AMF’s and review of their impact on the market introduction of AMF’s Country reports Bioethanol and biogas in Sweden Biodiesel from used frying oil in Austria Biodiesel in Germany Biofuels in France Biofuels in Spain Natural gas in Italy Biofuels in East Europe Reports of int. workshops and discussion forums Biofuel Discussion Forum - Brussels, 26 May 2005 Towards introduction of alternative motor fuels: country specific situations Results of the scenario calculations and the cost-benefit analysis Synthesis report - key policy issues and policy suggestions for the large-scale market implementation of bio-fuels and hydrogen on EU level Report on national and EU-level policy workshops Final project report
2
Lead editor VTT VITO VITO HIT VITO HIT IPTS VTT VITO
Application Bio CNG H2 x
x
x
Sept 05
x x x x
x
x
March 06 Nov 05 Oct 05 Dec 05 Aug 05 Feb 06 Feb 06 draft Sept 05
x x x x
VITO VITO VITO VITO HIT
Delivery date
x x x x
Dec 04 March 06
x
subc subc subc subc HIT HIT SETR.
x x x x x x
May 05 May 05 May 05 Sept 05 Oct 05 Nov 05 Nov 05
VITO HIT
x
June 05
IPTS
x
x
x
x
x
x
x
IPTS VTT x x VITO x x subc = subcontractor report
PREMIA – International AMF activities: Ethanol in Brazil
TABLE OF CONTENTS Abstract ......................................................................................................................... 4 1. INTRODUCTION..................................................................................................... 5 1.1 Scope and Objectives of the Report ........................................................................... 5 1.2 Methodology and Structure of the Report........................................................................ 5 2 General Description of Brazil .................................................................................... 6 2.1 Basic information and importance of the country............................................................ 6 2.2 Ethanol Production in the world market and in Brazil..................................................... 8 2.3 Alcohol Production and Trading Profile .......................................................................... 9 2.4 Alcohol driven vehicles.................................................................................................. 13 North..................................................................................................................... 13 3. Brazil as the World Leader in Ethanol .................................................................... 15 3.1 Brief historical overview................................................................................................ 15 3.1.1 Proalcool.................................................................................................................. 15 3.1.2 The weaknesses of Proalcool .................................................................................. 17 3.2 Government incentives................................................................................................... 18 3.3 Technology Issues .......................................................................................................... 20 3.4 Competition - Ethanol Cost vs. Gasoline ....................................................................... 21 4. Effects in society ..................................................................................................... 23 4.1 Impacts on the Energy balance....................................................................................... 23 4.2 Impacts on the National Economy ................................................................................. 24 4.3 Labour ............................................................................................................................ 25 4.4 Land usage – Agriculture boost ..................................................................................... 26 4.5 Environmental impacts................................................................................................... 27 5. Prospects for the Brazilian ethanol market ............................................................. 30 6. Conclusion............................................................................................................... 33 7. Appendix ................................................................................................................. 35 Alcohol Standards in Brazil ............................................................................................. 35 Fuel ethanol Specifications in Brazil ............................................................................... 38 8. References ............................................................................................................... 39
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PREMIA – International AMF activities: Ethanol in Brazil
ABSTRACT Ethanol in Brazil is one of the most important biofuels related cases worldwide. The reasons that pushed the introduction and the development of ethanol in Brazil are all interrelated. The vision that was set more than 30 years ago was Brazil to be able to produce its own energy for transportation resulting into economic, social and environmental benefits. The steps towards the realization of the ambitious program went through several difficulties resulting from both national (availability of ethanol) and international factors. The incentives that were given by the Brazilian government supported the introduction of ethanol into the market with great success. Several problems arose when ethanol was to stand in the market with incentives diminishing. The changes that ethanol created in Brazil are noticeable. The country increased its energy security and the economic indices showed that Brazil is now more competitive in economical terms. Furthermore the new jobs that were created and the environmental benefits of the use of the sustainable fuel resulted into the increase of quality of life. Nowadays ethanol in Brazil is considered as a promising industrial commodity with great potential and bright future.
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PREMIA – International AMF activities: Ethanol in Brazil
1. INTRODUCTION 1.1 Scope and Objectives of the Report As the oil prices have increased dramatically in 2005, fuel-ethanol has become a very attractive alternative and its expansion in the energy marketplace happens to be basically a matter of economic competitiveness and supply. This increase of price (if remains) will generate great economical and consequently social obstacles that will have to be faced from governments by taking drastic measures. Furthermore, the production peak for oil will create a more difficult situation since this will initiate the point where the production of oil will not be able to meet the market’s demand. The above difficulties and threats concerning the world oil market are basically the main opportunities for biofuels and at that case for ethanol. More are: -
specifically, some of the most important reasons, supporting the biofuels exploitation Energy diversification and security Renewability of energy feedstock Mitigation of air pollution The greenhouse effect Expansion of agribusiness Opportunities for rural workers.
Developing counties, which rely in a respectable percentage in agriculture, consider “energy farming” as a measure to improve the quality of life and the economy in a sustainable way. Furthermore the support that developed countries can provide creates a win-win situation as fuel-ethanol produced in a developing country and used in a degree in the developed world offers the opportunity of environmental and energy benefits to one side, while on the other side it creates a new source of income and improvement of life conditions.
1.2 Methodology and Structure of the Report This report depicts the case of Ethanol in Brazil, mainly used for transportation purposes. The information that contains has been collected from several sources explaining and at some cases analysing facts and data. Personal views and opinions showing a trend in favour or against an action or a programme were planned to be avoided as the scope was to present the information based on the historical actions and results that took place. The main idea of this report was to show why Ethanol Brazil is considered such an important case, present the data that support this statement and show the effects that this initiative had. In this context, at the first part of the report some basic information concerning Brazil is listed, with emphasis on alcohol production and trading as well as on the time evolution of alcohol driven vehicles. Accordingly, the major activities characterizing Brazil as the world leader in ethanol production are cited.
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PREMIA – International AMF activities: Ethanol in Brazil
Subsequently, the effects of the ethanol production program in Brazil (Proalcool) on the local society are explained. Finally, the report finishes with an analysis of the prospects for the Brazilian ethanol market.
2 GENERAL DESCRIPTION OF BRAZIL 2.1 Basic information and importance of the country Nowadays ethanol is becoming a very important alternative fuel. The geographical region of which Brazil belongs notes a significant activity that can be added to the overall large number of activities that many countries have started with initiatives that boost the development of ethanol and can be seen in table 1. In fact the Brazilian National Alcohol Policy (Proalcool) is one of the world’s most ambitious efforts to produce a renewable biomass fuel as an oil substitute. Ethanol Production in South America Location Feedstock Ethanol Production
Brazil
Sugarcane
Peru
Sugarcane
Colombia
Sugarcane
Central America
Sugarcane
The Brazilian government launched its National Fuel Alcohol Program in the mid-1970s, and by 1980 ethanol use had overtook gasoline. Since price liberalization in 1999, ethanol has maintained prices a third lower than gasoline. Brazil is the world's leading ethanol producer and exporter, distilling nearly 15.1 million m3 in 2004. In 2002 Peru announced the "Mega-Project," a plan to build up to 20 distilleries and an ethanol pipeline from the interior to the port of Bajovar. Up to 600,000 acres of sugarcane will be planted in forest areas now used for coca leaf production. The government hopes to export 1.13 million m3 of ethanol by 2010. From 2006 the use of 10 percent ethanol in fuel will be mandated in cities with populations over 500,000, requiring the cultivation of an additional 370,000 acres of sugar cane and nine new ethanol plants to produce the necessary 984 thousand m3 a year. El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica project total output to reach 500 thousand m3 by 2010, enough to allow for a 10 percent ethanol blend in gasoline. Costa Rica, Jamaica and El Salvador export ethanol fuel blends to the United States duty-free under the Caribbean Basin Economic Recovery Act, and are looking to increase exports.
Table 1. Ethanol initiatives in South America [11]
Brazil is the largest South-American country. The basic figures presenting the identity of this country can be found in table 2.
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PREMIA – International AMF activities: Ethanol in Brazil
Figure 1: Map of Brazil
BRAZIL Area Terrain Land use
Environment - current issues
Population GDP GDP - real growth rate GDP - composition by sector Labor force:
total: 8,511,965 sq km land: 8,456,510 sq km water: 55,455 sq km mostly flat to rolling lowlands in north; some plains, hills, mountains, and narrow coastal belt arable land: 6.96% permanent crops: 0.9% other: 92.15% (2001) deforestation in Amazon Basin destroys the habitat and endangers a multitude of plant and animal species indigenous to the area; there is a lucrative illegal wildlife trade; air and water pollution in Rio de Janeiro, Sao Paulo, and several other large cities; land degradation and water pollution caused by improper mining activities; wetland degradation; severe oil spills 186,112,794 purchasing power parity - $1.492 trillion (2004 est.) 5.1% (2004 est.) agriculture: 10.1% industry: 38.6% services: 51.3% (2004 est.) 89 million (2004 est.)
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PREMIA – International AMF activities: Ethanol in Brazil
Labor force - by occupation Unemployment rate: Population below poverty line: Budget: Public debt: Agriculture - products: Industries: Electricity production Electricity - consumption: Oil - production: Oil - consumption: Oil - proved reserves: Natural gas - production: Natural gas - consumption: Natural gas - imports Natural gas - proved reserves: Exports - commodities Imports - commodities: Debt - external:
agriculture 20%, industry 14%, services 66% (2003 est.) 11.5% (2004 est.) 22% (1998 est.) revenues: $140.6 billion expenditures: $172.4 billion, including capital expenditures of NA (2004) 52% of GDP (2004 est.) coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment 339 billion kWh (2002) 351.9 billion kWh (2002) 1.788 million bbl/day (2004 est.) 2.199 million bbl/day (2001 est.) 13.9 billion bbl (2004 est.) 5.95 billion cu m (2001 est.) 9.59 billion cu m (2001 est.) 3.64 billion cu m (2001 est.) 221.7 billion cu m (2004) transport equipment, iron ore, soybeans, footwear, coffee, autos machinery, electrical and transport equipment, chemical products, oil $219.8 billion (2004 est.)
Table 2. General information for Brazil [28]
2.2 Ethanol Production in the world market and in Brazil The great potential that biofuels have is a fact that is accepted by most scientists. However, bioethanol still plays a minor role in the energy market. Compared to the world gasoline consumption that is 1.2 billion m3/year (7.7 billion barrels/year)1, it becomes clear that fuelethanol consumption only represents about 2.5% of current gasoline consumption. However, it is worth noting that a growing number of countries have recently either expanded existing domestic fuel-ethanol production programs or established new ones. Cases of Brazil, the USA, China, Thailand, Colombia, Peru, Canada and Sweden are indicating that activity has started taking place while continuously more and more countries consider ethanol one of the most important short-term alternative fuels that can substitute gasoline. [11] Brazil and the USA are currently the major fuel-ethanol producers and consumers representing approximately 85% of total global demand. Moreover, it is known that when Henry Ford designed the model T Ford, it was his expectation that ethanol made from renewable biological materials would be the major automobile fuel. Brazil is currently responsible for the production of more than 1/3 of the total ethanol produced in the world and is also the main exporter of ethanol. Figure 2 shows the historical 1
US Energy Information Agency, 2001 data projected to 2003
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PREMIA – International AMF activities: Ethanol in Brazil
data for ethanol production globally compared to the amount that Brazil and U.S.A. have produced.
Ethanol Production 45 12000 37.5 10000
Million m3
30 8000 World production Brazilian production USA production
22.5 6000
4000 15 7.5 2000
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Figure 2: World ethanol production in comparison with Brazilian and USA ethanol production
2.3 Alcohol Production and Trading Profile The Brazilian Transport Sector is responsible for the total gasoline consumption of the country. Moreover, 81 % of the diesel oil, 97% of the kerosene, 1.4% of the natural gas, 6.5% of the fuel oil and 92% of the alcohol are consumed within the transportation sector. The uniqueness of this sector in Brazil is however the amount of ethanol that is consumed, which exceeds 15.1 million m3 per year. In Brazil, ethanol is used in one of two ways: - as octane enhancer in gasoline in the form of 20 to 25% anhydrous ethanol at 99.6 GayLussac (GL) and 0.4% water (a mixture called gasohol), - or in neat-ethanol engines in the form of hydrated ethanol at 95.5 GL. Therefore, the gas stations in Brazil provide two types of substitutes for gasoline. - the hydrated alcohol used as pure fuel in the engines (Alcohol Fleet), - and the anhydrous one used in a mixture with gasoline in a percentage of 20 to 25% (Gasoline Fleet). [6] Figure 3 shows a comparison between the two uses of fuel alcohol. The annual production of ethanol in Brazil (Fig 3) has an increasing general trend, but it is dependant upon factors such as: - climate, 9
PREMIA – International AMF activities: Ethanol in Brazil
-
competitiveness of ethanol versus sugar, market situation, gasoline prices.
Figure 3: Ethanol production in Brazil
The climate plays an important role to the production of ethanol as it is closely related to harvest quantities. Severe climatic conditions can result into great reduction in harvested quantities of sugarcane at some areas having as a final result the reduced ethanol quantity. Another factor that can control the quantity of ethanol produced is the price of sugar that can sometimes be more attractive that ethanol. Finally, the oil prices and consequently the gasoline prices worldwide are one of the key aspects in making the ethanol competitive or not. According to the sugar industry union of Sao Paolo in Brazil, the Ethanol production in Brazil during 2004 was around 15.1 million m3. The potential and the future are believed to be promising. If transformed into reality, the Brazilian Energy Initiative proposed in 2002 at the Rio+10 Summit held in Johannesburg would boost the supply of bio-fuels. The proposal recommends “increase in renewable energy to 10% as a share of world total by 2010”. If the referred 10% goal will be adopted for gasoline, the fuel-ethanol market will reach in 2010 the volume of 130 million m3 (considering vegetative growth in consumption). Expansion of energy crops would be necessary to produce this larger volume. This will certainly result in tremendous increase of ethanol produced by Brazil. Brazil has a very volatile and unique ethanol market. It can, for a period, be a strong exporter of ethanol and on the other hand, for another period it can be a large importer. As it is depicted in figure 4, in the 90’s Brazil was the largest importer of ethanol in the world. The main reasons of this unique instability are:
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PREMIA – International AMF activities: Ethanol in Brazil
-
-
Climatic influence; the country's cane growing region in the Centre/South has been subject to the El Niño and La Niña phenomena, which usually go along with drought and below average sugar cane yields. The last time that a serious drought occurred in the region was in 2000/01 when cane production fell by around 15%. Sugarcane market; sugarcane serves as a raw material in two different markets. In this context, fluctuations in the production of ethanol may very well be explained with the concept of opportunity costs. Ethanol trade in Brazil 3000 2500 1500 1000
export
500
import
20 04
20 02
20 00
19 98
19 96
19 94
19 92
19 90
-1000
19 88
19 82
-500
19 86
0 19 84
Million litres
2000
-1500
Figure 4: Brazilian ethanol trade [8]
The Brazilian experience showed that methods for minimising causes that bring instabilities exist. The geographical spreading of sugar cane plantations all over the country can minimize the weather factor and in fact the government has started applying this strategy. The spreading of plantation over the vast expanses of Brazil allow for spreading of risk. The solution for the structural volatility factor may be decoupling ethanol from sugar production. This can be achieved by the construction of dedicated plants that produce ethanol for export. Another way for ensuring sufficient supplies for the export market would be longterm contracts for large volumes, which allow for significant economies of scale at the plant. Subsequently, this could compensate for a possibly lower profitability when compared with sugar. [24] During the last years the ethanol market shows characteristics of a mature and well-structured market. Brazilian exports of fuel alcohol to the United States have been at record levels in 2004 and, for the first time, the country was able to ship ethanol directly to that market despite a stiff tariff. The EU, the third largest fuel ethanol market after Brazil and the US, has made a proposal which would allow duty free or at least reduced duty imports from Mercosur countries. In addition, several countries in the Far East have either started to import fuel alcohol or have announced plans to do so over the next couple of months. 11
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In 2004, the volume of ethanol traded worldwide in several industrial sectors grew to around 4878 mln litres. This number represents almost 10 % of total world production. Regarding alcohol fuel, about 700 million liters (4.4 million barrels) were traded in 2004 representing less than 20% of the trading market and this is still a very low volume considering market potential. Although it is true that this market is in an infant stage and therefore is not well structured yet the protectionist barriers that exist in important energy markets such as the European Union, the USA and Japan certainly limit its evolution and inhibit its consolidation. [29] Compared to 2003 there was an increase of aprox. 33% in global ethanol export. The rise was almost entirely due to record exports from Brazil, which increased its export market share to around 50% compared to 2003. The higher Brazilian exports also boosted the market share of the Americas to around 64% compared to 42% in 2003. All other continents reported declines in absolute as well as relative terms with Europe having a share of 22% (30%) followed by Asia/ Pacific with 11% (23%) and Africa with 3% (5%). [7] However, the numbers of 2004 for Brazil are unlikely to increase in 2005 as ethanol exports from Brazil are expected to fall again following the strong recovery in prices over the last couple of months coupled with the changing supply situation on the US and Indian markets. The following table clearly depicts the world ethanol production state as it was by the end of 2004. Although the values for ethanol production are not the same in all sources, a general trend shows that the world ethanol industry is a very fast developing market with the potential to become a competitive global market.
World Ethanol Production, 2004 Country Brazil United States China India France Russia Others Total
Million m3 15,1 13,38 3,65 1,75 0,83 0,75 5,31 40,77
Table 3: World Ethanol Production [7]
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2.4 Alcohol driven vehicles Brazil has a huge fleet of cars, increasing with a high rate and a population of about 160 million people. The number of cars in different regions of Brazil is shown in table 4. It can be seen that alcohol driven cars were more than one fifth on the overall fleet in 1998.
North Northeast Southeast South Middle-west TOTAL Total
Alcohol fleet Gasoline Fleet % of Alcohol fleet 18,6 80,827 352,819 23,1 496,269 1,650,624 22,3 2,903,367 10,072,724 17,2 731,938 3,508,007 23,1 351,316 1,165,460 21,4 4,563,717 16,749,634 21,313,351
Table 4: Brazilian Car Fleet- 1998, from Geipot 1999, [3]
Another factor that has to be considered is not only the percentage of ethanol cars or just the absolute values of ethanol cars. As in most developing countries, the number of inhabitants per vehicle decreases from year to year. If this number is to be compared with similar numbers for Europe or U.S.A.(fig. 5) it can be noticed that a great expansion of the number of cars is expected to take place in Brazil during the next years or decades. In h a b ita n ts p e r v e h ic le in s e le c te d c o u n tr ie s 12 10 8
USA
Italy
Japan
Spain
Argentina
4 2 0
Brazil
6
1997 1988
Figure 5: Inhabitants per vehicle in selected countries, ANFAVEA, 1999 [1]
During the 1980’s, ethanol dedicated vehicles were dominating the market. It is important to notice that, over the 1990’s, the gasoline-powered vehicle sales have steadily increased as is depicted in figure 6. Alcohol-powered vehicles actually diminished in a rapidly rate, due to the high costs of alcohol production compared to gasoline costs and certainly due to availability issues of alcohol that created instabilities in the alcohol market and vehicle market. Furthermore, technical problems of the past, made the situation for alcohol vehicles even more difficult. Having in mind all the above parameters, the interest on alcohol-powered
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vehicles has been "reheated" with the introduction of Flexible Fuel Vehicles on the Brazilian market and the future of ethanol appears quite promising. The reliability of fuel supply is one of the main reasons why FFVs are currently very successful in Brazil, as it creates the possibility to switch over to gasoline in times of ethanol shortages. FFV technology will be discussed in more detail in the next chapters.
Types of cars sold in Brazil 1800000
New registrations
1600000 1400000 1200000 1000000
Gasoline powered vehicles Ethanol powered vehicles
800000 600000 400000 200000
Figure 6: Production of Gasoline and alcohol powered vehicles [1]
14
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0
PREMIA – International AMF activities: Ethanol in Brazil
3. BRAZIL AS THE WORLD LEADER IN ETHANOL 3.1 Brief historical overview Brazil is probably the country that has furthest gone with regard to large scale use of alcohol in the automobile fuel sector. Alcohol as a fuel has a long history in Brazil. The first official alcohol policy was established in 1931, and since then, several attempts were made to mix alcohol (anhydrous) with gasoline to fuel Brazilian automobiles [31]. However, the oil crises in the 1970s led the military government (Brazil had a nationalist military government between 1964 and 1985) to start promoting the use and production of alcohol intensively. Initially, in the 1970s, the government created the Brazilian National Alcohol Program (Proalcool) and intensified the use of gasohol (a mixture of ethanol and gasoline) to fuel common gasoline cars. Then, since 1980, automobile factories have produced alcohol-fueled cars. This makes Brazil one of the few countries in the world that has managed to separate a significant part of the automobile industry from petroleum dependency. This big transformation of the Brazilian fuel structure was the result of enormous efforts of the state [32]: (i) by shaping the agricultural and industrial policies for achieving the goals of the program; (ii) by investing public resources in research; (iii) by regulating and giving incentives to the private sector to pursue innovation and invest in alcohol related activities; (iv) by giving incentives to car owners to shift to alcohol fueled cars, thus increasing the demand for alcohol.
3.1.1 Proalcool The Proalcool was created in 1975 to concentrate all the national efforts to increase the alcohol production and use. It basically consisted of two phases. During phase one (1975– 1979), the government policies searched to facilitate both distillery expansions and higher conversion rates in the mixture gasoline–alcohol. In phase two, from 1980, the Brazilian government kept authorizing and subsidizing the vast expansion of sugarcane production capacity and industrial investments in mills and in distilleries. Also, automobile factories started to produce only-alcohol-fueled cars with the technology developed in the universities and research centers. In phase one, the alcohol program was a response to high oil prices, sugar low prices and surplus production. More anhydrous alcohol was mixed to gasoline. The Brazilian long experience with mixed fuel showed that conventional gasoline engines could efficiently operate using a mixture of up to 20% of anhydrous alcohol. Also, the government started giving subsidies to expand distilleries. In this phase, there was no rigid commitment to supplying alcohol intensively, since the proportion of alcohol in the mixture could vary without affecting car efficiency and alcohol production was still low. It would be only a question of tradeoff between sugar and alcohol production. If the sugar prices fell, sugar production could be shifted to alcohol, or vice-versa, without affecting the consumers and without large adjustment costs.
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Different from phase one, phase two introduced the use of alcohol-fueled cars. In 1980, Brazilian car factories started to release the first models of alcohol-powered cars. The technology for these cars was primarily developed at public research centers in the 1970s, and then passed to the private sector, which keeps developing it. Moreover, autonomous alcoholonly processing plants were built using government subsidies to achieve the agricultural output necessary to fulfill future demand for alcohol. These plants cannot produce sugar as an alternative end product. Therefore, at this point, the situation of the alcohol program became irreversible, once part of the market depended exclusively on alcohol to fuel their cars, and the alcohol production could not be completely shifted to sugar. On the other hand, the sugarcane industry in Brazil has had strong dependency to the unstable international sugar market. One of the measures used to stabilize domestic production and to cope with the years of excess production was to convert part of the sugar into alcohol, close to the mills. This anhydrous alcohol could be blended with gasoline in a proportion up to aprox. 24%. In 1975 the main objectives of the Brazilian ethanol program were: - to increase the national energy security, - to help stabilize sugar production – with all the effects that this could have (employment, stable market, etc.). The continuation of the oil crisis in 1979 forced the Brazilian government to take more drastic actions and promoted the development of new plantations and new alcohol-powered vehicle fleet. Incentives where given to finance the creation of a great number of distilleries in order to meet the forecasted high demand for alcohol. Also all the necessary actions took place in order to overcome distribution problems considering fuel station and pumps. It is a fact that Brazil introduced ethanol as an alternative motor fuel with great success. The response from the public was very strong resulting to an ethanol production in 1987 that was 30 times more than that of the late 70’s. By the mid-'80’s, most cars that were produced in Brazil where running on ethanol. At that period ethanol was competing fully with gasoline. The trend of ethanol changed in 1989 when a shortage in ethanol could not meet the demand of the consumers. Proalcool was about to terminate, when the Gulf war created again an opportunity for ethanol. Nevertheless, the public lost its confidence with ethanol while vehicles dedicated for ethanol fuel could not operate due to the shortage. In the 90’s the declension started taking place for ethanol. The main initial reasons were: - a poor cane harvest - higher sugar prices that led to a shortage - large number of alcohol driven cars The instability that was created to the market resulted to: - the creation of bad ‘reputation’ for ethanol - and led people back to the conventional fuels.
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3.1.2 The weaknesses of Proalcool It is widely believed that Proalcool had several problems. Amongst them are the governmental control of the fuel production, and the concession of federal incentives that reached a total of US$ 11 billion. Other factors contributed to the crisis of Proalcool are the lowering of the prices of crude oil, and the increase of Brazilian extraction of off shore oil that reduced dependency on foreign energy imports. Furthermore, in 1998 subsidies were gradually extinguished and alcohol prices were set to fluctuate in the free market. During the last years alcohol price has reached a point where it is competitive over gasoline. Of course the program evolved through the years and adaptations according to the market demands were made whenever this was necessary and possible. Proalcool may be considered for some people as a “failure”, but it surely demonstrated actions that had never been experienced in such large scale before. Looking back at the main objectives, not only the energy security was increased, but also Brazil proved to its people and to the rest of the world what can be done through programmed and organized actions. Moreover, the creation of new jobs (both skilled and unskilled) had as a result the decrease of the unemployment rate. Another important factor that finally resulted to the overall success and the sustainability of the program was that that the program was almost entirely based on domestic manufactured equipment. The market and consequently the new jobs that were created from that program cannot be neglected. This market has showed many technological developments, in both agriculture and cane processing, resulting into lower ethanol cost and a huge potential for large surplus in biomass-based (bagasse and trash) electricity. Apart from all the more positive side effects that this could have, the importance of the environmental benefits cannot be neglected. Nowadays, three (3) decades after the initiation of the program the clear results are: - reduction of oil imports – energy security, - more stable agriculture (sugarcane), - employment increase, - CO2 reduction, - technology transfer and know how expertise. The Brazilian ethanol case showed and confirmed the effect these kinds of programs have to the creation of new jobs. Furthermore, it is not only the number of new jobs that are created, but it is also the quality that increased. The general trend in most of the agricultural countries is toward better technology and quality, but due to the technological advances, fewer jobs. In a very great percentage it is due to the ethanol program that people have moved to many small villages in order to work around there, thus giving life and economical development to many small towns and villages. It is clear that the Brazilian ethanol case is one of the most important biofuel cases in the world and can be considered as a main ‘pilot project’ for other countries that examine the possibility to start actively get involved with biofuels and especially with ethanol.
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The fuel nowadays that vehicles are using in Brazil is either pure ethanol (94% ethanol and 4% water) or a more “fossil fuel oriented” version gasohol (78 % gasoline, 22 % ethanol).
3.2 Government incentives Proalcool was a support program to increase sugar cane alcohol production to use as a substitute of gasoline. The initial objective of this program was to increase the number of mills producing alcohol. The incentives that were offered at the initiation of the program by the Brazilian government helped to introduce fuel alcohol into the market. The circumstances over the global oil market resulted into the necessity of more incentives. New plantations were developed along with the increase in car fleet. The government supported economically investors in order for more distilleries to produce ethanol. The support measures also involved the systematic approach of the distribution system that included fuel stations and pumps. The incentives and subsidies of the main alcohol program in Brazil (Proalcool) were planned to be the transitory step in order for ethanol to become competitive over gasoline which would face ‘problems’ resulting from the high price that it was planned to reach. ‘Economy of scale’ was another factor forecasted that would assist the development of ethanol, as it happened. Low oil prices during the second half of the 80’s created serious problems to the Brazilian government. The discontinuation of government incentives in the form of subsidies would result in a serious problem in the market as millions of people were relying on ethanol that at that time could not compete without support over gasoline. The subsidy to cover the difference between alcohol costs and prices was kept with declining proportions until the end of 1998, when major changes in fuel pricing policy took place. Gasoline prices, until then regulated, were allowed to get stable by the market. Alcohol subsidies were also gradually extinguished and alcohol prices were also allowed to fluctuate with the market. This resulted to the reduction of alcohol prices that got almost half the price of gasoline (price/km). Proalcool came as a mix of distributive and regulatory policies [33]. On the one hand, the government distributed several incentives to alcohol related activities, satisfying the demands of many interest groups that influenced the adoption and implementation of an alcohol policy. On the other hand, regulations were adopted to make automobile industries to produce alcohol-fueled cars and to make fuel distribution companies to work with alcohol. The primary purposes of these incentives and regulations were to create and keep a market for alcohol, to increase alcohol production and to foster technological development in the alcohol sector. Thus, the government was trying both to increase demand and supply of alcohol related activities. Briefly, the main incentives in the Proalcool program have been [32] the following:
Subsidies to the industrial and agricultural sectors. Cheap credit was a very important subsidy to alcohol activities. The Brazilian government offered credit for agricultural and industrial investments in alcohol production at interest rates well below the market rate. Other features of credit contract, such as a sizable grace period, made the incentives even greater. 18
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Protection against alcohol imports. The Brazilian government secured that all production of alcohol was commercialized at a price above the minimum price, and imports are not allowed in normal situations. Thus, sugarcane entrepreneurs had guaranteed that if they invested in the expansion of alcohol production, they would have a market for it. Subsidies to consumers. To ensure that alcohol production was absorbed by the market, alcohol pumps had to be installed at all gas stations, and the government guaranteed, through price control, alcohol prices per mileage much lower than the gasoline prices. These factors stimulated sales of alcohol-powered cars and ensured car owners that they would have a secure supply of cheap fuel for a long period. Incentives to research on alcohol related fields. Many universities, research institutes and companies were given incentives to undertake research on alcohol related activities, mainly concentrated from biotechnology for genetic improvement to mechanical engineering for the development of engines.
More precisely, the increase in the production and use of ethanol as a fuel was made possible [34] by three government actions: i.
The decision that the state-owned oil company, PETROBRAS, purchased a guaranteed amount of ethanol;
ii.
The provision of economic incentives for agro-industrial enterprises willing to produce ethanol, offering low interest rates from 1980 to 1985 and nearly US$ 2.0 billion in loans (historical dollars), which represented 29% of the total investment needed to reach present installed capacity;
iii. Several steps to make ethanol attractive to consumers by selling it at the pump for 59 percent of the price of gasoline. This was only possible because the gasoline price was established by Government at a value approximately double the price in USA. Some years later ethanol sells for 80-85% of the price of gasoline at the pump station. To preserve this ratio and simultaneously guaranteeing a remuneration of US$ 400/m3 of ethanol to producers, requires a cross subsidy from the sales of conventional fuels. Since its inception the fuel price policy adopted to open the way for the use of ethanol was the following: the government indexed the consumer price of alcohol to the price of gasoline and charged for gasoline a price which was approximately double the price in the United States. The proceedings of this "tax'' on gasoline were used to reduce the cost of other petroleum derivatives (LPG and nafta), and in the case of ethanol to cover its higher production costs. The justification for such a policy was the beneficial environmental and social consequences of the program. For example, each liter of gasoline sold by PETROBRAS to distributing companies is overcharged US$ 0.14, while diesel oil is overcharged US$ 0.01. Through this mechanism it has been possible to pay producers US$ 0.40/l and sell ethanol in the retail market by US$ 0.65/l. On the other hand, gasoline is sold to the distribution companies by US$ 0.34/l (0.20 which is its real price plus 0.14 which is the intrasectorial fuel subsidy) and commercialized at US$ 0.75/l in the pump station. Such cross-subsidies have the disadvantage that it is tightly controlled by the Government through the sales price of ethanol, gasoline and diesel oil. Apart from this cross-subsidy, which was created to subsidize ethanol through taxation in gasoline and diesel oil other economic incentives -either to producers or consumers- are
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practically nonexistent today. In the Northeast region, however, incentives are still offered to producers within the context of regional development policies.
3.3 Technology Issues Technology played and continues to play a major role to the success of the ethanol program and its capability to stay in the competitive market. Harvesting technology In terms of technology, the mechanisation of harvesting is a very important aspect. The number of available unskilled manpower in Sao Paulo would not be enough for the manual cutting of unburnt cane if mechanisation did not exist. In some countries, it may be possible to keep manual cutting; however, it is the increased seasonality coefficient (and necessarily low wages) that would ultimately result in low-quality jobs. Secondly, mechanization would not be as simple as the use of today's green cane harvesters; it would include trash recovery, transportation, and conditioning. Also, the power generation sector of the cane processing units would operate for at least eleven months per year (the accepted standard for this industry). Seasonality would be reduced; jobs would be created for bagasse/trash handling, storing, and power station operation. Recently, one analysis of job losses due to mechanical harvesting concluded that if mechanization increases from its current level of 15 % to 46 % in Sao Paulo, it would result in a 15 % loss of jobs. One specific region (Ribeirao Preto), already 30 % mechanized, would lose 31 % of the jobs if mechanization reaches 60 % of the total. Again, no consideration is given to higher quality job creation. It was estimated in 1991 that if 85 % of the total sugar cane area in Sao Paulo is mechanized, the number of jobs in the harvesting sector would drop 25 to 30 %. An unburnt cane harvester could replace 50 workers (with 1990 technology and an average productivity of 7 tonnes per person per day in Sao Paulo). In the estimate, the permanent higher quality jobs created in the power generator sector or the indirect jobs for equipment production and maintenance were not included. Although these figures are preliminary and based on hypotheses that are changing with new technology inputs, they provide a useful first estimate. [8] Vehicle technology In terms of technology regarding vehicles, Flexible Fuel Vehicles (FFV’s) were recently introduced in Brazil. Volkswagen launched the fuel-flex Golf, which can operate by using gasoline or ethanol, or any blend of the two fuels. GM, Ford and FIAT responded by releasing at the market new fuel-flex models. This technology is considered to boost sales of vehicles that use ethanol. This industry is booming in a very fast pace. A very important factor that may even influence the future of ethanol is the performance of the cars that use it. Current models of with fuel-flex engines perform as good as with gasoline than in ethanol. Cold engine starting problems have been overcome due to systems that cooperate with the engine control units and allow Fuel Flex Vehicles (FFV’s) to operate as normal gasoline cars. Moreover, the car industry worldwide is heavily interested to possibly invest in FFV’s and therefore considers Brazil not only as a potential market, but also as a terrain that will allow to make some practice in order to expand FFV’s in the rest of the world. Sales in the first nine
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months of 2004 reached 220,000 cars. This number represents almost a quarter of new car sales and is expected to jump to 40% in 2005. In general most of the technical barriers of the past have been solved nowadays, and people care more about the price that they pay than anything else. The cars that use ethanol are starting to regain their position into the market. While the current gas prices are soaring again, alcohol looks all the more attractive and together with FVV’s the ‘guilty’ past of ethanoldedicated vehicles is progressively wiped out.
3.4 Competition - Ethanol Cost vs. Gasoline The term competitiveness is one of the most important key aspects not only in the case of ethanol but also in every new product that enters a market. Competitiveness in the world of ethanol has at least two aspects: - inter-sectorally: the competition of ethanol vs. gasoline, - intra-sectorally: the competition between the various suppliers of ethanol Considering the increase in world oil prices and although the gap between the cost of production of gasoline and ethanol has narrowed considerably, it has not quite been reversed. Both sugar and maize prices have developed in a much more stable manner than oil prices have. This gives a benefit to the ethanol industry and it is expected that it will play a very important role within the next years. After all, oil prices are volatile and there are many analysts who expect quotations to fall back soon. This has been seen extensively during the last years. Moreover, the build up of ethanol production capacity represents a considerable investment, which requires long planning horizons. This is translated into the fact that subsidies will remain necessary for the near future even though it may be argued that the overall level should be reduced if oil and petrol remain high. During the period until early 2003, sugar for the domestic market was only marginally more profitable than anhydrous alcohol. However, that situation changed in late 2002, when prices on the domestic sugar market took off and consequently lifted the value for sugar cane in this category. The prices of anhydrous alcohol also rose at the end of 2002, but not by the same margin. The situation eased in throughout most of 2003 but reversed again towards the end of the year. Given this opportunity cost structure a miller would have, for most of the time, preferred sugar production for the domestic market over anhydrous alcohol distilling. For most of 1999 and 2000, anhydrous alcohol production has been more profitable than the production for the world sugar market. However, in 2002, the price rise on the world sugar market as well as the repeated devaluation of the Brazilian real turned the situation around and sugar exports were more profitable than anhydrous alcohol. The returning weakness on the world sugar market towards the end of 2002 and the increasing tightness on the domestic ethanol market turned around the situation again and anhydrous alcohol production was more profitable than sugar exports. The sharp fall in alcohol prices in early 2004 meant that sugar exports were once again more profitable. [24]
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Furthermore, in order to gain insights into the sources of competitiveness of the various suppliers of ethanol against gasoline, the following costs should be reduced. Before ethanol can leave the distillery, the following cost components have to be taken into account: - Feedstock costs - Operating costs Various research studies conducted in 1990 showed that, on average, direct labour and social taxes made up 21 to 24 % of the total cost of sugar cane production (including land, capital charges, and other fixed and variable costs). After including all the costs (capital, commercial, labour, and social taxes) associated with processing the cane into ethanol, direct labour and social taxes account for 20 to 25 % of the cost of producing ethanol (both growing and processing it). Agricultural labour and social taxes account for more than 60 % of total labour costs. With the liberalization of hydrous alcohol prices in 1999, government intervention largely stopped. Today, authorities regulate the market through changes in the blending rate for anhydrous alcohol and occasional purchases for or sales from strategic reserves and credits for storing ethanol. [12] In ethanol, feedstock makes up the largest part of the overall cost. Brazil has the advantage of having the lowest feedstock costs of all fuel ethanol producers. In the first half of 2004, the sugar cane costs of ethanol were less than 15 cents per litre in the Centre/South of the country. One litre of ethanol in Brazil costs 0.44 $, while a litre of gasoline costs 1.85 $.
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4. EFFECTS IN SOCIETY 4.1 Impacts on the Energy balance The Brazilian government succeeded, despite all the difficulties and barriers that it faced, to make ethanol an important substitute for gasoline. Depending on the year, ethanol reached percentages of more than 50% (fig. 7) of the “gasoline” segment. The fluctuations of the percentage of ethanol in the energy mix as discussed previously may be a problem but efforts for stabilisation are promising a more stable future. Nevertheless, over the period from 1975 to 2002, fuel ethanol use helped to replace around 210 bln litres of gasoline.
Market Share of Ethanol and Gasoline 100 90 80 70 60 % 50 40 30 20 10 0 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02
Gasoline Ethanol
Year Figure 7: Market share of ethanol and gasoline in energy mix of “gasoline sector”
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4.2 Impacts on the National Economy Brazil saved up to 55 billion U.S dollars on oil imports from 1975 to 2003 as a result of the strategy that it followed [23]. Such figure is quite impressive. It represents 85% of the total present country hard-currency reserves and 50% of the total government secured external debt. The present annual amount of money saved offsets the amount of subsidy paid by liquid fuel users to support ethanol. As an example, in 1996 liquid fossil fuel consumers paid approximately US$ 2 billion overprice to cover the ethanol's higher cost than gasoline. Nevertheless, total annual saving for the country has been US$ 4.9 billion. In this sense we can say that ethanol production is an effective mechanism to use soft money to control international debt. Net imports of oil vs. production of crude oil (Mtoe) 80
77,23
70
Net imports
68,85 65,68
60
Production
(Mtoe)
50
45,34
40 30
20,96
20 10
36,48 34,12 33,09 28,6 28,17 22,21
33,46
27,28 23,45
1976
1982
2 per. Mov. Avg. (Production)
12,8
9,5
8,6 8,6
0 1970
2 per. Mov. Avg. (Net imports)
1988
1994
2000
2006
year
Figure 8: Net imports of oil vs. Production of crude oil between 1971 and 2002
Furthermore the economical benefit expands to the fact that Brazil is currently exporting ethanol, thus improving several economic indices. The attractiveness of the price that Brazil is exporting ethanol, has made Brazil to become the largest exporter of this commodity. At present, exports are mostly in the form of beverage and industrial alcohol. However, the country is hoping that it will be the principal supplier of fuel ethanol to Japan, should this country introduce fuel alcohol mixes. The other indirect impact on the economy came to Brazil through the decrease of the unemployment rate that is discussed further. Finally the creation of new markets allowed for new investments in terms of agriculture, production facilities and vehicle technology.
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4.3 Labour As in agriculture, in ethanol industry the number of jobs and their quality are strongly influenced by the technology level. Consequently, the matter of job creation and job quality in large-scale ethanol production is similar to agribusiness units. In ethanol industry, a much larger number of jobs than in conventional oil-based industries are created. These jobs are also more diversified and decentralized than jobs in the oil sector. [8] Official unemployment rates for Brazil were kept at quite low levels for some years. The average for the 80’s was 5 % (in 1989 it was 3% and in 1989 it was 8%). However, the concealed unemployment rate during that period was high: in 1988, 44% of workers in agriculture, 6 % in industry, and 15 % in services received less than the official (reference) minimum wage was (at that time, US$53 per month). Only 20 % of workers in industry and services, and 5 % of agricultural workers, received more than US$265 per month. [8, 18] Furthermore, there are significant regional differences as well. Amongst the main sugar cane producing areas, Sao Paulo, which produces approximately 60 % of Brazil's sugar cane, has the highest salaries. As a rule of thumb it can be stated that every 1 million tonnes of sugar cane processed per year generates 2,200 direct jobs (1,600 in agriculture, and 600 in industry) and around 660 indirect jobs. Agricultural supervisors and skilled industrial workers account for 30 % of total labour force; medium-skill workers (e.g., truck and tractor drivers) account for 10 %; and unskilled labourers (doing planting, cultivating, and harvesting, and low-level industrial work) account for the remaining 60 %. The 660 indirect jobs that are created are related to equipment manufacture, engineering, repair and maintenance in external shops, and chemical supplies manufacture. In Sao Paulo, where 140 million tonnes of sugar cane are processed every year, this leads to the creation of a total of 380,000 jobs. It is estimated that sugar cane agribusiness in Brazil as a total created 800,000 direct jobs and 250,000 indirect jobs in 1990; two thirds - or 700,000 - of these jobs can be attributed to ethanol production. To be able to estimate the quality of the jobs in Brazil one must bare in mind other employment sectors as well. In Sao Paulo, the job that was responsible for the largest proportion of unskilled labour (cane cutting) generated an average income of US$140 per month. This figure is higher than the average salary of 86 % of agricultural workers, 49 % of industrial workers, and 56 % of workers in the service sector in Brazil as a whole. Moreover, it has been assessed that the family income of cane cutters is $220 per month, which is 50 % higher than the average family wage in Brazil. However, it is the seasonal nature of the jobs that causes severe instability to the family income. This means that during the harvesting season the average family wage is $280 per month, whereas during the offseason, it is only $160 per month. It has been made mandatory by special legislation that 1 % of the net sugar cane price and 2 % of the net ethanol price be used for assistance in improving services for sugar cane workers (e.g., medical, dental, pharmaceutical, better sanitary conditions). In the years to come, one very important issue that will play a key role in the evolution of the ethanol industry is the balance between mechanization and the number and quality of new jobs created. A law requiring the cutting of unburnt sugar cane could accelerate mechanical 25
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harvesting. Already, in the state of Sao Paulo, the labour market cannot supply the required amount of unskilled workers.
4.4 Land usage – Agriculture boost Sugarcane grown for ethanol production occupies only 4.8% of the land devoted to primary food crops in Brazil, and uses less area than corn (24.0% of the area), soybeans (19.2%), beans (10.7%), and rice (10.8%) ([35]). The land used for all sugarcane crops (sugar plus ethanol) represents only 7.5% of the area used for all crops or 0.4% of the Brazilian territory. This is also approximately true for the State of Sao Paulo, where the largest areas dedicated to sugarcane production (and the highest use of cultivable land) is found. Sao Paulo has 15million hectares of agricultural land, of which only 50% is currently being used for this purpose. Thus, competition between land for food, export crops, and energy crops is not significant at the moment. Compared to other countries, this percentage is considered to be low and therefore the potential that exists cannot be neglected. The country’s sugar and alcohol industry had been constantly changing over the past 15 years and was likely to continue to do so in the future. While in the early 1990s the North/Northeast regions accounted for almost 35% of the area under cane, their share fell to less than 21% in 2004 as many milling companies moved to the Centre/South. There, the growing conditions for sugar cane are much better than in the North/Northeast, resulting in the country’s rise to its position as the world’s lowest cost producer. Nowadays, sugar cane production is concentrated in the Southeast, South and Centre/West of the country where the crop has gradually displaced coffee and orange groves From the 70’s until the 90’s, the development in technology and the increase of intensity of production resulted to ethanol yield from 0,367 to 0,904 m3 / hectare. The Brazilian ethanol production system is composed of approximately 400 separate industrial units. Each unit has a range for exploiting canes that vary from 5,000 to 50,000 hectares. Approximately 60,000 producers supply sugar cane to the industrial units. External suppliers produced approximately 38 % of the sugar processed in the year 1986, with mill owners themselves providing approximately 62 % According to data from the Agriculture Ministry, the 2005/06 (May/April) sugar cane crop in the Centre/South is expected to increase by 6 to 8% to 346 to 353 mln tones. Moreover, the amount of sugar and ethanol produced in the 2005/06 harvest is likely to increase proportionately. In 2004/05, the Centre/South produced 22.05 mln tones of sugar, up 7.8% over 2003/04. Ethanol production rose by 3.6% to 13.54 blv litres. The 2005/06 sugar cane estimate is slightly below earlier industry forecast which were in the 350 to 360 mln ton range. [6, 7]
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4.5 Environmental impacts The common practice of burning sugar cane fields prior to harvesting in order to improve productivity has been severely questioned for environmental reasons. Although there seems to be no real reason for concern, since carbon dioxide from burning is entirely recycled, the environmental problem that is created has to do with particles in local scale. The renewable energy lost in burning could be used if suitable harvesting and transportation systems could be designed to handle the green cane and trash economically. A more efficient use of biomass for power generation could impact larger areas besides Brazil and would have important consequences for job creation and quality in many places. As mentioned before, car ownership and use are increasing fast, causing higher emission levels of CO2. Consequently, ethanol production and use in Brazil may prove to be an important alternative supporting the efforts to greenhouse gas emissions. Ethanol in the transport sector of Brazil offers almost complete absorption of carbon dioxide emitted during the combustion of fuel alcohol. This sustainable system allows, in principle, to increase the energy supply, essential for economic growth, with less hazards to the environment. In order to assess the net CO2 emissions from ethanol extracted from sugar cane, it is important to include all aspects of the agricultural and industrial stages of production and consumption, where fuel alcohol is used instead of fossil fuels. Therefore, other aspects must be considered: - There is a large energetic potential of not used sugar cane bagasse, that if utilized with more efficiency can generate sufficient electrical energy not only to its own consumption but also for sale, which would bring a substitution for the fuel oil, large emitter of CO2; [30] - The emission of carbon due to the substitution of the vegetal cover can be positive or negative, depending on if the sugar cane substitutes other crops, natural covers or pastures with biomass density per lesser hectare. Deforestation for sugar cane dedicated areas should not be an option as the total CO2 produced from an area that has been deforested and planted with sugar cane can result negatively in CO2 reduction. [30] For comparison of the total CO2 emissions of the Brazilian fuel alcohol program with equivalent emissions for gasoline some assumptions where made taking into account blend properties and engines in Brazil. One litre of hydrated alcohol (for alcohol-powered νehic1es) substitutes 0.8 litre of gasoline and one litre of anhydrous alcohol (to blend with gasolinepowered vehicles) substitutes 1.04 lit of gaso1ine mainly due to efficiency reasons (Fig. 8) [30].
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Figure 9: Total consumption of gasoline and substituted part. [6]
The Nationa1 Energy Ba1ance and The IPCC Methodology were used in the literature to determine the Carbon (C) and CO2 emissions of the gasoline. The following results were found: - From 1975 to 1984: 0.61 kg C/lit gasoline - From 1985 to 1998: 0.63 kg C/lit gasoline Table 5 and figure 9 show the avoided emissions of CO2 through the substitution of gasoline from ethanol from 1975 to 1998. The share of avoided CO2 emissions through ethanol constitutes approximate1y 85% of the total emissions resulting from the combustion of all light vehicles fleet in the Brazilian Transport Sector, for the last decade. This substitution is equivalent to withdrawing an average of 20,360 103 t CO2/year from the atmosphere. Consumption (103 m3 ) Anhydrous Alcohol 53,106 Hydrated Alcohol 140,236 Total Alcohol 193,342
Substituted Gasoline (103 m3 ) 55,230 112,189 167,419
Avoided CO2 Emissions (103 t ) 126,484 258,484 384,993
Table 5: Avoided CO2 Emissions through the Use of Ethanol- Alcohol Brazilian Program- 1975 to 1998
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Avoided CO2 emissions (10^3 t) 30000 25000
Tons
20000 CO2 emissions
15000 10000 5000
Figure 10: Avoided Carbon Dioxide from 1975 [1, 6]
29
97 19
95 19
93 19
91 19
19
89
87 19
85 19
83 19
81 19
79 19
77 19
19
75
0
PREMIA – International AMF activities: Ethanol in Brazil
5. PROSPECTS FOR THE BRAZILIAN ETHANOL MARKET The future for ethanol in Brazil seems to be promising as the combination of technological developments, increased oil prices in the market and the experience that has been gained throughout the 30 years of ethanol production and use in Brazil offer an opportunity for new investments which will push the market to even better results. Production ‘Grupo Graciano’ will invest BRL 70 mln in a new sugar and alcohol plant in the county of Mendonca, Sao Paolo state. The plant will come online in 2006/07 and will double the group’s production capacity by 2009. Santa Isabel’s first plant is located in Novo Horizonte, Sao Paolo state. ‘Grupo Unialco’, which operates the Unialco plant in Guarapes and the Alcoolvalve plant in Aparecida, is to invest $40 mln in a new plant in Suzanapolis. The Usina Sopesa will start crushing cane in 2007. Under phase 1 of the project the plant will process one mln tons of cane by 2008 for the production of alcohol. Phase 2 of the project includes the production of sugar. The investment has been made possible by the involvement of a foreign investor, the name of which has not been disclosed yet. ‘Nova America’ is to increase cane-crushing capacity at its plant in Maracai after the end of the 2005/06 campaign. Crushing capacity is to rise from 14,000 tons a day at present to 16,500 tons. At the same time the plant will install a 32 MW cogeneration facility. Total investments are in region of BRL80mln, of which 80% come from the National Development Bank (BNDES). Vehicles - Market Accordingly, the National Association of Vehicle Manufactures (Anfavea) sales of flex-fuel vehicles overtook sales of conventional gasoline cars for the first time in May 2005. Total sales in May amounted to 67,500 units (49.5% of total light vehicle sales. In April of this year 55,100 flex-fuel cars were sold, accounting for 40.4% of sales. Sales of vehicles powered by pure ethanol amounted to 2,760 units (May 2005), down from 4,047 units in April and also below the 5,510 units seen in May 2004. The renewed interest in flex-fuel vehicles after a slump earlier in the year may be explained with the weakening ethanol prices on the local market in the wake of the record cane crop. Also, the rising real has meant that Brazilian ethanol has become less competitive on the export markets thus raising domestic supplies. A Volkswagen Brazil representative brought the audience in a recent convention up to date to the most recent developments in the market for total flex-fuel vehicle, a technology which allowed cars to run on any mixture of hydrous alcohol, anhydrous alcohol and gasoline. The basic idea behind this development entails making the decision among different types of fuel whenever consumers refuel their vehicles and certainly not when they purchase their cars. Volkswagen was the first to introduce this new technology back in March 2003, since when sales of flex-fuel vehicles had developed very briskly. In 2003, total sales of flex-fuel vehicles amounted to 48,000 units rising to 329,000 in 2004. At the same time, sales of pure alcohol vehicles had also been quite buoyant, reaching 36,000 units in 2003 and 51,000 units in 2004. 30
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Overall, trade had remained much stronger than initially expected. Stakeholders in the car industry initiated a study of the market for flex-fuel vehicles in order to determine future ethanol demand. The analysis, which was published in 2003, foresaw the market share of flex-fuel vehicles reaching 17% in 2004, rising to 30% in 2005, 50% in 2006 and 67% from 2007 onwards. In the reality, the actual development of the market proved to be much more rapid. In 2004, the share of flex-fuel vehicles achieved 22% while in 2005 this could increase to 40% rising to 60% in 2006. [14, 15]
FFV market share in Brazil - January 2003 to October 2005 100%
80%
60%
40% FFV Introduction 20%
p
05
05 se
ju l
05
05
04
05
m ay
m ar
ja n
04 p
no v
04 se
ju l
04
04
03
04
m ay
m ar
ja n
03 p
no v
03 se
ju l
03
03
m ay
m ar
ja n
03
0%
Figure 11: Market share of FFV’s in Brazil between January 2003 and October 2005 [Source: ANFAVEA]
The outlook for the sales of flex-fuel vehicles in the Brazilian market continues to be bright. Both Fiat and Volkswagen will start offering cars with 1.0 litre engines with the new technology in the first half of this year. Volkswagen expects that by the end of this year between 75-80% of its cars sold will have a flex-fuel engine. At present more than 50% of VW’s cars offer this technology. With Fiat and VW offering 1.0 litre engines with flex-fuel technology, a new boost may be expected. After all, 57.3% of all vehicles sold last year belonged to this category. The popularity of the 1.0 litre engine is partly explained with the lower sales tax on these cars which amounts to just 9%. 1.0-2.0 litre engines are levied a 15% tax if the engine runs on alcohol or if it is a flex-fuel vehicle. Bosch’s Flex Fuel System, introduced in 1994 in Brazil, was certainly a pioneering development. This system, which enables the use of alcohol-gasoline mixtures as fuel, is currently in very high demand. Furthermore, in expanding the number of alternative fuels in its product line-up, Bosch do Brasil presented the first concept car with Tri-Fuel technology utilizing alcohol, gasoline and natural gas in 2003.
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The driving forces for the creation of a system that goes further than the conventional FlexFuel system were not only of environmental origin, but it is understood that Brazil learned a lot from the experience of more than 3 decades in the ethanol industry. The uncertainty of the availability and also the price fluctuations at a specific fuel should not anymore alter the decision for choosing to buy a car that will run with ethanol.
Figure 12: A concept car accommodating Tri-Fuel technology. [27]
Other transport means One great example of the sizeable growth in the Brazilian ethanol industry is a Brazilian company named Neiva (subsidiary of Embraer). The company has unveiled the world’s first commercially produced, ethanol-burning aircraft, opening the way for more ethanol planes. Neiva Aeronautic Industry has just delivered the first single-engine, single seta EMB 202 Ipanema to a crop-spraying company. Neiva also hopes to convert the 150 six-passenger Sertanejo and Minuano aircraft in the country, which have engines similar to the Ipanema's. [26]
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6. CONCLUSION The importance of the Brazilian alcohol program can be divided into two main aspects. The Brazilian case is surely a reference for every government that wishes to invest in ethanol in order to see strengths, weaknesses, opportunities and threats of the program that was implemented. It can be considered as a complete program with first stages, peaks and decline. Finally it is visible that strong foundations can be the means for overcoming obstacles such as low competition prices or availability. The decrease of ethanol fleet number in the 90’s proved to be as one of the main threats. It was showing indications and warning for ethanol market crisis resulting to the evanescence of this market. FFV’s came at the right time. The uncertainty that ethanol-dedicated vehicles created is now over and there is no chance for citizens who buy an FFV to face the problems of availability of the past. Parallel to that, the governments decision to let the market set ethanol and gasoline prices proved to be the right choice. This confirmed the statement that initiatives and incentives should be given at the initiation of such programs baring in mind that these incentives will allow the new market or the new product to place it self in the competition after some years without any direct financial support. The ethanol program in Brazil not only created opportunities for development of a new market but it also reduced imports, created new jobs, reduced CO2 emissions and raised the morality of the Brazilian people. All these factors along with the current situation with ethanol are a proof that finally we can talk about a ‘successful’ program. Recapitulating, several benefits were obtained by the use of ethanol as a liquid fuel, i.e: (a) creation of more than 700,000 rural jobs with very modest investment cost (US$ 20,000 each); (b) development of sugarcane crop technology and their processing to sugar and ethanol, increasing Brazil's capacity to act as a major player in the international sugar market; (c) demonstration at worldwide level that a massive alternative and renewable fuel program can be carried out and implemented in less than 10 years; (d) significant savings in hard currency. As a general conclusion one may state that the Brazilian government started building up some competitive advantages to sugarcane alcohol use as an automobile fuel by investing in technology research, creating an alcohol industrial policy and offering incentives for the private sector. In the short term, with low oil prices, the alcohol program could be seen as one more “undesirable government intervention in the fuel market”. However, the economic context of the 1970s can justify Proalcool as a reasonable policy to attempt to deal with oil crisis. Also, as the world has become more environmentally conscious and oil becomes scarce and expensive in the future, alcohol is a real option for worldwide substitution of liquid fossil fuel and can be an important alternative to achieve reductions in CO2 emissions [36]. Brazil has built some competitive assets that can put it in a privileged situation in the market of alcohol production and technology in the long term. This case shows the importance of public policies in allowing the creation of a market for renewable energy. Proalcool reveals that mechanisms for implementing economic and technology policies, though significantly 33
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complex and uncertain, can lead the private sector, and society in general, towards the accomplishments of planned national or environmentally sustainable goals. On the other hand, Proalcool’s decline in economic competitiveness due to the fall in oil prices in the 1990s illustrates the difficulties of long-range planning, which is one of the key points for planning sustainable development strategies. Nowadays, as environmental interests and values are much stronger, public policies towards the use of renewable energy policies are likely to receive much support.
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7. APPENDIX Alcohol Standards in Brazil 1.
Industrial Alcohol Regardless of its origin and method of production, industrial alcohol is classified as: (a) Anhydrous, where the dehydration is practically complete. (b) Rectified, when it is the product of a rectification process. (c)
2.
Crude ("bruto"), resulting from distillation and partial rectification of fermented material.
Fuel Alcohol An anhydrous product which may be mixed with petroleum derivatives for use as a motor fuel. It should satisfy the following requirements: (a) Alcohol content, minimum
99.5 % v/v
(b) Non-volatile residues, in mg/litre, maximum
5.0 (5 p.p.m)
(c)
3.0 (30 p.p.m)
Total acids, in mg/100ml, maximum
(d) Chlorides, in mg/100 ml, maximum
3.
1.0 (10 p.p.m)
Technical Anydrous Alcohol A product of dehydration, having a minimum alcohol content of 99.5 ° GL (% v/v)
4.
Analytical Reagent Grade Alcohol A type of hydrous or anhydrous alcohol satisfying the following requirements: (a) Non-volatile residue, in mg/litre, maximum
zero
(b) Total acids, in mg/100 ml, maximum
3 (30 p.p.m)
(c)
10
Permanganate time, in minutes, minimum
(d) Reactions for fusel oils, aldehydes, acetone, furfural and benzene
35
negative
PREMIA – International AMF activities: Ethanol in Brazil
5.
Pharmaceutical Grade Alcohol Rectified alcohol which satisfies the following requirements:
6.
(a) Alcohol content, range
92.7 - 95.2 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
6 (60 p.p.m)
(c)
1
Alkalinity in mg of 0.1 N H2SO4 required to neutralize 100 ml, maximum
(d) Non-volatile residue (ash) at 100°C, in mg/kg, maximum
122 (p.p.m)
(e) Reactions for fusel oils, aldehydes, methanol and benzene
negative
Potable Alcohol A rectified product, (free of copper) having the following characteristics (as specified in Decree 9688 of 11-4-1949): (a) Alcohol content, minimum
95 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
6 (60 p.p.m)
(c)
500 (p.p.m)
Non-volatile residue, in mg/litre, maximum
(d) Coefficient of impurities (total congeners) in mg/100 ml, maximum
7.
50 (500 p.p.m)
Fine Alcohol ("Alcool Fino") A rectified product which satisfies the following requirements:
8.
(a) Alcohol content, minimum
96 ° GL (% v/v)
(b) Permanganate time, in minutes, minimum
5
(c)
1.8 (18 p.p.m)
Total acids, in mg/100 ml, maximum
Rectified Alcohol A rectified product which satisfies the following requirements:
9.
(a) Alcohol content, minimum
95 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
3.0 (30 p.p.m)
(c)
3.6 (36 p.p.m)
Total esters, as ethyl acetate, in mg/100 ml, maximum
Ordinary Alcohol
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An alcohol which meets the following requirements: (a) Alcohol content, range
92 - 94.9 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
5.0 (50 p.p.m)
(c)
55 (550 p.p.m)
Total esters, as ethyl acetate, in mg/100 ml, maximum
10. Crude Alcohol ("Bruto") An alcohol which meets the following requirements: (a) Alcohol content, range
90 - 91.9 ° GL (% v/v)
(b) Total acids, in mg/100 ml, maximum
15 (150 p.p.m) 55 (550 p.p.m)
(c)
Total esters, as ethyl acetate, in mg/100 ml, maximum
Table 6: Alcohol standards in Brazil [21]
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Fuel ethanol Specifications in Brazil
Characteristics
Units
AEAC (Anhydrous)
1. Appearance
__
Clear and free of suspended matter
2. Total acids, as acetic acid
mg/litre 30 max (30 p.p.m)
30 max (30 p.p.m)
MB-2606 (NBR-9866)
3. Electrical conductivity
µS/m
500 max
500 max
MB-2788 (NBR-10547)
4. Chlorides, as Cl.
mg/kg
__
1 max (1 p.p.m)
MB-3055 (NBR-10894)
5. Sulphate, as SO4
mg/kg
__
4 max (4 p.p.m)
MB-3055 (NBR-10894)
6. Specific gravity at 20°C, (at point of production)
kg/m³
791.5 max
809.3±1.7
MB-1533 (NBR-5992)
7. Specific gravity at 20°C, denatured with 3% v/v gasoline (at point of sale)
kg/m³
__
808.0±3.0
MB-1533 (NBR-5992)
8. Material non-volatile at 105°C, (at point of production)
mg/litre 30 max (30 p.p.m)
30 max (30 p.p.m)
MB-2123 (NBR-8911)
9. Copper, as Cu.
mg/kg
0.07 max (0.07 p.p.m)
__
MB-3054 (NBR-10893)
10. Iron, as Fe.
mg/kg
__
5 max (5 p.p.m)
MB-3222 __
11. Sodium, as Na.
mg/kg
__
2 max (2 p.p.m)
MB-2787 (NBR-10422)
12. Acidity/alkalinity
pH
__
7.0±1.0
MB-3053 (NBR-10891)
13. Residue on evaporation, (at point of sale)
mg/litre __
50 max (50 p.p.m)
MB-2053 (NBR-8644)
14. Ethanol content, (at point of production)
°INPM
99.3 min
93.2±0.6
MB-1533 (NBR-5922)
__
92.6 to 94.7
MB-1533 (NBR-5922)
30 max (3.0% v/v)
CNP/DIRAB No. 209/81
15. Ethanol content, when °INPM denatured with 3% v/v gasoline, (at point of sale) 16. Gasoline content, (at point of sale)
mg/litre __
Table 7: Fuel ethanol specifications in Brazil [12]
38
AEHC (Hydrous)
Methods Visual
PREMIA – International AMF activities: Ethanol in Brazil
8. REFERENCES 1. ANFAVEA. Anuario Estatistico (1999) 1957/1998. Sao Paolo, Brazil. 2. BEN 1999 – Balanco Energetico Nacional (1999)/Ministerio das Minas e Energia, Brazilia, Brasil 3. GEIPOT (1999) :Ministerio dos Transportes, Anuario Estatistico- Brasilia, Brazil 4. IPCC (1996) – Greenhouse Gas Inventory Reporting Instructions- Ipcc Guidelines for Nacional Greenhouse Gas, Inventories, Vol 1,2,3- IPCC, IEA, OECD 5. Macedo I.,C. (1997): Greenhouse Gas Emissions and Bio-Ethanol Production/ Utilization in Brazil, IR/CTC- 05/97, Piracicaba, Brazil 6. Ribeiro S., K., D.Sc. Thesis, COPPE, Federal University of Rio de Janeiro, (1995), Brazil 7. F.O. Licht Gmbh- World Ethanol and Biofuels Report, November 2004- March 2005, April 2005. 8. Isaias de Carvalho Macedo, Converting Biomass to Liquid Fuels: Making Ethanol from Sugar Cane in Brazil, Energy as an Instrument for Socio-Economic Development, Sao Paolo, Brazil 9. T.B. Johansson, H. Kelly, A.K.N. Reddy, and R.H. Williams, “Renewable Fuels and Electricity for a Growing World Economy”, in Renewable Sources for Fuels and Electricity (Washington, D.C.: Island Press, 1993) 10. Bellona Foundation, Brazil Launches Alcohol Powered Plane, April 2005. 11. Earth Policy Institute from Renewable Fuels Association, Homegrown for the Homeland: Ethanol Industry Outlook 2005 (Washington, DC: 2005), pp.8-14 12. Christoph Berg, World Fuel Ethanol Analysis and Outlook (Ratzeburg, Germany: F.O. Licht, April 2004) 13. Stephane His, “Biofuels Worldwide,” technical report, Panorama 2005: Energy, Transport, Environment (Paris: Institute Francais de Petrol, 25 November 2004) 14. Peter Apps, "South Africa Maize Farmers See Ethanol Plant In 18 Months," Reuters, 15 March 2005 15. "Use of Ethanol Fuel for Cars," Energy Saving Now website, viewed 26 June 2005, http://energysavingnow.com/biomass/carsbiofuel.shtml. 16. David Cullen, “EU Says Won’t Meet 2 Percent Biofuel Target This Year,” Reuters, 3 March 2005
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PREMIA – International AMF activities: Ethanol in Brazil
17. Lucy Hornby, “Asia Pushes Ahead on Biofuel, Despite Cost,” Reuters, 28 February 2005 18. Melissa Alexander, "Coarse Grains," World Grain, January 2005 19. James Thompson, Ethanol’s Booming in Brazil, December 2004 20. National Department of Fuels –Technical Regulation DNC- 01/91, Specifications for Anhydrous fuel Ethanol (“AEAC”) and Hyrdous Fuel Ethanol (“ AEHC”) 21. Associacão Brasileira de Normas Tecnicas (A.B.N.T.)- (Brazilian Association for Technical Standards), Standard EB 121, Classification of various types and qualities of alcohol 22. http://www.canegrowers.com.au 23. www.cornandsoybeandigest.com/mag/soybean_ethanols_booming_brazil/ 24. http://www.distill.com/World-Fuel-Ethanol-A&O-2004.html 25. www.iangv.org/ 26. http://www.bellona.no/en/energy/37677.html 27. Robert Bosch – Company newspaper 6-2005. 28. www.cia.gov 29. Carvagho E., The whereabouts of a fuel – ethanol world market. UNICA 30. www.ivig.coppe.ufrj.br/doc/paper-suzpau.pdf 31. De Castro Santos MH, 1985, "Alcohol as fuel in Brazil: an alternative energy policy and politics. PhD dissertation. Department of Political Science, MIT, Cambridge. 32. Puppim de Oliveira J.A., 2002, "The policymaking process for creating competitive assets for the use of biomass energy: the Brazilian alcohol programme", Renewable and Sustainable Energy Reviews 6 (2002) 129–140. 33. Lowi T., 1964, "American business, public policy, case studies, and political theory", World Politics, 1964; July:677–715. 34. Moreira JR, Goldemberg J., 1999, "The alcohol program", Energy Policy 1999;27(4):229–45. 35. Fundacao Instituto Brasileiro de Geografia e Estatistica, 1989, Rio de Janeiro. 36. Ribeiro SK, Rosa LP. 1998, "Activities implemented jointly and use of fuel alcohol in Brazil for abating CO2 emissions", Energy Policy 1998
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