Biofuel and developing countries: Case in Brazil
This article was originally written by Natsuko Utsumi for World Bank’s web site.
As a result of rising world oil prices, concerns about energy security, and about climate change caused by CO2 emission from the fossil fuels, interest in biofuels as an alternative energy source continues to grow globally. Both the industrialized countries and developing countries have not ceased their pursuit of the commercialization of biofuels. In the case of developing countries, particularly oil-importing countries, biofuels are seen as a way to curb oil import, stimulate rural development and create jobs.
Today, the two largest biofuel markets are Brazil, which produces ethanol from sugar cane, and the United States, which produces ethanol from corn. While biodiesel production is costly and not yet viable commercially, ethanol enjoys high marketability, particularly ethanol from sugarcane, being the most cost-effective and productive using current technology.
Ethanol is a large component in Brazil’s commitment to clean energy, which is a hallmark of its economy. As World Bank Latin America and Caribbean Vice President, Pamela Cox says, “Since hydroelectricity usually accounts for over 80% of the power generation and ethanol from sugarcane accounts for over 30% of fuel for automobiles, the carbon intensity of the Brazilian energy sector is half the global average and less than 20% of the OECD country average.”
New flex-fuel vehicles—capable of running on varying percentages of ethanol— are also revitalizing the sale of ethanol. Flex-fuel vehicles already account for 20 percent of Brazil’s car fleet, while the number of single-fuel cars on the road is falling gradually, Says Petrobras downstream director, Paulo Roberto Costa.
The Brazilian Experience: Ethanol
Of the global fuel ethanol production of around 40 billion liters in 2006, about
90 percent was produced in Brazil and the United States . Apart from the fact that Brazil has had the longest history of ethanol production, starting in the 1930s; that it has mandated consumption; and that it has uniquely favorable sugarcane-growing conditions in its center-south region, there are other factors that have made Brazil the most competitive producer in the world. These are linked to high productivity and low production costs.
1) Although cane cultivation is water-intensive, nearly all of the cane fields in the center-south region are rain-fed, not irrigated.
2) Ethanol from sugarcane does not compete with other crops. Bio-fuels use only 4 million hectares of land – about 5% of Brazil’s cropland.
3) Productivity has been boosted by decades of research and commercial cultivation.
4) Most distilleries in Brazil belong to sugar mill/distillery complexes, and are thus capable of flexibly changing the production ratio of sugar to ethanol
5) Flex-fuel vehicles have increased the attractiveness of building hybrid sugar-ethanol complexes and allayed consumer fears about potential ethanol shortages.
Close to 100 countries around the world are growing sugarcane, yet none have been able to match Brazil’s sugarcane cost structure.
Brazil is the only country to have achieved a commercially competitive ethanol industry, and this was preceded by more than 20 years of government support. Even today, Brazil continues to maintain a significant tax differential between gasohol (80 percent gasoline/20 percent ethanol) and hydrous ethanol.
Governments provide substantial support to biofuels to maintain competitiveness against gasoline and conventional diesel. These supports include consumption incentives (fuel tax reductions), production incentives (tax incentives, loan guarantees, direct subsidy payments), and mandatory consumption requirements.
Sharing Brazil’s Technology and Knowledge
In light of Brazil’s leading position in biofuel industry, the World Bank is seeking to facilitate the export of Brazil’s technology for making sugar-cane ethanol to developing countries in Africa and elsewhere, according to Bank’s vice-president for Latin America, Pamela Cox. Biofuels present several incentives to developing countries for their adoption:
1) Diversification of energy sources and lower exposure to the price volatility of the international oil market. Diversification is attractive for oil-importing countries, especially those that have high delivered costs of petroleum (such as land-locked countries).
2) Rural development. Biofuels hold the promise of contributing to rural development by creating jobs in feedstock production, biofuel manufacture, and the transport and distribution of feedstock and products.
3) Reduction in harmful pollutants from vehicle exhaust. Ethanol has the greatest air-quality benefits.
4) Net reductions in lifecycle GHG emissions. Developing countries do not currently have binding GHG reduction targets under the Kyoto Protocol. However, through the Clean Development Mechanism (Kyoto Mechanism), they can sell carbon credits gained as a result of GHG reductions obtained from the use of biofuels.
Despite the various advantages that biofuel offer to developing countries, the World Bank’s Masami Kojima and Todd Johnson have warned that with the advantages come certain risks. Developing countries are also concerned with the potential social and economic costs of biofuel programs. These include the historical need for significant and ongoing government subsidies to the industry. Because of this, biofuel program subsidies are likely to be monopolized by large-scale farms and agribusiness. Furthermore, there will likely be fiscal and equity impacts caused by the reduction in government revenues from tax exemptions for biofuels. Biofuel production also have implications for agriculture and agricultural trade policy, and potential environmental damages associated with feedstock production and biofuel manufacture.
It is impossible to deny the environmental benefits that accrue from the use of biofuels due to their lower emissions of pollutants. However, the possible negative effects cannot be ignored. For example, biofuel feedstock production and processing may cause water and air pollution, soil depletion, and habitat loss associated with the conversion of forests to cropland.
Another effect has recently impacted poor countries across the globe: rising food prices. The increased demand for raw materials including wheat, soy, maize and palm oil for the biofuel production has resulted in rising food prices, which have also been linked to higher energy and fertilizer prices, a weak dollar and export bans.
The production and use of biofuels within the present economic framework presents great development opportunities as well as challenges, and one of the most important challenses is the vital need to address the impacts that biofuel programs have on the poor.
Danny Leipziger, World Bank Group Vice President for Poverty Reduction and Economic Management (PREM) says, “The poor are not just facing higher food prices but also higher energy costs, which is a worrying combination. Policy responses to protect the poor from food price rises are urgent, and need to be designed in a way that is conducive to stimulating greater agricultural production in the long run.” World Bank Group President Robert B. Zoellick called for a New Deal for Global Food Policy to focus not only on hunger and malnutrition, access to food and its supply, but also on the interconnections with energy, yields, climate change, investment, and the marginalization of women.