Can Brazil Save the World?

Map of Brazil I have a request to look at Brazil’s ethanol fuel program, which, on the surface, seems unequivocally more successful than the US endeavors. In the US, ethanol is made from corn and large government subsidies. I cover some reasons for the current failure in this article. In Brazil, ethanol fuel is made from sugar cane, which is cheaper to grow than corn.

Brazil’s ethanol program began, not out of concern for the environment, but rather as a market response to the oil shocks of the 1970s. As gasoline prices reached all-time highs (and in real terms, still the all-time highs) in the late 70s and into the 1980s, Brazil began to look for alternatives to petroleum based fuels. Because they were the largest producer of sugar in the world, they figured that turning sugar into alcohol would be a good way to go. It also helped that at the time, sugar had a relatively low market value, so the chief input good was cheap. The program took off, and by 1986 about 75 percent of all new cars sold in Brazil were equipped to burn ethanol instead of gasoline.

The good thing about sugar cane, in terms of producing ethanol, is that it requires very little labor except at harvest time. The increase in the value of growing sugar caused farmers to shift production from other crops to sugar. This lead to two things happening: One, as the scale of sugar production increased, it became possible for large, corporate farms to buy out smaller, and less efficient farmers. As more and more small farms became part of large scale production, the cost of growing sugar decreased. Also, because sugar cane is relatively less labor intensive than other crops, the workers who were working the fields for these other crops were suddenly unemployed–leading to a shift inward of the labor supply curve, lower wages, and lower production costs.

Brazil’s ethanol fuel success, however, began to disappear just as rapidly as it appeared. Indeed, the market works exactly that way. Starting the late 1980s, the price of gasoline began to drop rapidly and the world price of sugar began to rise. As a consequence drivers found gasoline to be cheaper than ethanol, and farmers found it more lucrative to sell the sugar rather than convert it to ethanol. By the mid-1990s, virtually no pure ethanol cars were being demanded or produced. Except as an additive to gasoline, Brazil’s ethanol program was dead.

Starting at the turn of the century, however, environmental concerns have brought ethanol fuels back into play. The Kyoto Protocol, which was opened for signature in late 1997, revolved around reducing greenhouse gas emissions, and ethanol proved to be the ticket. Ethanol produces less overall carbon dioxide compared to gasoline. The reason is that sugar cane, like any plant, acts as a carbon sink, pulling CO2 from the air. When it is burned as ethanol, the CO2 is released back into the atmosphere. So while it is true that ethanol production produces more greenhouse gases than gasoline, the difference is that the ethanol uses carbon that is already in the air rather than pulling new carbon from the ground. In other words, ethanol fuels cannot reduce greenhouse gasses, but they can slow the production of more greenhouse gasses.

In any case, the Kyoto Protocol called for country specific reductions in greenhouse gasses, chiefly CO2. The key for Brazil is that they are not a giant producer of CO2 when compared to countries like the UK, Germany, and the US. Under the terms of the Protocol, Brazil is allowed to export clean air and import pollution, and that is partially what they have done to make ethanol production profitable again. One case of this is that German car manufacturers, who want to sell cars, are paying Brazilians to buy German cars that run on ethanol fuel. What this allows the Germans to earn credits towards their CO2 reduction goals without having to reduce emissions themselves. In effect, the Germans are using their wealth to purchase clean air from the Brazilians.

The lessons of Brazil’s ethanol program are three-fold. First, markets work, when we allow them to. Ethanol fuels may the energy source of the future, and if we quit paying for corn subsidies, maybe we can just buy cheap fuel from Brazil. Second, ethanol fuels are not all they are cracked up to be, in that they do not necessarily reduce emissions, they just slow them down. Third, ethanol fuels can make Brazil the new Saudi Arabia. What will happen, however, when Brazil becomes rich, wages increase, and sugar cane is no longer a cheap crop? We shall see, but right now I need to run and put some gas into my 1997 Toyota Corolla.