History of the Brazilian Ethanol Program

BRAZIL ALCOHOL NATIONAL PROGRAM

Márcia Azanha Ferraz Dias de Moraes*

Luciano Rodrigues**

Piracicaba - Brazil Junho 2006

* Ph.D. Professor, University of São Paulo (USP – ESALQ, Department of Economics, Administration and Sociology) ** MSc, Student in Applied Economics at the University of São Paulo (USP – ESALQ, Department of Economics, Administration and Sociology)

SUMMARY

Page

LIST OF PICTURES.................................................................................................................... 3

LIST OF CHARTS....................................................................................................................... 4

LIST OF TABLES ....................................................................................................................... 5

THE FIRST PHASE OF PROÁLCOOL : 1975 TO 1978 ........................................................... 8

THE SECOND PHASE OF PROÁLCOOL: 1979-1983 – CARS RUNNING ON HYDROUS ALCOHOL................................................................................................................................. 10

BOTTLENECKS IN THE SECOND PHASE OF PROÁLCOOL............................................ 11

PROÁLCOOL RESOURCES (1ST AND 2ND PHASES) ....................................................... 13

THE SUBSIDY TO HYDROUS ALCOHOL ........................................................................... 16

SECOND PHASE OF PROÁLCOOL: INCENTIVES TO DEMAND..................................... 20

PROÁLCOOL CRISIS............................................................................................................... 23

THE 1990’S: THE DEREGULATION OF THE SECTOR ...................................................... 25

PRICE LIBERALIZATION: FEBRUARY 1999 ...................................................................... 27

DIRECT SUBSIDIES ................................................................................................................ 29

FINANCING FOR ALCOHOL STOCKS BY THE PRIVATE ENTERPRISE....................... 30

CURRENT TAXATION ON FUELS........................................................................................ 32

EVALUATION OF THE ALCOHOL NATIONAL PROGRAM............................................. 34

ECONOMIC VIABILITY OF PROÁLCOOL .......................................................................... 40

CONCLUSIONS ........................................................................................................................ 42

REFERENCES........................................................................................................................... 44

Appendix 1 ................................................................................................................................. 46

Appendix 2 ................................................................................................................................. 50

Appendix 3 ................................................................................................................................. 52

Appendix 4 ................................................................................................................................. 54

LIST OF PICTURES

Picture 1. Evolution of petroleum prices in the international market......................................... 7

Picture 2. Evolution of sugar international prices ...................................................................... 8

Picture 3. Brazil: domestic sales of auto-vehicles (automobiles and other small-sized vehicles) per type of fuel, 1970 to 2005**. ..................................................................................................... 22

Picture 4. Historical evolution of alcohol production in Brazil, harvests from 1970/71 to 2005/06........... .................................................................................................................................. 36

Picture 5. Sugarcane in Brazil: evolution of production and area harvested, from 1970 to 2005*............... ................................................................................................................................. 37

Picture 6. Evolution of hydrous alcohol and gasoline C sales shares....................................... 39

Picture 7. Sales evolution of alcohol (anhydrous, hydrous and overall) and of gasoline A....39

LIST OF CHARTS

Chart 1. Pricing structure of fuels in Brazil during intervention period .......................................18

Chart 2. Summary of the mandates of Sugar and Alcohol Council (CIMA) that deal with resource

subsidies from the government to producers..................................................................................29

Chart 3. Summary of the Mandates of Sugar and Alcohol Council – CIMA regarding the purchase

and the sales of alcohol by the government....................................................................................30

Chart 4. Values actually used by the financing program for fuel alcohol stocks..........................32

LIST OF TABLES

Table 1. Annual flow of Rural and Industrial Proálcool investments. 1975 a 1985 .................. 15

Table 2. The government’s annual balances on the trading of carburating alcohol (1981-1990……………… .......................................................................................................................... 20

Table 3. IPI rates for different passenger cars - 2006................................................................. 23

Table 4. Gasoline and alcohol Sales – 2001 to 2005 – in cubic meters ..................................... 38

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BRAZIL ALCOHOL NATIONAL PROGRAM

The Alcohol National Program (Proálcool or PNA) was created by President Ernesto

Geisel on November 14th 1975, during the military regime, through Decree No 76593. The alcohol

production targets of the program forecasted the production of 3 billion liters of alcohol in 1980,

which was fully reached and increased to 10.7 billion liters in 1985.

As to the Alcohol National Program implementation process, two phases stand out. The

first one starts with the promulgation of Decree No 76593, in November 1975, and lasts until 1978.

It concerns the use of a mix of 20 per cent alcohol contents in the gasoline, the implementation of

alcohol distilleries attached to sugar distilleries, and the involvement of the automotive industry

for the production of alcohol-run cars. The alcohol production in this period grew approximately

350 per cent (from 555.6 million to 2.49 billion liters of alcohol).

The second phase of Proalcool, started in 1979, regards large scale production of hydrous

alcohol to be used in cars that ran exclusively on this fuel. From 1980 to 1988 the alcohol

production soared from 3.7 billion to 11.6 billion liters, showing an average annual growth of 15

per cent.

In PNA’s first phase, the government gave many incentives to alcohol producers, such as

agricultural and industrial financing, product acquisition guaranteed by the Sugar and Alcohol

Institute (Instituto do Açúcar e do Álcool - IAA), and fixed prices considering the parity of 44

liters of alcohol for every 60 kgs (a sack) of sugar1. In the second phase, the support to producer

and to consumption was reinforced. To the producer, alcohol production was stimulated by the

reduction of the parity of a sack of sugar to 38 liters of alcohol. To the consumer, many measures

were adopted aiming at encouraging the consumption of the new fuel (hydrous alcohol): (i) a

guarantee of maximum selling price was established at 66 per cent of the gasoline price; (ii) a 50

per cent price reduction was offered on the Flat Road Tax (Taxa Rodoviária Única2); (iii) vehicles

for taxi drivers were exempted from Tax on Manufactured Goods (Imposto sobre Produto

Industrializado - IPI); (iv) 5 per cent IPI reduction for cars run on alcohol, besides exemption from

both Tax on Operations Regarding the Trading of Goods (Imposto sobre Circulação Mercadoria -

1 Fuel alcohol prices were fixed by the government taking sugar prices as a basis, so that it would be indifferent for the producer to manufacture either sugar or alcohol from the same raw material (sugarcane). 2 Tax falling on vehicles’ register and annual license, to be charged previously to the vehicle’s register or annual license renewal. The amount charged used to be calculated on the total value of the vehicle: 7 per cent for those run on gasoline, and 3 per cent for ethanol-run ones.

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ICM) and on Tax on Fuels and Lubricants (Imposto Único sobre Combustíveis e Lubrificantes -

IUCL) (Moraes, 2000).

The advent of PNA should be analyzed taking into consideration the combination of two

markets – sugar and petroleum – that stimulated the development and the achievement of the

national policy for fuel alcohol.

The rising of petroleum barrel prices, deriving from petroleum exporting countries

(OPEP) policies, resulted in the imported product prices soaring by 225 per cent between October

1973 and January 1974. The effects on the Brazilian balance of trade were substantial, culminating

at a deficit of US$4.69 billion dollars in 1974 (Santos, 1993). The inflation rate increased by 122.6

per cent in one year – from 15.5 per cent in 1973, it built up to 34.5 per cent in 1974. These factors

turned out to be fundamentally significant to the definition of energy policies to be adopted by the

government.

At the same time, sugar producers faced an overproduction crisis, with declining prices

both on the national and on the external markets. In the sugar international market, prices

plummeted from US$0.55 per pound to US$0.12 per pound, pressing profitability in the sector.

Therefore, fuel alcohol was to be an important way for the government to reduce

petroleum importation and to improve the country’s macroeconomic indices. Alcohol production

would also allow sugar producers to direct part of the sugarcane used in the production of sugar at

the new market of fuel alcohol. The alignment of public and private interests was fundamental to

the attainment of the program goals. Pictures 1 and 2 illustrate price behavior in both markets.

Picture 1. Evolution of petroleum prices in the international market

Source: Elaborated as from Santos (2003)

Spot

Opep

8

Picture 2. Evolution of sugar international prices

Source: Elaborated as from Santos (2003)

THE FIRST PHASE OF PROÁLCOOL : 1975 TO 1978

As we have pointed out before, the first phase of the program regarded the use of a mix of

20 per cent anhydrous alcohol contents in the gasoline. In July 1975, the promulgation of Decree

No 75.966 established the first rules for the development of the Alcohol Program, in which the

following stand out: (i) the parity price of anhydrous alcohol and sugar; (ii) trading rules (all the

alcohol production should be sold to PETROBRAS3; the Sugar and Alcohol Institute (IAA) should

control the production and trading of all types of alcohol all over the country); (iii) anhydrous

alcohol should be produced primarily in distilleries attached to sugar mills; (iv) alcohol distilleries

would be financed by official credit entities, or by the Special Fund for Exportation (Fundo

Especial de Exportação4).

Credit conditions to sugar-mill-attached or autonomous distilleries, as stipulated in

Decree No 75966 in the beginning of Proálcool, were the following:

(i) 100 per cent of industrial investments financed. Investment conditions: 15 per cent

a year interest rates for projects in the North/Northeast, and 17 per cent for the

3 Public company at the time, which detained the monopoly of petroleum exploration and refinery. 4 Fund that comprised taxes charged on every sack of sugar and on every liter of non-carburating alcohol produced, as well as on net revenues on exportation. Sugar producers received for the exported product an amount that was similar to its price in the domestic market, so that the difference was destined to the Special Fund for Exportation (Fundo Especial de Exportações). This caused a high level of dissatisfaction among producers from the Center-South Region.

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remaining regions of the country; up to 12 years for full payback, and up to 2

years’ term of delay ;

(ii) Agricultural area financed (sugar cane and other raw materials): 7 per cent a year

interest rates, up to 5 years for full payback, and up to 2 years’ term of delay;

(iii) Monetary correction was inexistent for agricultural as much as for industrial areas.

By the end of 1975, the macroeconomic unbalance of Brazilian economy had become a

lot worse: the external debt had grown, foreign currency reserves had been reduced, exportations

showed to be far below forecasts and not enough external resources were attracted in order to

cover deficits in current transactions.

In October 1975, President Geisel made a speech to the Nation announcing a series of

drastic measures as a means of reducing the deficit in the balance of duties as much as possible,

the Alcohol National Program being among them. On November 14th 1975, PNA was launched by

Decree 76593, following the rules previously stipulated.

As from 1977, the Program’s credit norms were altered, so that the monetary correction

was included in the loans. Here are the main changes:

(i) From 70 to 90 per cent of industrial investments financed, depending on the sized of

the distillery and on the raw material used;

(ii) Reduction of interest rates to: 6 per cent for distilleries attached to sugar mills (4 per

cent for the region of SUDAM/SUDENE5); and 5 per cent to autonomous distilleries

(3 per cent for areas of SUDAM/SUDENE);

(iii) Monetary correction equivalent to 40 per cent of ORTN6 variation;

(iv) Term of delay for starting payback: three years.

As from 1982, already in the second phase of Proálcool, credit rules were altered again: a

3-year-term-of-delay was stipulated to attached distilleries and of 4 years to autonomous units. In

the same year, the interest rates changed to 5 per cent a year plus monetary correction, according

to the following rules: in SUDAM/SUDENE areas, up to 60 per cent ORTN for attached

5 States belonging to the North and Northeast Regions of the country. 6Obrigações Reajustáveis do Tesouro Nacional (ORTN). Federal government bonds that featured monetary correction added to return on investments. The value of one unit of such government bond was to be largely used as a monetary correction index in the Brazilian economy.

10

distilleries and up to 55 per cent ORTN for autonomous units; in the remaining regions, up to 70

per cent ORTN for attached units and up to 65 per cent for autonomous ones.

The lack of monetary correction in the credit, considering the high inflation rates of the

period, implied lower interest rates than local private banking in the Brazilian market at that time,

and it is indicative of an important support to the sector.

Nastari et al. (2005) state that these special conditions for investments together with other

government support programs established at the launching of the PNA were subject to an

investigation by US Department of Commerce. The inspection on alcohol exports from Brazil to

the United States7 was related to a countervailing duty case carried out by the ITC (International

Trade Committee, Washington DC), which was initiated in March, 1985.

According to the authors, the US DOC investigation concluded that the effect of all the

Brazilian government support programs to its alcohol industry, including special interest rates on

government-financed loans was equivalent to only 2.63 per cent of the industry revenue in 1984.

ITC considered that the residual effect of the government support was insufficient to constitute

harm to US alcohol producers8.

THE SECOND PHASE OF PROÁLCOOL: 1979-1983 – CARS RUNNING ON HYDROUS

ALCOHOL

The retaking of Proálcool started with the second petroleum economic crisis, which

occurred during the first half of 1979. From 1976 to 1978 there was a relative stability in the

petroleum market, and this was followed by a period in which OPEP members – mainly Saudi

Arabia, Iran and Iraq - disputed petroleum market control, disagreeing on prices and on volumes to

be exported.

In 1979 there were various price rises, so that in the spot market of Rotterdam the price of

the barrel was US$36.80 by the end of 1979 (by the end of 1978 it was US$12.58).

7 At the same time, ITC also ordered investigations on anti-dumping charges. Both investigations were requested by the US ethanol industry in response to increasing Brazilian ethanol exports to the US in 1984. The base period for analysis was the year of 1984. 8 According to Nastari et al (2005) all findings were submitted to independent auditors from United States, who attested to all results. The ITC ruled on a 4x1 vote that there were no grounds for conviction, since no evidences were found to support the alleged harm.

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From 1978 to 1979, the value of Brazilian importation grew by 32 per cent, mainly due to

petroleum, almost tripling the deficit in the balance of trade (at that time, Brazilian energy

dependence regarding petroleum was 41.6 per cent; in 1973, it was 43.6 per cent).

Although external loans were abundantly available, the balance of duties was closed with

a deficit of US$3.2million, and the net external debt increased by 27 per cent (reaching US$40.2

billion). The inflation rate in 1978 had already outstripped the barrier of 40 per cent a year, and

after the economic crisis it soared to 77 per cent a year in 1979 (Santos, 1993).

In June 1979, during a meeting at the Economic Development Council (Conselho de

Desenvolvimento Econômico) chaired by the President of the country, a new alcohol production

target of 10.7 billion liters was established, to be reached in 1985.

BOTTLENECKS IN THE SECOND PHASE OF PROÁLCOOL

The second phase of the program started with some of the problems that had had their

origins in the first phase, among which we emphasize: (i) a long time to have distillery projects’

legal proceedings approved; (ii) the absence of monetary correction in in the loans offered to the

distilleries9; (iii) distribution and warehousing of alcohol; (iv) price of alcohol paid to producers;

(v) resources for financing the expansion of plantations and of industrial capacity; (vi) fragmented

decision-making structure, and (vii) development of technology for engines running exclusively on

alcohol. Besides these, there was the difficulty in managing to get the automobile industry involved

in Proálcool (Santos, 1993).

The lack of infra-structure for alcohol warehousing and distribution logistics was the most

serious problem faced by PNA at the end of the first phase of the program.

Resolution No 18/78, dating from November 1978, granted fuel dealers the responsibility

for purchasing alcohol straight from alcohol distilleries (according to monthly quotas fixed by

CNP) and transporting it to mixing centers. However, due to the new production scale, this system

was no longer compatible to the new phase of the program. As from 1979, PETROBRAS would be

in charge of the product’s distribution and storing.

9 Due to slow legal proceedings for the projects approval and high inflation rates, at the time when projects were approved the amount requested had lost its value, and therefore it was not sufficient for the implementation of investments any longer.

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According to Santos (1993), it was necessary to create a chain of warehousing tanks and

collection centers, as well as a transportation system (pipes, and also railway, highway and

cabotage systems) to transport alcohol from mills and distilleries to collection centers, from which

it would be taken to mixing centers.

In March 1980, a resolution from Alcohol National Council (Conselho Nacional do

Álcool - CNAL), established that the means of transport to be used for hydrous alcohol should be

primarily pipes, followed by cabotage, railways and highways, given that the latter could not be

used for distances over 300 km.

This decision privileged PETROBRAS, as it already had a wide transportation system

available (oil pipes, tankers and trucks) for petroleum derivatives, whereas the dealers had only

trucks. In August 1983, Decree No 88626 established that PETROBRAS could purchase and

distribute the necessary volume of alcohol to supply the demand and the emergency stocks by

means of its distribution system.

Santos (1993) points out that by the end of 1983, PETROBRAS was very near to holding

the monopsony of alcohol, as it was already authorized to buy about 50 per cent of all the

country’s alcohol consumption (considering both anhydrous and hydrous alcohol, given that in

São Paulo and surrounding areas this percentage reached 100 per cent). In addition, PETROBRAS

used to buy not only the government’s emergency stocks, but also 100 per cent of the distilleries’

excess production. On top of this, it controlled a significant share of tank collectors (23.5 per cent

of the total warehousing capacity, approximately 1.3 million cubic meters), and the biggest chain

of hydrous alcohol filling stations in the country.

This way, the problems of distribution and tanking – considered to be bottlenecks for the

implementation of the program – were solved, and as from 1989 filling stations all over the

country received permission from the National Petroleum Council (Conselho Nacional do

Petróleo-CNP) to install alcohol pumps.

The number of stations equipped for selling hydrous alcohol grew rapidly: on December

31st 1980, 3,587 filling stations sold both gasoline and hydrous alcohol; one year later, the number

of such stations had grown to 9,021, and by the end of 1982, to 10,009 stations (Santos, 1993).

Currently, over 32,000 filling stations sell both fuels all over the country.

Concerning the involvement of the automobile industry in the second phase of the

program, car producers claimed guarantee on the government’s own commitment and on the

13

creation of an infra-structure for hydrous alcohol distribution, as the issues of alcohol tanking and

distribution systems were essential for the success of the program.

The Aeronautics Technical Center (Centro Técnico da Aeronáutica - CTA), an agency

from the Ministry of Aeronautics, together with the automobile industry developed the technology

for cars run on hydrous alcohol, under the supervision of the Industrial Technology Agency

(Secretaria de Tecnologia Industrial - STI), belonging to the Ministry of Industry and

Commerce. In 1978, as the problems of storing and distribution had been overcome by the

government, car manufacturers joined PNA, and the main ones (Volkswagen, Ford, G.M. and Fiat)

already produced vehicles running on alcohol in the same year.

PROÁLCOOL RESOURCES (1ST AND 2ND PHASES)

Concerning the resources for the accomplishment of the program, Santos (1993) points out

that during the first phase of Proálcool, they stemmed from the country’s budgetary endowments

and from positive results in the trading of anhydrous alcohol mixed to gasoline. In March 1976,

through Resolution No 304/76, the Brazilian Federal Reserve Bank (Banco Central) stipulated the

regulations of Proálcool industrial operations. It established that resources for financing

installations, for updating or enlarging alcohol distilleries would derive either from the trading of

carbureting alcohol or from government allowances from the National Monetary Committee

(Conselho Monetário Nacional).

Operations on rural credit were regulated by the Brazilian Federal Reserve Bank (Banco

Central) in June 1976. It is important to point out that initially, the value financed consisted of 100

per cent of the budgeted values, with 7 per cent interest rate a year, with 2 years’ term of delay and

up to 5 years for full payback, according to the type of activity.

Other measures taken to stimulate alcohol production were the financing of trading costs,

mainly for storing (the harvesting lasts 6 months while the trading occurs all year round), given

that this credit corresponded to 60 per cent of the total amount produced in the case of sugar, and

up to 80 per cent in that of alcohol.

According to Belik (1992), the biggest part of the resources for PNA’s credit derived

from the Monetary Budget of the Country, where agricultural credits (Rural Proálcool) as well as

credits for the acquisition or enlargement of the industrial units (Industrial Proalcool) were

14

originated. These resources were administrated by the Brazilian Federal Reserve Bank (Banco

Central), through the General Fund for Agriculture and Industry (Fundo Geral para Agricultura e

Indústria - FUNAGRI), in the sub-account Proálcool10.

In December 1980, the International Bank for Reconstruction and Development (IBRD –

World Bank) and the Brazilian Federal Reserve Bank (Banco Central) made an agreement aiming

at offering about US$1 billion resources to the program. In November 1982, Proálcool received

US$250 million from the World Bank.

The US$1 billion loan was subjected to the opening of the Brazilian market of equipment

for distilleries to foreign companies. However, there was strong pressure from national groups,

including São Paulo State Industry Federation (FIESP), the very alcohol producers, and even from

the National Bank of Social and Economic Development (BNDES), who were against the opening

of the market. Due to such disagreement, Brazil received only the first part (US$250 million), and

the rest was cancelled by the World Bank.

After 1987, the fund administration was taken over by the National Treasury, and the

information was not published11 anymore.

Table 1 shows the annual flows of Rural and Industrial Proálcool investments. From 1976

to 1982, the data used have separate values for Rural and Industrial Proálcool. After this period,

there is only overall data available.

10 The sub-account Proálcool was created inside FUNAGRI in 1976. 11 Besides this, with the closing down of the Sugar and Alcohol Institute in the early 1990’s, a lot of information on the sector was lost, marking the collection of primary data more difficult.

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Table 1. Annual flow of Rural and Industrial Proálcool investments. 1975 a 1985

Year Rural Proalcool (millions US$)*

Industrial Proálcool (millions US$)*

Total (millions US$)

1976 7 53 60 1977 101 198 299 1978 79 283 362 1979 120 197 317 1980 280 404 684 1981 498 657 1,155 1982 134 483 617 Total (1976-1985) 1,219 2,275 3,494 1983 __ __ 207** 1984 __ __ 173** 1985 __ __ 201** Source:* 1976 a 1982: Santos (1993). Average values of 1982, updated by IGP-DI index.

Converted into dollars at the average rate of Cr$ 180.451/US$1.00 ** 1983 to 1985: Belik (1992). Nominal values, converted by annual average exchange rates

We observe that, out of the total amount invested form 1976 to 1982, the biggest part

(65,1 per cent) was destined to the industrial area. Until then, US$ 3,494 billion had been invested

in PNA. As from 1982, the amount invested fell considerably, totalling US$ 581 million.

On June 15th 1981, a CENAL (Comissão Executiva Nacional do Álcool - National

Alcohol Executive Committee) decision temporarily suspended all credit contracts for distillery

projects due to a lack of funds. As from 1982, on account of a reduction on public expenditures,

resources from the IBRD were the only available source of funds for approved projects. This

shortage of resources during the second phase of PNA resulted from the critical economic situation

of the country, and turned out to be a bottleneck for the expansion of the program. Projects

approved by CENAL were from then on sponsored by the private enterprise, which made it

possible for external loans to finalize the implementation of industrial units.

Belik (1992) analyzed the resources financed to producers through Rural and Industrial

Proálcool credit facilities, which were used to stimulate PNA. The author mentions the study

FUNDEPAG/SICCT (1987, p.49), which evaluated subsidies given to producers from 1975 to

1985 through loans that charged lower interest rates than those in the market, due the absence of

monetary correction.

According to this study, the sugarcane plantation implementation benefited from credit

facilities that implied in the lack of reimbursement of more than 50 per cent of the credit volume

16

granted. As to the industrial credit line, in two years, 1979 and 1980, the volume of non-

reimbursed resources amounted to 90 per cent of the values originally agreed to. The proportion of

non-recoverable agricultural and industrial investments started falling in 1982 and reached zero in

1985. The inflexion point in 1982 was due to the introduction of monetary correction through the

variation of ORTNs. As from 1985, loans to rural and industrial Proálcool were to include full

monetary correction, discouraging new entrepreneurs’investments (Belik, 1992).

On the other hand, regarding the capture of subsidies by plantation owners and large-scale

businesses, Nastari et al. (2005) state that special financing conditions had limited impact on the

value of production, equivalent to only 2.63 per cent of the industry revenue in 1984, according a

US DOC (Department of Commerce) investigation 12.

Until 1987, these resources were originated in the sub-account Proálcool from

FUNAGRI. After this period there was a drastic reduction in the volume of financed distilleries,

and a general shortage of credit.

THE SUBSIDY TO HYDROUS ALCOHOL

In economical terms, hydrous alcohol was not competitive as compared to gasoline, as it

had higher production costs. To make its use economically viable, there was a price supplementing

mechanism to the producer that lasted until October 1999.

At first, the Account Alcohol (Conta Alcool), created in 1976 and later called Price

Standardization Fund (Fundo de Uniformização de Preços - FUP) was used to operate this subsidy.

Resources from the FUP account were transferred to the Alcohol Price Standardization Fund

(Fundo de Unificação dos Preços do Álcool - FUPA), and were used to make alcohol consumption

viable as compared to gasoline, as well as to unify the price of the product in the country. Later,

these resources were destined to a PETROBRAS Account, and were to be called Specific Price

Rate (Parcela do Preço Específico - PPE).

Resources from the Alcohol Account were used for several incentives given to the sector,

such as the support to hydrous alcohol. Although Regulation No 114 from the Ministry of Mines

and Energy had scheduled its extinguishment for January 1997, this subsidy was maintained until

October 1999. Then, the supplementation to hydrous alcohol prices was extinguished, as the price

12 See page 10

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rise of petroleum derivatives together with the depreciation of the national currency, the “real”,

made hydrous alcohol become economically competitive as compared to gasoline.

The subsidies given by the government to ensure competitiveness between hydrous

alcohol and gasoline were guaranteed only for the effectively existing demand (as estimated by the

government), and not for the overall production. Support was given according to the volume

demand in each State, given that the transference to producers was made by the Sugar and Alcohol

Production Industry Trade Unions (Sindicatos das Indústrias de Fabricação de Álcool e Açúcar) in

each of the States.

As stated by Serodio (1999), in 1999 the government guaranteed the subsidy of R$0.045

per liter of hydrous alcohol on a total volume of 7.3 billion liters (the estimated demand), totaling

expenses of around R$330 million with the support to this product.

Nastari et al. (2005) explained the mechanism of the Alcohol Account (Conta Álcool),

which was used to operate the support to fuel alcohol. The Alcohol Account (Conta Álcool) was

created in 1976, and it was kept by the National Petroleum Council (CNP) until November 1984.

In December 1984 the control of Alcohol Account was transferred to PETROBRAS, a period

when the national inflation rate was very high, and the prices of fuels (both alcohol and petroleum

derivatives) were under the control of the government.

The Alcohol Account (Conta Álcool) and the Petroleum Account (Conta Petróleo) were

accounting tools to measure differences due to the price structure of fuels in general (oil

derivatives and ethanol). Nastari et al. (2005) show the pricing structure of fuels used by the

government to fix the fuel prices at producer and consumer levels. It is noted that these accounts

could have surplus or debit balances, depending on the prices determined by the government at

producer and consumer levels (Chart 1).

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Chart 1. Pricing structure of fuels in Brazil during intervention period

Parcel Discrimination

A Price of fuel net of taxes

B ( + ) Federal taxes on sales (PIS/COFINS)

C ( + ) State Tax (ICMS)

D ( = ) Invoiced Price including taxes

E ( + ) Taxes on distribution and retail

F ( + ) Distribution margin

G ( + ) Freight

H ( + ) Retail margin

J ( = ) Cost of fuel

K ( - ) Price for the consumer

L ( = ) Difference (Petroleum Account or Alcohol

Account)

Source: Nastari et al. (2005)

Until the deregulation, the government set the price of the fuels at the producer level

(parcel A), and at the consumer level (parcel K), as well as those for distributions and retails

margins (parcels F and H), and also the freight margins (parcel G). The cost of fuel (parcel J) was

a value constructed as a result of the government policy for fuels. The government also set the

price at the consumer level (parcel K). The Petroleum and Alcohol Accounts corresponded to the

accumulated value of the parcel L. In certain periods, as when the government’s main aim was to

curb inflation, fuel consumer prices had smaller readjustments than those paid to producers, which

resulted in deficits in the accounts mentioned.

From 1976 to 1983 the Alcohol Account (Conta Álcool) accumulated a surplus of

US$1.045 billion; from 1984 to 1993, the Alcohol Account accumulated a debit balance of US$

0.70 billion. In the latter period, the Petroleum Account accumulated a deficit of US$2.7 billion.

(Nastari et al., 2005, p.59).

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According Nastari et al (2005) the alleged subsidies received by ethanol producers

through price during the period when prices were administered by the Brazilian government and

PETROBRAS are incorrect. On the contrary, they state that there is evidence showing that, during

the period between the end of 1986 and April 1997 (when the price of anhydrous alcohol at the

producer level was liberalized), prices determined by the government for producers, on their sales

of ethanol to fuel distributors, were in varying degrees consistently below the average cost of

production13, resulting in a large transfer of income from producers to consumers.

The difference between the selling price of hydrous and anhydrous alcohol determined by

the government and their average costs of production has been the object to court cases whose

decisions are pending still today.14

Nastari et al. (2005, p.11) concluded that there was an effective transfer of income from

producers to consumers of US$ 9.38 billion for sales of hydrous ethanol, and of US$ 2.21 billion

for sales of anhydrous ethanol.15 This policy motivated the producers to seek permanent cost

reductions, through the application of technological innovations and scale savings in production.

Brugnaro (1992) analyzed the shaping of fuel prices and costs in order to assess the

government’s balance in the trading of alcohol. According to the author, in the period 1981-90,

government expenses in the federal realm concerned the acquisition of alcohol by producers, the

subsidies for equalizing costs, the transportation of anhydrous alcohol to the gasoline mixing

centers, the mixing, managing and warehousing costs, and also the payback of transportation costs

to distributors. As far as revenue sources are concerned, the author mentions sales to distributors

and tax collection.

The author estimates the government’s balance in the trading of carburating alcohol from

1981 to 1990. During the whole period considered, the balance estimated by the author presented a

surplus, as shown in Table 2.

13 Along this period, costs of production were surveyed by IBRE/FGV (Instituto Brasileiro de Economia/Fundação Getúlio Vargas). These surveys were conducted to serve as benchmarks for the determination of prices as the producer level (Nastari el al, 2005). 14 Monthly data on production costs for sugarcane, anhydrous and hydrous, as well as the prices fixed by the government, from November 1986 to April 1997 can be found in Nastari et al. (2005). 15 The authors multiplied the difference between prices and average costs by demand of each product during this period, and converted them into nominal US dollars. The average loss over this period was US$ 90.53 and US$ 94.21 per cubic meter of hydrous and anhydrous alcohol, respectively.

20

Table 2. The government’s annual balances on the trading of carburating alcohol (1981-1990)

Balance Excahange Rate Balance (US$) Year

Cr$ (million) ExchangeRate US$ (million)

1981 95,700 92.89 1,030.25

1982 128,030 179.47 713.38

1983 138,230 577.36 239.42

1984 132,950 1.833.45 72.51

1985 24,320 6.195.02 3.93

1986 92,440 13.59 6,802.06

1987 145,430 39.33 3,697.69

1988 181,790 264.25 687.95

1989 24,030 2.81 8,551.60

1990 23,820 67.67 352.00

Source: Brugnaro (1992)

Appendix 1 brings anhydrous and hydrous alcohol price evolutions and the value of the

subsidy received by producers per cubic meter, from 1980 to 1990.

SECOND PHASE OF PROÁLCOOL: INCENTIVES TO DEMAND

Among the incentives given by the government aiming at expanding the use of hydrous

alcohol, it is worth mentioning:

(i) lower prices for alcohol (initially fixed at 65 per cent of gasoline prices) than for

gasoline;

(ii) discount in the Flat Road Tax (Taxa Rodoviária Única) for alcohol-run vehicles;

(iii) longer financing term for the purchase of alcohol–run cars; and

(iv) the opening of filling stations for alcohol during the weekends (as they used to be

closed for gasoline).

However, in May 1980, alcohol-run car production targets were far behind plans, and this

made hydrous alcohol stocks increase to the point of exceeding warehousing capacity, which

resulted in the liberation of exportation to Japan and to the United States.

21

Resolution No14, from March 1982 established measures viewing at the recovery of the

alcohol market, such as: (i) lessening of the maximum ratio between alcohol and gasoline prices

from 65 per cent to 59 per cent; (ii) increasing the IPI of gasoline-run cars and reducing it for cars

run on alcohol; (iii) installing densimeters in filling stations, so that the consumer could check the

quality of the alcohol.

As to car prices, the automobile industry agreed to sell cars run on alcohol for the same

price as those run on gasoline, despite the higher production costs, as a means of encouraging the

consumption of cars run on alcohol.

Consumers reacted favorably to these measures, as sales of alcohol-run cars increased by

59.7 per cent in April, 20.2 per cent in May, and 46.9 per cent in June. Picture 3 shows the sales

evolution of alcohol-run and gasoline-run cars.

It is interesting to notice that consumers reacted immediately to incentive and disincentive

policies to the Program (sale trends for the different products would revert in a few months,

making demand fluctuation become rather important), which indicated the importance of the

consumer for the success of the Program.

Another measure of high impact for the recovery of alcohol-run car sales was

Government Decree No1944, from June 1982, which exempted up to 100HP alcool-run passenger

cars to be used as taxis from IPI, for one year.

At the end of 1982, alcohol-run car market was superheated, representing 38 per cent of

the total passenger car sales, and in December the same year this rate reached 67 per cent. As from

1984, consumers showed clearly to have approved of cars run on alcohol, as shown in Picture 3.

(Appendix 2 presents the data regarding cars sales).

We observe that from 1983 to 1989 sales of alcohol-run cars represented 90 per cent of

the overall car sales, on average. As from 1989, this proportion started to decrease (probably due

to the alcohol shortage crisis that occurred at the time) and in 1990, alcohol-run car sales were

only 11.04 per cent of overall car sales.

In 2000, this proportion corresponded to less than 1 per cent. Nowadays, flex fuel car

sales have inverted the demand again in their favor. Consumers have promptly approved of flex

cars, and they can already be found in most models, from various brands. In 2004 and 2005 there

was an increase in the demand for hydrous alcohol, as consumers fill their cars with alcohol

whenever it costs up to 75 per cent of gasoline prices.

22

1980 – 2nd Petroleum shock

1979 – 2nd phase of proálcool

1973

1st Petroleum

shock!

1975 - 1978

1st phase of

proálcool

1997

Beginninf of

deregulation!

1999

Deregulation

Picture 3. Brazil: domestic sales of auto-vehicles (automobiles and other small-sized vehicles) per type of fuel, 1970 to 2005**

Source: Anfavea, 2005 (from 1970 to 2004) and UNICA, 2006 (year 2005).

* Flexfuel: Either gasoline or ethanol, or still any mix of gasoline/ethanol in a single tank of fuel

** considering sales up to November, 2005.

23

The governments gives an incentive to alcohol and flex fuel cars by charging a lower rate

of IPI (Tax on Manufactured Goods – Imposto sobre Produto Industrializado) than that for

gasoline-run cars. The same rates are charged for both flex fuel and alcohol-run cars. Table 3

shows the rates in force in 2006.

Table 3. IPI rates for different passenger cars - 2006

Alíquota IPI Engine Power Gasoline Alcohol or Flex Fuel Engine up to 1 liter 7 % 7 %

Engine 1 - 2 liters 13 % 11 %

Engines above 2 liters 25 % 20 %

Source: Automotive manufacturer (Volkswagen)

We note that tax rates for low-power cars are equal for gasoline, alcohol and flex cars,

and also are lower than those for more powerful models. The more engine power, the bigger the

taxation difference between gasoline and flex/alcohol cars.

PROÁLCOOL CRISIS

As from 1986, various factors contributed to the beginning of a reassessment of the

Program. According to Santos (1993), since January that year, petroleum international prices

started to decline. The growing internal production of alcohol lessened the country’s dependence

on imported petroleum, and the economic plans prioritized inflation and public deficit controls,

showing clearly that the expansion of the Program should be made by increasing productivity in

agricultural and industrial activities, as government loans for expanding installed capacity had

been suspended.

The depletion of official resources evidenced the difficulty of the government in

continuing to intervene in the sector. Moreover, conflicts between producers and government

showed the need for a new model of government intervention.

In October 1987, due to the deficit in the Alcohol Account, PETROBRAS quit buying

any stock of alcohol that exceeded the demand. This terminated payments to producers, although

24

the norms established in Decree No 94541, from July 1987, still determined that PETROBRAS

must buy emergency stocks and exceeding volumes.

The measures adopted by PETROBRAS resulted in problems for alcohol producers, who

complained about the gap in product prices. The prices were based on cost studies made by

Fundação Getúlio Vargas, but they were determined jointly by the Petroleum National Council and

government agencies in charge of the economic policy, which was anti-inflationary, that is, it was

for cutting down public prices. As from the harvest of 1985/86, these factors caused the stagnation

both of sugarcane and alcohol productions, while consumption grew by 12 per cent.

As stated by Santos (1993), in the harvest of 1989/90, about 28 autonomous distilleries

financed by Proálcool had closed down, which meant a reduction of about 500 million liters of

alcohol. In the same year, sugarcane suppliers and even alcohol producers themselves threatened

to halt production. Besides this, conflicts between sugarcane suppliers and alcohol producers

aroused. At that time, there were also denunciations of illegal trading of alcohol. The

circumstances still aggravated when PETROBRAS reduced radically its alcohol stocks, which

generated a product shortage crisis: by the end of 1989, consumers faced long lines in the filling

stations.

The government took measures to relieve the supply crisis: a reduction of anhydrous

alcohol contents (from 22 per cent to 13 per cent) in the mix gasoline-alcohol, importation of

methanol, and the replacement of anhydrous alcohol by MTBE (methyl tertiary butyl ether). In

spite of these, there were lines in filling stations again in 1990 when it was not harvest time, due to

a new shortage of alcohol.

This way, a new reversion in consumer behavior took place, and alcohol-run cars sales –

which represented 90 per cent of overall sales for four years consecutively – started to decline in

1988, as illustrated in Picture 2. The demand decrease for alcohol-run cars and the economic crisis

faced by the country ended up by balancing the fuel alcohol market.

The 1989 and 1990 alcohol supply crises showed clearly the strong dependence of

PETROBRAS on anhydrous alcohol (which was and still is mixed to gasoline, replacing tetraethyl

plumb to guarantee its octane), and so the institution came to defend the use of MTBE as a

substitute product.

25

While the conflict between PETROBRAS and alcohol producers grew, the environmental

issue emerged, strengthening the standpoint of alcohol producers, as alcohol is regarded as a

“clean fuel”. The use of oxygenated fuels – aiming at reducing CO2 emissions – turned out to to be

a trend in developed countries as from the mid 1990’s. In Brazil, CETESB (Companhia de

Tecnologia de Saneamento Ambiental - Technology and Environment Sanitation Agency -), the

agency that controls polluting elements emissions, has become an important fuel alcohol alley.

In August 1990, President Fernando Collor recognized the limits of alcohol as a substitute

to petroleum derivatives. Despite refusing to extinguish Proalcool, he chose to keep alcohol

production within the already installed capacity. Meanwhile, he pointed out the need for providing

resources to PETROBRAS so as to enlarge the national production of petroleum. In 2005,

Brazilian self-sufficiency in petroleum production was announced.

In the early 1990’s, with the commercial opening to external markets promoted by the

Brazilian government, and with the featuring of State financial difficulties, the exhaustion of the

previously existing state intervention model in the sugar-alcohol production chain was made

evident. This is especially clear when we consider the changes that occurred in the country’s

institutional environment, as shown in the following section.

THE 1990’S: THE DEREGULATION OF THE SECTOR

Moraes (2000) analyzed the deregulation of the sugar and alcohol sector in Brazil. Dating

from 1999, the State considerably turned away from the sugar alcohol sector, and the main impacts of

such change are: sugar cane, sugar and alcohol prices are ruled by a free market; mills and distilleries

no longer have sugar and alcohol production quotas, and the support to fuel alcohol was discontinued.

It is important to observe the distinct institutional environments at the beginning of

Proálcool and nowadays: today the political regime in force is democratic, as the Congress has a

decisive role in public policy decisions, whereas in 1975 the military regime allowed for

centralized decisions. The present Federal Constitution (1988) impedes state interventionist action;

the country’s economy is inserted in a globalized market, subject to the World Trade Organization

(WTO) rules, not to mention the lacking resources of the Brazilian government to implement public

sectorial policies.

26

As from the reform implemented by President Fernando Collor, a new institutional

apparatus was established for the decision-making policy on alcohol and sugar, within a context of

economic liberalization of the country as a whole, supported by the Federal Constitution of 1988.16

According to such Constitution, the intervening role of the State on the Brazilian

economy has changed significantly, as it has established that State planning must have only an

indicative character, which has ended up by weakening government action, and therefore it has

limited the strength of the Sugar and Alcohol Institute in the sugar-alcohol sector.

The publication of Law No 8.178, from March 1991, determining rules on prices and

salaries, was of crucial importance for the deregulation process of the Brazilian economy started

during the Collor government.

Concerning product prices in the sugar-alcohol chain, in March 1996, Minister of

Treasury Pedro Malan emitted Regulation No 64, establishing that: “…are subject to the

government policy of price liberalization… sugarcane prices, including freights, supplied to mills

and autonomous distilleries all over the country, standard crystal sugar prices, alcohol prices for all

types of carburating ends, alcohol prices for all types of non-carburating ends, and all types of

residual molasses prices, in the producing units” given that January 1st 1997 was the initial date for

the Regulation No 64 to be in force.

There were three delays before the total liberalization of the sugarcane production chain,

as only in 1999 all the products were to operate without any government intervention. The delays

in deregulation were the following:

1. Ministry of Treasury’s Regulation No 294 (December 1996)

It delayed sugar cane, sugar and alcohol price liberalization, originally forecasted for

January 1st 1997. These were postponed to two distinct dates: anhydrous alcohol prices would be

liberated as from May 1st 1997 (which really happened); prices of sugar cane, standard crystal

sugar, all types of alcohol (except for anhydrous) and of residual molasses would come to be freed

as from May 1st 1998.

16 The Federal Constitution of 1946 ordained the State intervention principle on the economy, which was kept in the

Constitution of 1967. Instead, the Constitution of 1988 regulates in a completely opposite way (Bezerra, R.C. Parecer

sobre os dispositivos legais da legislação intervencionista do setor sucroalcooleiro. São Paulo, 1997. Technical review

presented to UNICA, São Paulo).

27

2. Ministry of Treasury’s Regulation No 102 (April 1998)

New delay for the liberalization of prices for sugar cane, standard crystal sugar, and

hydrous alcohol for carburating ends, for November 1st 1998.

3. Ministry of Treasury’s Regulation No 275 (October 1998)

It delayed for three more months the date of price liberalization for sugar cane, standard

crystal sugar, hydrous alcohol for carburating ends, and of residual molasses, postponing the

liberalization date from November 1st 1998 to February 1st 1999.

On this same day, CIMA emitted Resolution No6, stipulating the limit of resources to be

used on expenditures with the Álcool Program in 1999. It determined a reduction on the total

annual volume of the expenditures, which went from R$ 1.3 billion to R$ 1.1 billion in financial

resources deriving from the Account Specific Price Rate (PPE), administered by ANP.

PRICE LIBERALIZATION: FEBRUARY 1999

Finally, on February 1st 1999, the system of liberalized prices was installed, both for

sugarcane and for all the products from the sugar-alcohol agro-industry.

The various delays in the liberalization of the sugar-alcohol sector, the discussions and the

active participation of the agents involved, as well as the news on the media constitute clear

evidence of the difficulties faced in this process as a means of balancing economic, environmental

and social issues.

We should emphasize the strong pressures and counter-pressures from the various

segments involved, whether supporting economic liberalization (required by efficient producers,

inclined to facing free market rules), or in the opposite direction, for keeping the pre-existing

system, as the continuity of production in comparatively less efficient regions (in the various

phases of the production chain) still depended on government support.

The liberalization occurred in an overproduction scenario both for sugar (nationally and

internationally) and for alcohol. The sector faced a serious financial crisis, culminating at the

closing down of many industrial units in 1999.

28

Free market pricing imposed a new competition model to sugar and/or alcohol mills,

leading them to seek new strategies to cut down costs and increase competitiveness in order to

ensure survival in the new environment. According to Vian (2003), the mills have adopted

different competitive strategies regarding sugar production (the companies started producing other

types of sugar: liquid sugar, organic sugar, sugar-artificial sweetener mix), and a diffusion of the

trading and use of byproducts (yeast, filtercake, molasses, bagasse to co-generate electric power).

The author also mentions the changes in the production process: the outsourcing of agricultural

and industrial services, as well as the introduction of mechanical sugarcane harvesting and

planting. Also, many mills have endeavored to improve their power balance to generate higher

exceeding electricity17

for the electric power market.

In addition, the mills also implemented new production organization and management

practices, resulting in a more professional company management, with reduced family

administration. The new management approaches and the recognition by the companies that the

more Brazil participates in the international trade, the higher the need for labor rules

corresponding to those of sugar producers of developed countries, have not only strengthened the

companies’ manpower departments, but have also caused positive impacts on labor negotiations

and on the labor market.

The competitive environment has also redefined the production market structure, which has

undergone a concentration process through mergers and acquisitions, including the introduction of

foreign capital18

in the sector. This move led the sugar and alcohol sector economical groups to

grow.

17

The Brazilian sugar mills and alcohol distilleries are self-sufficient in electric power, which is co-generated by the

sugarcane bagasse burning process. The bagasse of the sugarcane ground for sugar and alcohol production is burned in

broilers that generate steam to produce heat or move the power generators needed in the industrial process. With the

increase in the power efficiency in the sugar and alcohol manufacturing process, they started selling the exceeding co-

generated electrical power. 18

Currently four multinational groups operate in Brazil: FDA (a joint-venture formed by Brazilian group Cosan, with

participation of 47.5 per cent, and by French groups Tereos/Union DAS, also with 47.5 per cent, and Sucres &

Denrées/Sucden, holding 5 per cent); Coinbra/Louis Dreyfus (takeover of two sugar mills – Luciania Mill and Cresciumal),

Béghin-Say (takeover of Guarani sugar mill), and Glencore Group (Switzerland). Altogether, they account for

approximately 10 per cent of Brazil’s total crush. Also the English company Tate & Lyle took over 10 per cent of the sugar

port terminal from the Grupo Cosan in Santos, in Sao Paulo state. In June 2006 the multinational company CARGILL

bought 63% of CEVASA sugar and alcohol Mill in the State of São Paulo.

29

PNA’s decision-making structure has changed deeply with the deregulation of the sector.

As from 1988, with the creation of the Sugar and Alcohol Interministry Council (CIMA), this

agency has taken over all the decisions concerning the sugar-alcohol sector.

CIMA mandates concern the direct subsidies to fuel alcohol; they also regard the

formation of government’s strategic stocks as well as the availability of resources for producers to

develop regulating stocks, whose credit costs are lower than those in the market. It is observed that

the actual availability of resources has always been below producers’ needs and also below those

stipulated in the mandates mentioned.

The main decisions taken by CIMA are stated below:

DIRECT SUBSIDIES

There have been no direct subsidies to fuel alcohol since CIMA19 Mandate No15, which

extinguished the subsidy to alcohol producers as from November 1th 1999. Chart 2 brings the

articles in CIMA mandates that tackle with subsidies to alcohol.

Chart 2. Summary of the mandates of Sugar and Alcohol Council (CIMA) that deal with resource

subsidies from the government to producers

CIMA

Mandate Content

Nº 6/1998

10/16/1998

Reduction of maximum government expenditures in fuel alcohol programs in 1999. The maximum expenditures, which were R$ 1.3 billion (one point three billion reais or US$1.095 billion dollar) were lowered to R$ 1.1 billion (one point one billion reais, or 920 million dollars). Source of Resources: ACCOUNT - PPE.

Nº 10/1999

02/01/99

Subsidy value for hydrous fuel alcohol fixed at R$0.0450 (US$ 0.024) per liter as from 02/01/1999. Support on 7.3 billion liters production volume over one year. (demand estimation). Total amount of resources: R$330 million (three hundred thirty million reais (US$ 175.513 million dollars). Hydro fuel alcohol producers in Mato Grosso and Mato Grosso do Sul States obtain authorization of support for five years, with decreasing values as from the second year. The aim of this mandate was to enable the trading of alcohol in internal consumer centers located far from these producing regions.

19 Sugar and Alcohol Council, a federal government agency that establishes policies for the sector.

30

Nº 15/1999

10/27/99

Extinction of hydrous alcohol subsidies as from 11/01/1999 (the subsisies was done

previously to assure competitiveness between hydrous carbureting alcohol (AEHC)

and gasoline)

Source: Elaborated with information from Ministry of Agriculture, Cattle Breeding and Food

Supply (Ministério da Agricultura, Pecuária e do Abastecimento), 2006, and from the Petroleum

National Agency/ANP (2006).

FINANCING FOR ALCOHOL STOCKS BY THE PRIVATE ENTERPRISE

The National System of Fuel Stocks was constituted by Law No.8,176 in February, 1991.

However, despite the institutional support, there is no effective model for the creation of

government strategic stocks of fuel alcohol in the Country20

. Alongside with time, occasional

actions have been taken by the Federal Government, such as the purchase of fuel alcohol

exceeding stocks, instead of the adoption of policies for the creation of government fuel stocks, as

stipulated by the legislation in force. Between 1998 and 1999 three purchases were authorized for

the formation of stocks.

CIMA is the organ responsible for the definition of the amounts destined to the Stock

Program for every harvest year. Chart 3 shows the decisions concerning the Government’s

formation of stocks. We notice that there has been no puchase of alcohol for the formation of

government stocks since 2002.

Chart 3. Summary of the Mandates of Sugar and Alcohol Council – CIMA regarding the purchase

and the sales of alcohol by the government

CIMA

Mandate Content

Nº 1/1998

Data:01/30/98

Concerns the acquisition of 90,000m! (ninety thousand cubic meters) of hydrous

carburetting alcohol produced in the North & Northeast Regions for the formation of

government stocks of hydrous carburetting alcohol.

The alcohol acquired will be reinserted in the internal market between August and

December of the current year, and the financial resources deriving from the sale will

return to the Petroleum, Derivatives and Alcohol Account (PPE).

20 We must remember that most of the alcohol production takes place during the sugarcane harvest in the Center-South

Region of the country between April and November. In other words, the production takes place during 9 months and

must be stocked for the rest of the year.

31

Nº 4/1998

Data: 08/14/98

Concerns the acquisition of 500,000 m! (five hundred thousand cubic meters) of

hydrous fuel alcohol produced in the Center-South Region for the formation of


The alcohol acquired will constitute the product’s regulating stock, will be reinserted in

the market and the financial resources deriving from the sale will return to the

Petroleum, Derivatives and Alcohol Account (PPE).

Nº 11/1999

Data: 03/02/99

Concerns the acquisition of 300,000 m! (three hundred thousand cubic meters) of

hydrous fuel alcohol produced in the Center-South Region for the formation of


The alcohol acquired will constitute the product’s regulating stock, will be reinserted in

the market and the financial resources deriving from the sale will return to the

Petroleum, Alcohol and By-products Account. (PPE)

Nº 17/1999

Data 11/06//99

Concerns the sale of governmental stocks of hydrous fuel alcohol.

The financial resources deriving from the sale of fuel alcohol authorized in the form of

this Mandate will be accounted as credit in the Petroleum, Derivatives and Alcohol

Account. (PPE)

Nº 22/2002

Concerns the importation, as far as March, 2002, of 300,000 m! (three hundred

thousand cubic meters) of fuel alcohol and the acquisition of 300,000 m! (three

hundred thousand cubic meters) of hydrous fuel alcohol – AEC, from distilleries or

from their associated cooperatives, installed in the Northeast Region (the volume may

be increased by up to 100,000 m! (a hundred thousand m!) owing to the need for the

product in the Center/South Region and to its availability in the North East Region.

Source: Elaborated with information from Ministry of Agriculture, Cattle Breeding and Food

Supply (2006), and from the Petroleum National Agency/ANP (2006)

Besides the formation of government strategic stocks, there is a finance line (provide at

below-market interest rates) which enables producers to maintain stocks of this product. Chart 4

shows CIMA’s decisions concerning the financing of proven alcohol stocks

32

Chart 4. Values actually used by the financing program for fuel alcohol stocks.

Harvest Values authorized

by CIMA

Mandates

Values actually

spent*

Annual

special

interest

rate

Annual official

interest average

rates (Central

Bank - Selic)

Harvest 01/02 There was no finance program for stocks (Program established in 2002)

------------ ------------- ----------

Harvest 02/03 (Mandate CIMA N.24, Sep/12/2002)

R$500 million reais (US$149.65 million dollars)

R$115.4 million reais (US$34.54 million dollars)

11.5 per cent to 12.5 per

cent

19.22 per cent

Harvest 03/04 (Mandate CIMA N. 29, May/27/2002)


R$464.8 million reais (US$ 158.30 million dollars) (Center South Region: 91.14 per cent; North Northeast: 8.86 per cent)


cent

23.53 per cent

Harvest 04/05 (Mandate CIMA N.32, May/05/2004)


R$466.78 million reais (US$150.59 million dollars) (Center South Region: 90.6 per cent; North Northeast: 9.4 per cent)


cent

16.24

Harvest 05/06 (Mandate CIMA N. 33, May/05//2005)


Resources still not freed.


cent

19.12

Harvest 06/07 -------------- Not forecasted in the Government’s Budget.

-------------------

-------------------

Source: Ministry of Agriculture, Cattle Breeding and Food Supply /MAPA; Departament of Sugarcane and Agro-energy - DCAA General Coordination of Sugar and Alcohol - CFAA/DCAA, 2006 (personal communication)

CURRENT TAXATION ON FUELS

The current taxation and social contributions on fuels are:

• Tax on Operations Regarding the Trading of Goods and on Rendering Services (Imposto sobre

Circulação de Mercadorias e Serviços- ICMS);

• Contribution for the Worker’s Social Integration and for the Formation of the Civil Servant’s

Patrimony (Contribuição para o Programa de Integração Social do Trabalhador e de Formação

do Patrimônio do Servidor Público - PIS/PASEP);

33

• Social Contribution for Financing Social Security (Contribuição Social para o Financiamento

da Seguridade Social - COFINS);

• Contribution of Economic Domain Intervention (Contribuição de Intervenção de Domínio

Econômico - CIDE)

ICMS, PIS/PASEP and COFINS taxes are not in force exclusively in the fuel sector, also

falling on the remaining sectors of the economy. These taxes are percent taxes, applied on sale,

distribution and retailing chain of fuels, being analogous to excise or value added taxes. Except for

the case of ICMS, all taxes are accrued on equal terms, or percent rates, to gasoline C and hydrous

ethanol.

ICMS is a State tax whose rates vary both among products and states. In general, for most

of the Brazilian states, there are no significant differences in the ICMS rate between hydrous

alcohol and gasoline. In the State of Paraná, the rate of ICMS on gasoline is 8 per cent higher than

that on alcohol during the entire period analyzed; in the State of Sao Paulo, the main alcohol

producer and consumer, we observe that since 2003 the gasoline ICMS rate has been 13 per cent

higher than that for alcohol. This change was made to fight the existing tax evasion in the hydrous

alcohol market (as it was made public), which had been motivated by the previous 25 per cent

ICMS rate21.

CIDE was instituted by Law No.10336, dating from 12/19/2001, and falls both on

importation and on trading of petroleum and its by-products, as well as on natural gas, and on

hydrous fuel alcohol. According to this law, CIDE’s tax collection will be destined, in the form of

the Budgetary Law, to: (a) subsidize the prices for, or the transportation of, fuel alcohol, natural

gas, and for petroleum and its by-products; (b) finance environmental projects related to petroleum

or gas industry; and (c) finance a program of transport infra-structure.

It was verified that CIDE is a tax that falls on fuels in differentiated ways, viewing at

encouraging the use of alcohol and at reducing the use of fossil fuels. The current level for CIDE

on gasoline is R$ 280 per cubic meter (US$ 115.23/m3), and on diesel is R$ 70,00 per cubic meter

(US$ 28.81/m3). To all the other products, including fuel alcohol, the net rate of CIDE has always

21The high ICMS rate (25%) encouraged tax defraudation, in that defrauders felt it was worth running the risk of being caught by the government auditors (in this case, they would have to pay the tax defraudation fine).. See document from the Parliamentary Investigation Committee (CPI) on fuels and Moraes, 2000.

34

been zero. Therefore, the difference in taxation between alcohol and gasoline is R$280/m3 (US$

115.23/m3).

EVALUATION OF THE ALCOHOL NATIONAL PROGRAM

The evaluation of Proálcool has been the research object of many authors, and several

different results can be found, whether criticizing PNA due to high public expenditures, or

defending it, even to the point of alleging income transference from producers to consumers. In

this paper, we bring the viewpoint of some of the authors who have presented approaches on the

theme.

The evaluation of PNA starts from its goals, as stated in Decree No 76,593/75, which

created Proálcool. According to such Decree, the goals for the creation of PNA are:

(i) saving exchange values by reducing petroleum importation; (ii) reducing regional

income disparities; (iii) reducing income inequality; (iv) expanding the production of capital goods

used in distilleries.

Santos (1993)22 affirms that the definition of the goals of a program is fundamentally a

political process, and that in the case of Proálcool it is the result of the bargaining situation of the

actors, disputing its formulation.

The main concern of the President, as well as of his direct assessors and of the Ministries

in charge of economic issues was the country’s balance of duties, which was increasingly

deteriorating. At the same time, the Sugar and Alcohol Institute (IAA) faced problems deriving

from sugar super-production and its declining prices. Therefore, IAA pressured strongly for policy

alternatives that favored the sugar industry (alcohol was to be an alternative product).

Santos (1993) evaluates Proálcool considering the three goals identified during the phase

of alcohol-gasoline mix (and which was maintained in the second phase of program): (i)

improving in the balance of duties; (ii) reducing the country’s dependence on imported petroleum;

(iii) creating a new market for the sugar industry.

22 The major part of this section is based on the excellent work of Maria Helena de Castro Santos, compulsory reading for one to understand fuel alcohol policy in Brazil. The author defended her Phd thesis in the Massachusetts Institute of Technology-MIT, USA, December 1984. Thesis called “Alcohol as Fuel in Brazil: an alternative Energy Policy and Politics”.

35

According to the author, the goal for the creation of a new market for the sugar industry

was fully reached. From 1975 to 1983, Brazilian production of alcohol increased to 7.95 billion

liters; the production installed capacity went from 904 million to 11.1 billion liters per harvest. In

the early 1970’s, at least 96 per cent of all the alcohol produced was byproduct of the sugar

production process; in 1986/86 harvest, more than 60 per cent of the sugarcane was used in the

production of alcohol23

. Alcohol production stabilized sugar production levels, and its stock levels

showed to be lower alongside with time.

There was a relevant expansion in sugar and alcohol production in Brazil as from the

creation of Proalcool, which is also observed nowadays. After the crisis in the late 1990’s, new

factors have increased the product demand and have stimulated the growth in alcohol production.

We can mention the development of flex fuel cars, which has increased the internal demand for

hydrous alcohol. Furthermore, environmental issues have caused the external demand for

anhydrous alcohol to increase: besides being renewable, fuel alcohol is less polluting than gasoline

and contributes to a reduction in carbon emissions. Picture 4 shows the evolution in alcohol

production in Brazil for harvests from 1970/71 to 2004/05.

The expansion in sugarcane production has followed the evolution of alcohol

production24

. Picture 5 shows the evolution in sugarcane production and in plantation area

(Appendix 3 presents the data regards sugarcane production and plantation area). It is important to

observe the gains in productivity attained along the period: in 1975, sugarcane productivity (in

tons per hectare) was 46.5t/ha; in 1980 it improved to 57t/ha; in 1990, the productivity was

61.5t/ha, and in 2005 it reached 73.5t/ha. These productivity leaps were a consequence of public

and private investments in research. In recent years, it has been notably the result of research

investments with private resources (Copersucar).

23 Nowadays, the ratio is around 50 per cent for each product. 24 A expansão da produção de cana também foi motivada pelo crescimento da produção de açúcar.

36

1979 – 2nd Petroleum shock

1979 – 2ns phase of Proácooll

1973

1st Petroleum

shock!

1975 - 1978

1st phase of

Proálcool

1997

Beginning of

deregulation!

1999

Deregulation

Picture 4. Historical evolution of alcohol production in Brazil, harvests from 1970/71 to 2005/06.

Source: Moraes, 2000 (harvests from 1970/71 to 1982/83); Datagro, 2000 (harvests from 1983/84 to 1989/90) e UNICA, 2006

(harvests from1990/91 to 2005/06).

.

37

Picture 5. Sugarcane in Brazil: evolution of production and area harvested, from 1970 to 2005*.

Source: IBGE, 2006

Note: * estimation.

38

As regards to reducing the dependence on external energy, the goals have also been

reached. Considering the participation of fuel alcohol in the total consumption of liquid fuels,

Santos (1993) shows that in 1975 alcohol represented 0.2 per cent; in 1985 this ratio grew to 12.4

per cent. Strictly in the transportation sector, where all the alcohol is consumed, its contribution

evolved from 0.4 per cent in 1975 to 15.4 per cent in 1985. That is, not only did the country’s

dependence lessen, but the consumption pattern also modified in favor of renewable resources.

Nastari et al estimates that from 1975 to 2004, the use of alcohol allowed for the substitution of

nearly 230 billion liters of gasoline.

Alcohol and gasoline sales evolution from 2001 to 2005 can be found on Table 4. We

detect that gasoline C sales grew by approximately 5.8 per cent, while alcohol sales increased by

32.8 per cent, given that alcohol demands boosted as from the lauching of flex fuel cars. The

overall growth in alcohol sales, including the volume of anhydrous alcohol added to gasoline A,

was 28.3 per cent.

Table 4. Gasoline and alcohol Sales – 2001 to 2005 – in cubic meters

Year Gasolina C* Anhydrous

Alcohol**

Hydrous

Alcohol Total Alcohol

2001 22,211,002 4,702,222 3,500,448 8,202,670

2002 22,610,257 5,558,740 3,789,193 9,347,933

2003 21,774,095 5,107,826 3,241,883 8,349,709

2004 23,130,996 5,782,749 4,298,667 10,081,416

2005 23,490,564 5,872,641 4,648,222 10,520,863

Source: National Agency of Petroleum, Natural Gas and Biofuels (Agência nacional do Petróleo,

Gás natural e Biocombustíveis - ANP), 2006

*Gasoline C: gasoline A plus anhydrous alcohol.

** Sales estimated as from anhydrous alcohol contents in gasoline A.

Picture 6 shows hydrous alcohol and gasoline C Sales shares. At the beginning of the

period, the hydrous alcohol sales share was 13.6 per cent, which was altered to 16.5 in 2005.

39

Picture 6. Evolution of hydrous alcohol and gasoline C sales shares.

When we consider that gasoline C has anhydrous alcohol contents, we notice that the

overall alcohol sales share (hydrous plus anhydrous alcohol) as compared to gasoline A25 sales

increased considerably (Picture 7). It reached nearly 60 per cent in 2005, showing the alteration in

automotive fuel consumption profile in the country.

Picture 7. Sales evolution of alcohol (anhydrous, hydrous and overall) and of gasoline A

As to the saving of exchange values, Santos (1993) regards the gains with Proálcool as

modest. From 1977 to 1985, Brazil’s expenditures with petroleum net importation were US$64.8

25 Gasoline sales to the automotive market comprise Gasoline C. The example above illustrates the importance of alcohol Sales in the automotive fuel market.

40

billion, and estimations indicate that US$6.9 billion were saved (10.7 per cent of the total cost of

petroleum).

On the other hand, Nastari et al (2005) has calculated the value of alcohol, hydrous and

anhydrous, in gasoline equivalent, evaluated at the price of the gasoline in the world market

(Rotterdam). According to the author, in the period 1976 to 2004, ethanol used for fuel purposes

(excluding industrial and others uses) enabled savings of US$ 60.74 billion in gasoline

importation, in constant US dollars of January 2005. When interest on the foregone external debt

is considered (estimated at prime rate plus 2 per cent per year), Nastari et al (2005) found that

accumulated savings sum up to US$ 121.26 billion.

Proálcool social goals (reducing regional and individual income disparities) have not been

reached, since the aim of PNA, as designed by the burocratic agencies involved in decision-

making, showed to have primarily an economic bias.

ECONOMIC VIABILITY OF PROÁLCOOL

The authors who assessed the economic viability of Proálcool have found diverse results,

considering both private and social costs. At the beginning of Proalcool, many opponents

criticized the use of alcohol as a fuel alleging lack of economic viability and the need for subsidies

for its implementation. On the other hand, the arguments of PNA supporters were the savings in

exchange values and the lessening of energy dependence.

From the private standpoint, Santos (1993) points out that existing estimation suggests

that the return on investments for most of Brazilian distilleries has been around 12 per cent, that is,

favorable to private entrepreneurs. However, due to IAA’s policy of fixed prices for sugar cane,

the situation has been unfavorable to agricultural entrepreneurs, given the noticeable deterioration

in the trading terms of sugarcane during the Program.

Bélik (1992) stands out that the various authors mentioned in Pelin (1985), who assessed

overall costs of Proalcool, worked with estimations either of the difference between CIF prices of

imported26 petroleum and private costs, or with the difference between CIF prices of imported

26 The prices of imported petroleum are taken as proxy of the petroleum consumed internally, due to a lack of data about the cost of extraction of the national petroleum. Next, the author estimated the barrel cost equivalent to gasoline, by comparing the calorific contents of the fuels and volumetric power of engines.

41

petroleum and social costs of alcohol production. Private costs consider agricultural, industrial and

trading costs. They also consider capital opportunity costs.

In order to understand the results of the various studies, Pelin (1985)27 carried out a

detailed investigation on the proceedings adopted by the authors. The main divergences are in the

estimations of the correction factors of private prices, mainly concerning exchange rate and capital

opportunity cost. Calculations were made under different conditions: attached or autonomous

distilleries, industrial productivity, production scale, equipments for extraction (millstones or

extractors).

According the author, the cost variation of the hydrous alcohol equivalent barrel ranged

from US$67.8 to US$99.6 per equivalent barrel of petroleum. The price of gasoline in the spot

market of Rotterdam was US$41.23 per barrel, or US$45.35, including freight, indicating that at

the time hydrous alcohol was not competitive as compared to gasoline. Appendix 4, elaborated

according to Pelin (1983), shows carburatting alcohol production costs, as estimated by various

authors.

At the time of those studies, neither the co-generation of electric energy from bagasse nor

the use of vinasse as a fertilizer were in practice. Production costs were reduced after these

practices were incorporated to the production process.

As opposed to these estimations, the MIC/CENAL28 study, from 1981, endorsed by IAA,

indicated that in July 1981 the social costs of hydrous alcohol production were around

US$39,9/barrel CIF, and for anhydrous alcohol they were US$39,7/barrel CIF. At that time, the

average price of Brazilian petroleum imports was US$ 37,3/barrel CIF. Therefore, according to the

MIC/CENAL study, hydrous alcohol was competitive with gasoline.

Concerning production costs, Nastari et al. (2005) showed that the Brazilian National

Energy Comission published a report assessing Proalcool, which showed an economic cost of US$

30.50 per barrel29, including a return on investment of 11 per cent per year, and excluding the

credit associated with the value of excess sugarcane bagasse. According to the authors, these

values of economic costs are compatible with those found by the World Bank in its assessment of

the Proálcool program, estimated between US$ 33.40 and US$ 42.00 per barrel.

27 The author makes a deep analysis of the various methodologies adopted in each study. 28 Ministry of Industry and Trading/ National ExecutiveCommittee on Alcohol (Ministério da Indústria e Comércio/Comissão Executiva nacional do Álcool) 29 In US dollars of March 1986.

42

As stated by Bélik (1992) in a more recent work, Oliveira (1991) affirmed that Brazilian

alcohol would only be competitive if there was a new breakage in petroleum international market.

Nevertheless, Oliveira (1991) points out the positive aspects of PNA: if on the one hand the

government made investments of US$ 3.7 billion (US$2.5 billion in distilleries and US$ 1.2

billion in agriculture), on the other hand, they saved US$8.5 billion in exchange values until 1998

by cutting down petroleum importation.

In 1989, the Brazilian Federal Audit Issues Council (Tribunal de Contas de União) made

an operational audit on the management of Alcohol National Program, and found out that overall

investment until 1989 had been US$4 billion: 56 per cent by means of public loans, and the

remaining 44 per cent with private resources (Belik, 1992).

CONCLUSIONS

At present, Brazil is the world’s largest and most efficient alcohol producer, with the

lowest production cost in the world. From 1975 to 2004, cost reduction in ethanol production was

really impressive. The learning curve of the Brazilian ethanol is an important example of the

biofuel’s competitiveness as compared to fossil fuels.

Productivity gains are also important: in 1980, 4,200 liters of ethanol were produced per

cane hectare; in 2003, 6,350 liters of ethanol were produced per cane hectare; that is, there was a

51.2 per cent productivity increase in the period.

It is undeniable that Brazil’s leading position is a result of the intervening energy policy

of the Federal Government, as it controlled the sector until 1997. Alcohol National Program must

be analyzed considering the situation at the beginning of the program: a circumstance of two

markets, sugar and petroleum, which aligned public and private interests; authoritarian military

regime, privileging centralized decisions; a Federal Constitution that permitted direct government

action on the economy, and a closed economy. The replication of the Brazilian model in other

countries, besides the technical and economical issues, cannot underestimate the institutional

environment of each region, once the result may be distinct. The essential role of consumers in the

success of PNA should also be emphasized.

At present, however, the implementation of the Brazilian Program of Biodiesel, started in

recent years, faces a totally different institutional environment than that of Proalcool. Furthermore,

while at the time of Proalcool’s creation the main concerns of the Brazilian government were the

43

stability in the balance of duties and the reduction of the dependence on imported petroleum,

nowadays the environmental issues are important reasons for the growth in production and in use

of biofuels.

In order to create and develop Alcohol National Program, the Brazilian government gave

many incentives both to production and to the consumer. As far as alcohol producers were

concerned, the main incentives were agricultural and industrial financing, product acquisition

guaranteed, and fixed prices considering the parity between alcohol and sugar.

In the second phase, the support to producer was reinforced, given that a subsidy to

hydrous alcohol was introduced to ensure competitiveness between hydrous alcohol and gasoline.

It is important to bring to mind that in November 1999 the subsidy to hydrous alcohol was

extinguished.

Regarding incentives to demand aiming at the growth in the use of hydrous alcohol in the

second phase of the PNA, it is worth mentioning some of the measures adopted. Among those, the

government guaranteed a maximum selling price to consumer for hydrous alcohol at 66 per cent of

the gasoline price, and also fixed lower rates in many Federal and State taxes to alcohol-run cars as

compared to those fixed to gasoline-run cars.

Nowadays, current federal incentives concern lower IPI rates (Tax on Manufactured

Goods) for alcohol and flex fuel cars to the more powerful gasoline-run cars. There is also a credit

facility at lower interests than those practised in the market for alcohol stock formation by

producers.

As to the present taxes falling directly on fuels, the main difference between alcohol and

gasoline is found in CIDE rates (Contribution of Economic Domain Intervention), instituted in

1992. CIDE net values (PIS/PASEP and COFINS discounted) result in a difference in taxation

between alcohol and gasoline of R$280/m3 (US$ 115.23/m3). This way, there is an incentive to the

use of fuel alcohol, once it is considered renewable and less polluting than gasoline.

There is no consensus in the national literature as regards to an economic evaluation of

the PNA: some authors are very critical of the resources transferred to producers, whereas others

consider that there has been income transference from producers to the society.

Since the deregulation of the sector, in 1999, resources for the expansion of production

have come from the private enterprise, which continues investing in new agricultural and industrial

technologies as well as in new uses of sugarcane byproducts (such as the generation of electrical

44

energy, the sales of carbon credits, etc.), and also in new technologies to improve the sugar

contents in the cane.

Some challenges must be faced for the sustainability of sector in the future. Among these

challenges, it is worth mentioning the improvement of the labor market and the environmental

issues deriving from the expansion of cultivated areas.

REFERENCES

Agência Nacional do Petróleo, Gás Natural e Biocombustíveis-ANP, 2006 (National Agency of

Petroleum, Natural Gas and Biofuels). Available at <http://www.anp.gov.br>, accessed on

04/15/2006.

ANFAVEA. Associação Nacional de Fabricantes de Veículos Automotivos (National Assotiation

of Automotive Vehicle Manufacturer). Brazilian Automotive Industry’s Annual Records,

2005. Available at: <http://www.anfavea.com.br>, acesso em 05/06/2006.

Brazilian Federal Reserve Bank (Banco Central do Brasil), 2006. Temporal Series. Available at:

<https://www.bcb.gov.br>. accessed on 06/07/2006 (exchange rate).

BELIK, W. Agroindústria processadora e política econômica. Campinas, 1992. 219p. Tese

(Doutorado) – Instituto de Economia, Universidade de Campinas.

BRUGNARO, C. Estimativa do saldo do Governo na comercialização do álcool carburante.

Piracicaba, 1992. 100p. Dissertação (Mestrado) – Escola Superior de Agricultura “Luiz de

Queiroz”. Universidade de São Paulo

DATAGRO. Boletim informativo quinzenal sobre cana, açúcar e álcool (Informative Bulletim of

sugar cane, sugar and alcohol). 2000. nº 24. Available at: <http://www.udop.com.br>,

accessed on 06/05/2006

IBGE. Instituto Brasileiro de Geografia e Estatística-IBGE (City Agricultural Production).

Available at: <http://www.ipeadata.gov.br>, accessed on 06/05/2006

Ministério da Agricultura, Pecuária e Abastecimento (Ministry of Agriculture, Cattle Breeding and

Food Supply). Available at: <http://www.agricultura.gov.br>, accessed on 03/27/2006.

MORAES, M.A.F.D. A desregulamentação do setor sucroalcooleiro do Brasil. Americana:

Caminho Editorial, 2000

NASTARI, P.M.; MACEDO, I.C.; SZWARC, A. Observations on the Draft Document entitled

“Potencial for biofuels for transport in developing countries, The World Bank air quality

thematic group”. São Paulo, 2005, 71p.

45

OLIVEIRA, A. Reassessing the Brazilian Alcohol Programe. Review Energy Policy, jan/fev.1991 Butter Worth-Heinemann Ltda.

PELIN, R.E. Avaliação econômica do álcool hidratado carburante no curto e médio prazos.

São Paulo: Instituto de Pesquisas Econômicas/Universidade de São Paulo. 1985, 280p.

SANTOS, M.H.C. Política e políticas de uma energia alternativa: o caso do Proálcool. Rio de Janeiro: Notrya, 1993. 352 p.

SERODIO, E. Analisando as políticas existentes e traçando perspectivas para o setor sucroalcooleiro. In: TENDÊNCIAS DE PREÇOS E QUESTÕES POLÍTICAS DETERMINANTES PARA O MERCADO DE AÇÚCAR E ÁLCOOL, São Paulo, 1999. Anais. São Paulo: International Business Communications, 1999.

UNICA. União da Agroindústria Canavieira de São Paulo (São Paulo Sugarcane Agro-industry League). Available at: <http://www.unica.com.br>, accessed on 06/05/2006.

VIAN, C.E.F. Agroindústria canavieira. Estratégias competitivas e modernização. Campinas,

SP: Editora Átomo, 2003. 216p.

46

Appendix 1

Enclosed Table 1. Evolution of carburating anhydrous alcohol to producer, and subsidy values –

1980-1990

In force Center-South North-Northeast

Center-

South

North-

Northeast

PVU-PVD Subsidy PVU-PVD Subsidy

Exchange rate *** PVU-PVD Subsidy PVU-PVD Subsidy

(practised currency unit**/liter) umc**/US$ (----------------- US$/m3-----------

---) 1/1/1980 11.47 0.03 11.51 3.11 43.44 264.04 0.69 264.96 71.59 5/5/1980 16.62 0.08 16.68 6.11 49.59 335.15 1.61 336.36 123.21

26/9/1980 23.19 0.11 23.27 8.52 56.41 411.10 1.95 412.52 151.04 7/1/1981 23.01 0.11 24.45 8.52 67.19 342.46 1.64 363.89 126.80

29/1/1981 27.79 0.13 29.46 10.31 67.19 413.60 1.93 438.46 153.45 18/5/1981 36.66 0.31 39.78 13.59 83.62 438.41 3.71 475.72 162.52 2/10/1981 48.93 0.45 51.77 17.94 110.91 441.17 4.06 466.77 161.75 11/1/1982 49.11 0.45 51.77 17.94 130.56 376.15 3.45 396.52 137.41 20/3/1982 58.94 0.51 62.18 21.53 144.2 408.74 3.54 431.21 149.31 17/7/1982 72.65 0.67 76.82 26.19 176.87 410.75 3.79 434.33 148.07 1/10/1982 92.83 0.85 98.26 33.13 214.62 432.53 3.96 457.83 154.37

9/3/1983 114.56 0.88 121.29 40.91 398.57 287.43 2.21 304.31 102.64 1/6/1983 153.07 1.18 161.98 54.74 515.2 297.11 2.29 314.40 106.25

30/9/1983 228.95 1.76 242.14 81.99 698.38 327.83 2.52 346.72 117.40 1/1/1984 229.23 1.76 242.59 81.99 1.016.05 225.61 1.73 238.76 80.69

23/2/1984 334.67 2.57 354.17 119.71 1.125.10 297.46 2.28 314.79 106.40 1/6/1984 490.72 2.19 511.37 140.55 1.636.70 299.82 1.34 312.44 85.87 9/8/1984 499.37 2.19 520.01 140.55 1.984.39 251.65 1.10 262.05 70.83

24/9/1984 757.05 3.33 788.04 213.64 2.193.00 345.21 1.52 359.34 97.42 6/2/1985 1172.13 5.56 1218.59 333.28 3.745.22 312.97 1.48 325.37 88.99 1/6/1985 1640.63 5.59 1697.81 4000.60 5.722.11 286.72 0.98 296.71 699.15

25/9/1985 2362.51 8.05 2444.84 576.87 7.424.52 318.20 1.08 329.29 77.70 1/1/1986 2953.13 10.06 3056.05 721.09 11.253.00 262.43 0.89 271.58 64.08

28/2/1986 2.95 0.01 3.06 0.72 12.965.00 0.23 0.00 0.24 0.06 21/11/1986 3.74 0.01 3.87 0.90 13.9 269.06 0.72 278.42 64.75

10/2/1987 5.10 0.02 5.34 1.13 18.05 282.55 1.11 295.84 62.60 1/5/1987 9.46 0.03 9.88 2.09 30.63 308.85 0.98 322.56 68.23 1/6/1987 11.44 0.03 11.94 2.58 39.24 291.54 0.76 304.28 65.75 3/7/1987 11.71 0.03 12.21 2.65 44.71 261.91 0.67 273.09 59.27 4/9/1987 13.47 0.04 14.06 3.05 49.62 271.46 0.81 283.35 61.47

8/10/1987 15.55 0.05 16.22 3.52 53.14 292.62 0.94 305.23 66.24 1/11/1987 16.96 0.05 17.69 3.83 58.99 287.51 0.85 299.88 64.93 4/12/1987 19.14 0.06 19.95 4.33 67.15 285.03 0.89 297.10 64.48

47

11/1/1988 21.88 0.06 22.83 4.94 77.27 283.16 0.78 295.46 63.93

9/2/1988 25.47 0.08 26.59 5.75 90.39 281.78 0.89 294.17 63.61

14/3/1988 29.63 0.09 30.92 6.69 106.61 277.93 0.84 290.03 62.75

20/4/1988 34.37 0.10 35.87 7.76 125.06 274.83 0.80 286.82 62.05

20/5/1988 49.21 0.14 51.33 11.11 149.89 328.31 0.93 342.45 74.12

22/6/1988 57.94 0.17 60.46 13.08 177.42 326.57 0.96 340.77 73.72

30/7/1988 71.27 0.21 74.35 16.12 214.75 331.87 0.98 346.22 75.06

23/8/1988 96.15 0.25 89.88 19.49 266.08 361.36 0.94 337.79 73.25

23/9/1988 105.10 0.31 109.64 23.77 324.61 323.77 0.95 337.76 73.23

26/10/1988 137.59 0.40 143.61 31.04 409.65 335.87 0.98 350.57 75.77

1/12/1988 172.00 0.50 179.52 38.80 667.69 257.60 0.75 268.87 58.11

30/12/1988 214.99 0.63 224.41 48.50 667.69 321.99 0.94 336.10 72.64

13/1/1989 0.27 0.00 0.20 0.06 0.9 300.00 0.00 222.22 66.67

9/5/1989 0.34 0.00 0.34 0.07 1.09 311.93 0.00 311.93 64.22

15/6/1989 0.40 0.00 0.40 0.08 1.33 300.75 0.00 300.75 60.15

13/7/1989 0.55 0.00 0.56 0.11 1.91 287.96 0.00 293.19 57.59

7/8/1989 0.62 0.00 0.63 0.13 2.46 252.03 0.00 256.10 52.85

16/8/1989 0.80 0.00 0.81 0.16 2.46 325.20 0.00 329.27 65.04

31/8/1989 0.81 0.00 0.82 0.16 2.46 329.27 0.00 333.33 65.04

5/9/1989 0.92 0.00 0.93 0.19 3.25 283.08 0.00 286.15 58.46

15/9/1989 1.25 0.00 1.26 0.25 3.25 384.62 0.00 387.69 76.92

16/10/1989 1.65 0.00 1.67 0.33 4.47 369.13 0.00 373.60 73.83

31/10/1989 1.83 0.00 1.85 0.37 4.47 409.40 0.00 413.87 82.77

16/11/1989 2.53 0.01 2.55 0.51 6.22 406.75 1.61 409.97 81.99

6/12/1989 3.57 0.01 3.60 0.72 9.21 387.62 1.09 390.88 78.18

28/12/1989 5.57 0.01 5.57 1.11 9.21 604.78 1.09 604.78 120.52

31/1/1990 8.72 0.02 8.74 1.73 14.24 612.36 1.40 613.76 121.49

20/2/1990 10.83 0.03 10.85 2.15 23.54 460.07 1.27 460.92 91.33

1/3/1990 15.09 0.04 15.09 2.99 37.01 407.73 1.08 407.73 80.79

15/3/1990 19.94 0.05 19.94 3.95 37.01 538.77 1.35 538.77 106.73

6/8/1990 22.93 0.06 22.29 4.54 71.54 320.52 0.84 311.57 63.46

14/8/1990 26.39 0.07 26.37 5.23 71.54 368.88 0.98 368.60 73.11

5/9/1990 29.53 0.07 29.54 5.85 75.17 392.84 0.93 392.98 77.82

10/10/1990 35.44 0.09 35.87 7.02 94.58 374.71 0.95 379.26 74.22

7/11/1990 45.30 - 56.96 - 122.47 369.89 - 465.09 -

6/12/1990 49.25 - 62.08 - 153.97 319.87 - 403.20 -

Source: BRUGNARO (1992); Brazilian Federal Reserve Bank (Banco Central do Brasil), 2006. Temporal Series. Available at: <https://www.bcb.gov.br>. accessed on 06/07/2006 (exchange rate). Notes:

* values weighed according to annual productions in States. ** Practised Currency Unit (Unidade Monetária Corrente -u.m.c.): up to 02/27/1986 values in Cr$ (Cruzeiro); as from 02/28/1986 values in Cz$ (Cruzado); as from 01/16/1989 values in NCz$ (Cruzado Novo); as from 03/16/1990 values em Cr$ (Cruzeiro) *** Exchange Rate: American dollar (purchase) – montly average.

48

Appendix 1

Enclosed Table 2. Evolution of carburating hydrous alcohol to producer. and subsidy values – 1980-

1990

In force Center-South

North-

Northeast Center-South

North-

Northeast

PVU-PVD Subsidy PVU-PVD Subsidy

Exchange rate ***

PVU-PVD Subsidy PVU-PVD

(practised currency unit**/liter) umc**/US$ (----------------- US$/m3--------------

--) 1/1/1980 10.31 0.03 10.35 3.11 43.44 237.34 0.69 238.26 71.59 5/5/1980 14.94 0.08 15.00 6.11 49.59 301.27 1.61 302.48 123.21

26/9/1980 20.81 0.11 20.90 8.52 56.41 368.91 1.95 370.50 151.04 7/1/1981 20.81 0.11 22.19 8.52 67.19 309.72 1.64 330.26 126.80

29/1/1981 25.11 0.13 26.72 10.31 67.19 373.72 1.93 397.68 153.45 18/5/1981 34.71 0.31 36.77 13.59 83.62 415.09 3.71 439.73 162.52 2/10/1981 46.31 0.45 49.05 17.94 110.91 417.55 4.06 442.25 161.75 11/1/1982 46.48 0.45 49.05 17.94 130.56 356.00 3.45 375.69 137.41 20/3/1982 55.80 0.51 58.90 21.53 144.2 386.96 3.54 408.46 149.31 17/7/1982 68.77 0.64 72.78 25.56 176.87 388.82 3.62 411.49 144.51 1/10/1982 87.88 0.81 93.13 31.29 214.62 409.47 3.77 433.93 145.79

9/3/1983 108.43 0.83 114.93 38.64 398.57 272.05 2.08 288.36 96.95 1/6/1983 144.91 1.11 153.48 51.70 515.2 281.27 2.15 297.90 100.35

30/9/1983 216.71 1.67 229.44 77.45 698.38 310.30 2.39 328.53 110.90 1/1/1984 216.99 1.67 229.86 77.45 1.016.05 213.56 1.64 226.23 76.23

23/2/1984 316.79 2.43 335.61 113.08 1.125.10 281.57 2.16 298.29 100.51 1/6/1984 464.56 2.07 484.77 132.77 1.636.70 283.84 1.26 296.19 81.12 9/8/1984 472.73 2.07 492.64 132.77 1.984.39 238.22 1.04 248.26 66.91

24/9/1984 716.67 3.15 746.52 201.81 2.193.00 326.80 1.44 340.41 92.02 6/2/1985 1109.54 5.25 1154.32 314.92 3.745.22 296.25 1.40 308.21 84.09 1/6/1985 1533.00 5.28 1608.10 378.42 5.722.11 267.91 0.92 281.03 66.13

25/9/1985 2236.33 7.60 2315.68 544.92 7.424.52 301.21 1.02 311.90 73.39 1/1/1986 2795.40 9.50 2894.58 681.15 11.253.00 248.41 0.84 257.23 60.53

28/2/1986 2.79 0.01 2.89 0.69 12.965.00 0.22 0.00 0.22 0.05 21/11/1986 3.55 0.01 3.67 0.85 13.9 255.40 0.72 264.03 61.15

10/2/1987 4.83 0.02 5.06 1.07 18.05 267.59 1.11 280.33 59.28 1/5/1987 8.94 0.03 9.35 1.97 30.63 291.87 0.98 305.26 64.32 1/6/1987 10.81 0.03 11.30 2.44 39.24 275.48 0.76 287.97 62.18 3/7/1987 11.07 0.03 11.56 2.50 44.71 247.60 0.67 258.56 55.92 4/9/1987 12.73 0.04 13.30 2.89 49.62 256.55 0.81 268.04 58.24

8/10/1987 14.71 0.04 15.38 3.32 53.14 276.82 0.75 289.42 62.48 1/11/1987 16.04 0.05 16.74 3.62 58.99 271.91 0.85 283.78 61.37 4/12/1987 18.12 0.05 18.90 4.09 67.15 269.84 0.74 281.46 60.91 11/1/1988 20.7 0.06 21.62 4.66 77.27 267.89 0.78 279.80 60.31

9/2/1988 24.11 0.07 25.17 5.44 90.39 266.73 0.77 278.46 60.18

49

14/3/1988 28.04 0.09 29.28 6.32 106.61 263.01 0.84 274.65 59.28

20/4/1988 32.53 0.10 33.96 7.33 125.06 260.12 0.80 271.55 58.61

20/5/1988 46.57 0.14 48.62 10.49 149.89 310.69 0.93 324.37 69.98

22/6/1988 54.84 0.16 55.27 12.36 177.42 309.10 0.90 311.52 69.67

30/7/1988 67.46 0.20 70.43 15.23 214.75 314.13 0.93 327.96 70.92

23/8/1988 81.54 0.24 85.12 18.41 266.08 306.45 0.90 319.90 69.19

23/9/1988 99.48 0.29 103.87 22.46 324.61 306.46 0.89 319.98 69.19

26/10/1988 130.23 0.38 136.04 29.32 409.65 317.91 0.93 332.09 71.57

1/12/1988 162.79 0.48 170.05 36.65 667.69 243.81 0.72 254.68 54.89

30/12/1988 203.49 0.59 212.57 45.81 667.69 304.77 0.88 318.37 68.61

13/1/1989 0.25 0.00 0.26 0.06 0.9 277.78 0.00 288.89 66.67

9/5/1989 0.32 0.00 0.32 0.07 1.09 293.58 0.00 293.58 64.22

15/6/1989 0.37 0.00 0.37 0.08 1.33 278.20 0.00 278.20 60.15

13/7/1989 0.51 0.00 0.52 0.11 1.91 267.02 0.00 272.25 57.59

7/8/1989 0.58 0.00 0.58 0.13 2.46 235.77 0.00 235.77 52.85

16/8/1989 0.74 0.00 0.75 0.16 2.46 300.81 0.00 304.88 65.04

31/8/1989 0.76 0.00 0.76 0.16 2.46 308.94 0.00 308.94 65.04

5/9/1989 0.85 0.00 0.86 0.19 3.25 261.54 0.00 264.62 58.46

15/9/1989 1.16 0.00 1.17 0.24 3.25 356.92 0.00 360.00 73.85

16/10/1989 1.53 0.00 1.54 0.32 4.47 342.28 0.00 344.52 71.59

31/10/1989 1.70 0.00 1.71 0.35 4.47 380.31 0.00 382.55 78.30

16/11/1989 2.34 0.01 2.36 0.48 6.22 376.21 1.61 379.42 77.17

6/12/1989 3.31 0.01 3.34 0.68 9.21 359.39 1.09 362.65 73.83

28/12/1989 5.16 0.01 5.16 1.05 9.21 560.26 1.09 560.26 114.01

31/1/1990 8.09 0.02 8.09 1.64 14.24 568.12 1.40 568.12 115.17

20/2/1990 10.05 0.03 10.05 2.03 23.54 426.93 1.27 426.93 86.24

1/3/1990 13.97 0.04 13.98 2.83 37.01 377.47 1.08 377.74 76.47

15/3/1990 18.46 0.05 18.46 3.73 37.01 498.78 1.35 498.78 100.78

6/8/1990 21.23 0.05 21.23 4.29 71.54 296.76 0.70 296.76 59.97

14/8/1990 24.45 0.06 24.42 4.94 71.54 341.77 0.84 341.35 69.05

5/9/1990 27.34 0.07 27.35 5.53 75.17 363.71 0.93 363.84 73.57

10/10/1990 32.81 0.08 32.82 6.63 94.58 346.90 0.85 347.01 70.10

7/11/1990 41.94 - 52.12 - 122.47 342.45 - 425.57 -

6/12/1990 45.72 - 56.81 - 153.97 296.94 - 368.97 -

Brazilian Federal Reserve Bank (Banco Central do Brasil). Temporal Series. Available at: <https://www.bcb.gov.br>. accessed on 06/07/2006 (exchang rate). Notes:

* values weighed according to annual productions in States. ** Practised Currency Unit (Unidade Monetária Corrente -u.m.c.): up to 02/27/1986 values in Cr$ (Cruzeiro); as from 02/28/1986 values in Cz$ (Cruzado); as from 01/16/1989 values in NCz$ (Cruzado Novo); as from 03/16/1990 values em Cr$ (Cruzeiro) *** Exchange Rate: American dollar (purchase) – montly average.

50

Appendix 2

Enclosed Table 3. Automobile Sales per Fuel Type

Fuel Type

Year Gasoline Alcohol Flex

1965 161.668 - -

1966 186.538 - -

1967 193.867 - -

1968 230.234 - -

1969 303.519 - -

1970 373.825 - -

1971 467.140 - -

1972 546.267 - -

1973 663.437 - -

1974 755.948 - -

1975 778.920 - -

1976 808.729 - -

1977 748.071 - -

1978 877.295 - -

1979 905.706 3.114 -

1980 626.467 240.643 -

1981 344.467 136.242 -

1982 365.434 232.575 -

1983 78.618 579.328 -

1984 33.482 565.536 -

1985 28.655 645.551 -

1986 61.916 697.049 -

1987 31.190 458.683 -

1988 77.312 566.482 -

1989 260.821 399.529 -

1990 542.855 81.996 -

1991 546.258 150.982 -

1992 498.927 195.503 -

1993 764.598 264.235 -

1994 1.127.485 141.834 -

1995 1.557.674 40.706 -

1996 1.621.968 7.647 -

1997 1.801.688 1.120 -

1998 1.388.734 1.224 -

1999 1.122.229 10.947 -

2000 1.310.479 10.292 -

2001 1.412.420 18.335 -

2002 1.283.963 55.961 -

51

2003 1.152.462 36.380 48.178

2004 1.077.945 50.950 328.379

2005* 614.751 27.081 755.810

* Sales up to November/2005 included

Source: National Assotiation of Automotive Vehicle Manufacturers (Associação Nacional dos

Fabricantes de Veículos Automotores-Anfavea). 2005

52

Appendix 3

Enclosed Table 4. Sugarcane in Brazil: Evolution of Production and Area Harvested.

1947-2005

Year Production (in t)

Área Harvested (in ha)

1947 28.989.901 772.853

1948 30.892.577 818.608

1949 30.928.755 796.687

1950 32.670.814 828.182

1951 33.652.508 874.341

1952 36.041.132 919.780

1953 38.336.721 990.872

1954 40.301.966 1.027.409

1955 40.946.305 1.072.902

1956 43.975.743 1.124.083

1957 47.703.359 1.172.413

1958 50.020.121 1.208.134

1959 53.512.230 1.291.073

1960 56.926.882 1.339.933

1961 59.377.397 1.366.640

1962 62.534.516 1.466.619

1963 63.722.895 1.509.011

1964 66.398.978 1.519.491

1965 75.852.866 1.705.081

1966 75.787.512 1.635.503

1967 77.086.529 1.680.763

1968 76.610.500 1.686.727

1969 75.247.090 1.672.101

1970 79.752.936 1.725.121

1971 80.380.399 1.728.003

1972 85.106.223 1.802.648

1973 91.994.024 1.958.776

1974 95.623.685 2.056.691

1975 91.524.559 1.969.227

1976 103.173.449 2.093.483

1977 120.081.700 2.270.036

1978 129.144.950 2.391.455

1979 138.898.882 2.536.976

53

1980 148.650.563 2.607.628

1981 155.924.109 2.825.879

1982 186.646.607 3.084.297

1983 216.036.958 3.478.785

1984 222.317.847 3.655.810

1985 247.199.474 3.912.042

1986 239.178.319 3.951.842

1987 268.741.069 4.314.146

1988 258.412.865 4.117.375

1989 252.642.623 4.075.839

1990 262.674.150 4.272.602

1991 260.887.893 4.210.954

1992 271.474.875 4.202.604

1993 244.530.708 3.863.702

1994 292.101.835 4.345.260

1995 303.699.497 4.559.062

1996 317.105.981 4.750.296

1997 331.612.687 4.814.084

1998 345.254.972 4.985.819

1999 333.847.720 4.898.844

2000 326.121.011 4.804.511

2001 344.292.922 4.957.897

2002 364.389.416 5.100.405

2003 396.012.158 5.371.020

2004 415.205.835 5.631.741

2005* 422.926.362 5.791.792

Appendix 4

Enclosed Table 5. Hydrous carburatting alcohol production costs.

In US dollars* per barrel EQUIVALENTE of petroleum

Source Type of

distillery

Evaluation Region/Estate Raw Material US$/BE

Borges Attached Social cost São Paulo Cane 67. 8

Borges Attached Private. with subsidy São Paulo Cane 71.8

FGV Attached Private. with subsidy São Paulo Cane 72

IPT Autonomous Private. with subsidy Center-South Cane 75.3

INT Autonomous Private. with subsidy São Paulo Cane 76.9

FGV Attached Private. with subsidy Minas Gerais Cane 77.9

IPT Autonomous Private. with subsidy Center-South Sorghum/Cane 79.5

Williamson Autonomous Private. with subsidy São Paulo Cane 80.6

Borges Attached Private. with subsidy São Paulo Cane 82.2


Williamson Autonomous Private. with subsidy São Paulo Cassava 83.8


Barzelay Attached Social São Paulo Cane 84.7

FGV Attached Private. with subsidy Rio de Janeiro Cane 85.9

Barzelay Attached Private. with subsidy São Paulo Cane 86.1

CNE Autonomous Private. with subsidy Sudeste-Sul Cane 87.6

IPT Autonomous Private. with subsidy Center-South Cassava 88.1

Williamson Autonomous Private. with subsidy São Paulo Cane 94.4

Williamson Autonomous Private. with subsidy São Paulo Cassava 99.6

Source: Pelin (1985)

* in US dollars. from May 1981

History of the Brazilian Ethanol Program

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