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Brazil’s Government Funded, Government Nurtured Ethanol Industry

September 1, 2010


Those who live in glass house ought not throw stones.  It is quite brazenly disingenuous for UNICA to lecture Americans on our national ethanol policy.  The Brazilian government has had a far heavier hand in growing the ethanol industry in that country than this post would lead you to believe. Brazil created its National Ethanol Program (PROALCOOL) during the 1970's in response to the oil crisis of that time. Under the program, tax and loan incentives were used by the Government to build facilities. Secondly, the government provided subsidized loans to mills, valued at well over $2 billion and transferred large subsidies to the domestic auto industry to underwrite the cost of creating a special vehicle to run on hydrated alcohol. Brazil provides market guarantees for ethanol through a controlled producer price, where sales of ethanol are made through Petrobras (the state-owned oil and gas company) and historically, the price of ethanol was held to an artificially low level of 59% of the gasoline price at the pump. By the end of the 1990's, Brazil had created a robust industry with billions of gallons of production and billions of dollars in non-performing debt. Brazil wrote off the debt and retained the industry.  This year, it dropped a protective tariff of 20% ad valorem. Today, a number of programs remain in place:
  • A blending requirement that all gasoline used in Brazil contain a minimum of 20-25% anhydrous alcohol;
  • The banning of diesel-powered personal vehicles to boost the demand for ethanol powered vehicles;
  • A requirement that all government entities purchase 100% hydrated alcohol fueled vehicles;
  • A taxing regime that is favorable to ethanol compared to gasoline;
  • Low interest loans for financing producer owned stocks;
  • A protective tariff of 20% ad valorem;
  • The potential for special production subsidies for the Northeastern section of Brazil; and
  • Recently Brazil successfully reintroduced its flex-fuel vehicle, which creates a vehicle that can run on any blend of gasoline.
There is nothing altruistic about Joel's post.  He is simply chasing a larger market and a desire to displace an American-made product with a foreign import.