Brazil's Ethanol-Enhanced History

Together, with the appearance of the flexible fuel vehicles in 2003, the infrastructure and culture that forms the inheritance of Brazil's 1970s "Pró-Álcool" program is the key for the development of its local ethanol industry, with no strings attached to tax incentives or protective policies.
By Pedro G. Seraphim | August 10, 2009
Energy security comes from energy diversity. This phrase sounds very fashionable, but it was the motto that, in the mid-1970s, led Brazil to create its National Alcohol Program, better known as the "Pró-Álcool" program. At that time, the world had been hit by two oil price bombs, caused by production restraints in OPEC countries, and oil prices soared from a few cents per gallon to a couple of dollars per gallon. It is almost funny to compare those prices to the ones we have become accustomed to seeing today, but many people remember how all oil importing countries were affected by that sudden change, spreading an economic and financial crisis that drove the world into recession (by the way, that also seems to be nothing now).

In those years, Brazil had virtually no production of oil and was totally dependent on imports. The impact was terrible, ending a nice period of development with a rise in unemployment, unpayable external debt, and inflation and recession, all combined with the fact that the country was in the midst of a brutal military regime. Life was hard.

However, the scars of those times were healed in just a few decades.

Crisis and Opportunity
Two important creative seeds were sown during that tumultuous time. The first reaction to the oil crisis was for Brazil to task Petrobras S.A., the state-controlled oil company, with the development of new production capacity. As a result, Brazil has achieved self-sufficiency in oil with the off-shore findings in the Campos basin in the late 1990s and, more recently, with the huge reserves that were found under a deep off-shore salt sediment, Brazil is likely to become a net exporter of oil and gas in a few years.

The 1970s oil crisis also caused Brazil to turn its attention to the great potential that its agricultural sector had to offer. Brazil realized that there were many favorable factors, including the fuel-production qualities of sugar cane, existence of unique climate conditions for its growth, great availability of land with such conditions. Those factors, together with the high oil price reference and a range of private investors eager to find new opportunities in the crisis environment, led to the birth of the Pró-Álcool program, with the immediate target of creating conditions to make ethanol a viable car fuel, thus reducing Brazil's exposure to oil imports.

Building the Infrastructure
But making something new and revolutionary is never easy. For instance, to start creating a reasonably sound market for the new fuel, a new generation of vehicles equipped with the necessary technology to handle the new fuel had to be created. This was achieved in 1979, when the first Brazilian ethanol car was brought to the market — a Fiat model 147.

Another very important piece of the Pró-Álcool puzzle was the upgrade of the existing gas stations throughout the country, to make available a new independent pump which would serve only ethanol. Fortunately, this requirement was achieved by natural forces as a response to the undeniable fact that the market for fuel ethanol existed and was growing. No specific tax incentive or financing line was created for that. Petrobras played an important role by quickly making its truck-based gasoline distribution network capable of carrying ethanol throughout the country, and soon other distributors joined in. Also, as part of the Pro-Alcool program, the gasoline pumps started to receive a small blend of ethanol.

Soon there were clear signs that the Pró-Álcool was a success. The other auto makers present in Brazil at that time (General Motors Co., Ford Motor Co. and Volkswagen) followed Fiat. The production of ethanol cars increased steadily, and by 1983 exceeded the production of gasoline-fueled cars by almost 8 times. In that same year, the government set up a reduction in taxes for the ethanol cars as an additional incentive for the market. Car manufacturing and yearly licensing carry a heavy tax burden and such reductions saved consumers 4 percent on the purchase of an ethanol car versus a gasoline car. Between that first Fiat and the end of the 20th century, more than 5.6 million ethanol cars were produced in Brazil.

However, the ethanol cars had problems. Because fuel ethanol has a small percentage of water, the first ethanol-fueled engines tended to get rusty and, therefore, had a shorter life. Also, the consumption per mile was greater than in a gasoline car, so the consumer's choice for an ethanol car was very sensitive to ethanol price changes and its comparison to gasoline prices. These issues were not a real problem until the 1990s, when the general economy recovered, oil prices went to a lower level and gasoline engines gained even more efficiency. Those who opted for an ethanol car were then stuck with their fuel option; the only escape route being the acquisition of a new car.

In 1990, the production of gasoline cars suddenly rose and, in the following years, the production of ethanol cars was reduced to a very small number. That reduction, combined with a corresponding drop in ethanol production, led to the death of the Pró-Álcool program. Ethanol producers struggled to survive that period by directing their sugar cane to the production of sugar, a product that is certainly less profitable, but with somewhat steady markets. This, together with the 25 percent blend of ethanol into gasoline, kept the heart of the ethanol industry beating.

Pró-Álcool Inheritance and the Green Wave
The Pró-Álcool program left a significant inheritance in its wake — a working distribution network for ethanol: virtually all gas stations in the country equipped with one pump that served exclusively hydrated ethanol, developed techniques for planting sugar cane, ethanol production capacity and, just as important, a general culture accepting of using ethanol as a fuel.

Brazil had just started a new era in its economy, after taming inflation, bringing external debt under control and enhancing its hard currency reserves. But the energy scenario soon changed again. Besides the notorious fluctuations in oil prices, the level of concern with climate change was significantly raised, especially in connection with the role of fossil fuels in the emission of greenhouse gases. The response given by Brazil for these challenges came again from the ethanol industry.

Actually, the greatest shift happened in 2003, with the appearance of flexible fuel vehicles (FFVs). These cars have engine systems that are able to run with any mix of gasoline and ethanol. With these FFVs, fuel choice is delayed to the maximum extent possible. Instead of representing one single election at the moment the car is bought, fuel choice can be made each time the car goes to the gas station, depending on price conditions on that very day. From a purely economic perspective, as ethanol is less efficient, its price must be at least 70 percent below the gasoline price to justify its use. But with a production chain that results in up to 89 percent less greenhouse gas (GHG) emissions, and considering the infrastructure remaining from the Pró-Álcool program, consumers started to ask "Why not buy a flex-fuel car?" and the almost dormant ethanol production industry boomed again, but now with a much steadier local market environment.

Today, 90 percent of the cars manufactured in Brazil carry FFV technology. GM, Ford, Fiat and Volkswagen, as well as Citroën-Peugeot, Renault, Honda, Toyota, Mitsubishi and Nissan all manufacture FFVs for use in Brazil. Ethanol currently accounts for more than 50 percent of the whole consumption of light car fuels in the country, which represents the most significant reduction of GHG emissions in history.

Based on the unique combination of historical, technological, cultural and financial aspects summarized above, Brazil has developed a mature domestic market for ethanol. Thanks to FFVs, this market is likely to grow even more. It is a great scenario, where Brazil is controlling its energy sources in a level never seen before and that few countries have, and where great investment opportunities can be found.

Pedro G. Seraphim is a partner in the Energy and Agroenergy Practice Groups of TozziniFreire Advogados, a premier business law firm in Brazil. Reach him at