Public policies versus market factors: What drives ethanol expansion in Brazil?

Abstract

Concerns about energy security, rural development and the environment have driven biofuel expansion. Different policy and market drivers, such as designated areas for biofuel feedstock production and blend mandates, have played an important role in biofuel expansion in different countries. Understanding how policy and market drivers influence biofuel supply and demand can provide guidelines for countries seeking to expand biofuel production into new regions. The case of Brazil serves as an important example. In just over 10 years, the Cerrado region of Brazil, specifically the states of Goias and Mato Grosso do Sul, experienced a six-fold expansion in ethanol production, becoming the second largest production region in Brazil. The purpose of this study is to examine the influence of policies and market drivers on ethanol expansion in the Cerrado region using a market equilibrium modeling approach. Results elucidate the role that market and policy drivers, including area designated for sugarcane production, blend mandates and energy taxes, play in influencing ethanol expansion into an already intensive agricultural region of the country. The findings from this study have implications for sustainable biofuel production in other regions of the world.