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An economic model of Brazil's ethanol-sugar markets and impacts of fuel policies

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  • de Gorter, Harry
  • Drabik, Dusan
  • Kliauga, Erika M.
  • Timilsina, Govinda R.

Abstract

The lack of growth in the Brazilian sugarcane-ethanol complex since the 2008 financial crisis has been blamed on policies: lower mandate, holding gasoline prices below world levels, high fuel taxes, and inadequate fuel tax exemptions for ethanol. This paper develops an empirical model of the Brazilian fuel-ethanol-sugar complex to analyze the impacts of these policies. Unlike biofuel mandates and tax exemptions elsewhere, Brazil's fuel-ethanol-sugar markets and fuel policies are unique such that each policy, in theory, has an ambiguous impact on the market price of ethanol and hence on sugarcane and sugar prices. The results indicate two policies that seemingly help the ethanol industry do otherwise in reality: low gasoline taxes and high anhydrous tax exemptions lower ethanol prices. But higher mandates, hydrous ethanol tax exemptions, and gasoline prices had the expected impact of increasing ethanol and sugar prices. Eliminating Brazilian ethanol tax exemptions and mandates reduces ethanol prices by 21 percent. Observed changes in prices are explained by outward shifts in fuel transportation and sugar export demand curves, and bad weather reducing sugarcane supply.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6524.

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Date of creation: 01 Jun 2013
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Handle: RePEc:wbk:wbrwps:6524

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Keywords: Energy Production and Transportation; Markets and Market Access; Transport and Environment; Renewable Energy; Alcohol and Substance Abuse;

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  1. Crago, Christine Lasco & Khanna, Madhu & Barton, Jason & Giuliani, Eduardo & Amaral, Weber, 2010. "Competitiveness of Brazilian Sugarcane Ethanol Compared to US Corn Ethanol," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado, Agricultural and Applied Economics Association 60895, Agricultural and Applied Economics Association.
  2. Serra, Teresa, 2011. "Volatility spillovers between food and energy markets: A semiparametric approach," Energy Economics, Elsevier, Elsevier, vol. 33(6), pages 1155-1164.
  3. Tatiane Menezes & Carlos Azzoni & Fernando Silveira, 2008. "Demand elasticities for food products in Brazil: a two-stage budgeting system," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(19), pages 2557-2572.
  4. Havranek, Tomas & Irsova, Zuzana & Janda, Karel, 2011. "Demand for gasoline is more price-inelastic than commonly thought," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt0m94j50t, Department of Agricultural & Resource Economics, UC Berkeley.
  5. de Freitas, Luciano Charlita & Kaneko, Shinji, 2011. "Ethanol demand in Brazil: Regional approach," Energy Policy, Elsevier, Elsevier, vol. 39(5), pages 2289-2298, May.
  6. Amani Elobeid & Simla Tokgoz, 2008. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 90(4), pages 918-932.
  7. Rajcaniova, Miroslava & Drabik, Dusan & Ciaian, Pavel, 2013. "How policies affect international biofuel price linkages," Energy Policy, Elsevier, Elsevier, vol. 59(C), pages 857-865.
  8. Lapan, Harvey E. & Moschini, GianCarlo, 2012. "Second-Best Biofuel Policies and the Welfare Effects of Quantity Mandates and Subsidies," Staff General Research Papers 34891, Iowa State University, Department of Economics.
  9. Serra, Teresa & Zilberman, David, 2009. "Price volatility in ethanol markets," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin, Agricultural and Applied Economics Association 49188, Agricultural and Applied Economics Association.
  10. Kelvin Balcombe & George Rapsomanikis, 2008. "Bayesian Estimation and Selection of Nonlinear Vector Error Correction Models: The Case of the Sugar-Ethanol-Oil Nexus in Brazil," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 90(3), pages 658-668.
  11. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers, Cornell University, Department of Applied Economics and Management 126615, Cornell University, Department of Applied Economics and Management.
  12. Serra, Teresa, 2011. "Volatility Spillovers between Food and Energy Markets, A Semiparametric Approach," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland, European Association of Agricultural Economists 115997, European Association of Agricultural Economists.
  13. Madhu Khanna & Hayri �nal & Christine L. Crago & Kiyoshi Mino, 2013. "Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 95(2), pages 296-302.
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