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An Economic Model of Brazil’s Ethanol-Sugar Markets and Impacts of Fuel Policies

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  • Drabik, Dusan
  • de Gorter, Harry
  • Just, David R.
  • Timilsina, Govinda R.

Abstract

We develop an economic model of flex plants, export demands and two domestic fuel demand curves : E25, a 25 percent blend of ethanol with gasoline consumed by conventional cars, and E100, ethanol consumed only by flex cars. This allows us to analyze the market impacts of specific policies, namely the E25 blend mandate, fixing gasoline prices below world prices, the high gasoline tax, and a higher tax exemption for ethanol used in E25. Because Brazilian and U.S. ethanol prices have become linked, a change in Brazilian ethanol policy or a shock in world sugar markets can now impact U.S. ethanol and corn prices. Because of two demand curves, with flex car owners switching between fuels depending on relative prices, and because the mandate is for E25 only, the impact of each Brazilian policy in theory has an ambiguous impact on ethanol and sugar prices. Conventional wisdom is that a higher level of the mandate, gasoline tax exemptions for ethanol and gasoline price, and a lower gasoline tax, all help the ethanol industry. But for two policies, a low gasoline tax and a high tax exemption for ethanol used in E25, our empirical results show ethanol and sugar prices decline. Overall, we find that the package of policy reforms implemented in 2010 offset the ethanol price increase due outward shifts in fuel transportation and sugar export demand curves, and reduced sugarcane supply due to bad weather, by about 27 percent. Our model illustrates the importance of Brazil’s ethanol policies on world commodity markets and provides insights on how the Brazilian government can adjust policies to better control domestic inflation while minimizing impacts on investment.

Suggested Citation

  • Drabik, Dusan & de Gorter, Harry & Just, David R. & Timilsina, Govinda R., 2014. "An Economic Model of Brazil’s Ethanol-Sugar Markets and Impacts of Fuel Policies," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182709, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae14:182709
    DOI: 10.22004/ag.econ.182709
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    Cited by:

    1. Moncada, J.A. & Verstegen, J.A. & Posada, J.A. & Junginger, M. & Lukszo, Z. & Faaij, A. & Weijnen, M., 2018. "Exploring policy options to spur the expansion of ethanol production and consumption in Brazil: An agent-based modeling approach," Energy Policy, Elsevier, vol. 123(C), pages 619-641.
    2. Khanna, Madhu & Hector, Nunez & David, Zilberman, 2014. "The Political-Economy of Biofuel and Cheap Oil Policies in Brazil," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169471, Agricultural and Applied Economics Association.
    3. Chang, Chia-Lin & McAleer, Michael & Wang, Yu-Ann, 2018. "Modelling volatility spillovers for bio-ethanol, sugarcane and corn spot and futures prices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P1), pages 1002-1018.
    4. Anelise Rahmeier Seyffarth, 2016. "The Impact of Rising Ethanol Production on the Brazilian Market for Basic Food Commodities: An Econometric Assessment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(3), pages 511-536, July.
    5. Oliveira, Sydnei Marssal de & Ribeiro, Celma de Oliveira & Cicogna, Maria Paula Vieira, 2018. "Uncertainty effects on production mix and on hedging decisions: The case of Brazilian ethanol and sugar," Energy Economics, Elsevier, vol. 70(C), pages 516-524.
    6. Khanna, Madhu & Nuñez, Hector M. & Zilberman, David, 2016. "Who pays and who gains from fuel policies in Brazil?," Energy Economics, Elsevier, vol. 54(C), pages 133-143.
    7. Nunez, Hector & Onal, Hayri, 2013. "An Economic Analysis of Transportation Fuel Policies in Brazil," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149973, Agricultural and Applied Economics Association.
    8. Valdes, Constanza & Hjort, Kim & Seeley, Ralph, 2016. "Brazil’s Agricultural Land Use and Trade: Effects of Changes in Oil Prices and Ethanol Demand," Economic Research Report 242449, United States Department of Agriculture, Economic Research Service.

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