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

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

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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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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  1. 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, vol. 90(4), pages 918-932.
  2. 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.
  3. 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, vol. 95(2), pages 296-302.
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  5. 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, vol. 90(3), pages 658-668.
  6. Tomáš Havránek & Zuzana Iršová & Karel Janda, 2011. "Demand for Gasoline Is More Price-Inelastic than Commonly Thought," Working Papers IES 2011/10, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2011.
  7. 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.
  8. Serra, Teresa, 2011. "Volatility spillovers between food and energy markets: A semiparametric approach," Energy Economics, Elsevier, vol. 33(6), pages 1155-1164.
  9. David Zilberman & Gal Hochman & Deepak Rajagopal & Steve Sexton & Govinda Timilsina, 2013. "The Impact of Biofuels on Commodity Food Prices: Assessment of Findings," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 275-281.
  10. Tatiane Menezes & Carlos Azzoni & Fernando Silveira, 2008. "Demand elasticities for food products in Brazil: a two-stage budgeting system," Applied Economics, Taylor & Francis Journals, vol. 40(19), pages 2557-2572.
  11. Serra, Teresa, 2011. "Volatility Spillovers between Food and Energy Markets, A Semiparametric Approach," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115997, European Association of Agricultural Economists.
  12. Crago, Christine L. & Khanna, Madhu & Barton, Jason & Giuliani, Eduardo & Amaral, Weber, 2010. "Competitiveness of Brazilian sugarcane ethanol compared to US corn ethanol," Energy Policy, Elsevier, vol. 38(11), pages 7404-7415, November.
  13. Salvo, Alberto & Huse, Cristian, 2013. "Build it, but will they come? Evidence from consumer choice between gasoline and sugarcane ethanol," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 251-279.
  14. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers 126615, Cornell University, Department of Applied Economics and Management.
  15. de Freitas, Luciano Charlita & Kaneko, Shinji, 2011. "Ethanol demand in Brazil: Regional approach," Energy Policy, Elsevier, vol. 39(5), pages 2289-2298, May.
  16. Catherine Hausman, 2012. "Biofuels and Land Use Change: Sugarcane and Soybean Acreage Response in Brazil," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 51(2), pages 163-187, February.
  17. Rajcaniova, Miroslava & Drabik, Dusan & Ciaian, Pavel, 2013. "How policies affect international biofuel price linkages," Energy Policy, Elsevier, vol. 59(C), pages 857-865.
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