sectoral economic costs and benefits of ghg mitigation - IPCC

José R. Moreira
5 Case C – Social Costs of Ethanol Production in Brazil
A paper published in 1995 by Kevin Rask, professor at the Colgate University, made a cost-benefit
study for ethanol production in Brazil in the period 1978-1987. The general methodology is as
follows.
All of the private costs of ethanol production are taken from a survey made by an official
organization (IAA). The private costs (prices) are listed with contribution of 20 categories of input
and are assigned shadow prices to reflect their "true" price, for example, the wage rates or the
rental rates for agricultural land. Shadow prices do mainly result from (1) tariffs and quota on the
many importable factors, (2) subsidized interest rates on borrowing for capital investments and (3)
the overvaluation of the exchange rate resulting from direct government intervention and the
effects of trade restrictions.
For importable inputs the study adjusted the domestic prices to border prices using their own legal
tariff rate. Major inputs to ethanol production are labor, capital, farm machinery and equipment,
fertilizers, transportation services, and chemicals. These inputs are traded goods, and the private
prices of most of these goods are simply adjusted by subtracting the tariff rate from the domestic
price. The social price of fertilizer is a share-weighted social price of the components. The tariff
rate on each chemical component is then subtracted from the private cost of each to recover the
social value of the input. Major results of tariffs applied to the inputs are shown in Table 1.
Table 1 Tariff Schedules for Selected Ethanol - Inputs: 1976-1988 (%)
Fertilizer
Superphosphate Urea Potassium
Cloride
Agricultural
Chemicals Machines Equipment
Transpor
-tation
Automobiles
Input
Medium
Trucks
1976-1978 40 15 0 15 30 40 85 105
1979-1986* 20 15 0 15 30 55 105 105
1987-1989 20 15 0 15 45 45 -- --
Source: International Customs Journal; * For transportation input: 1979-1988
For evaluation of the social cost of capital (since the interest rates charged in government loans
were lower than the true social cost) the author uses the private sector marginal productivity
(12%/year) as the relevant opportunity cost of money.
The market wage rate in principle should be adjusted to reflect the true opportunity cost of
employing the marginal person in the ethanol sector. But based in other evaluation (Carvalho and
Haddad, 1981) the conclusion is that very little distortional effect exist and the rural market wage
for each class of laborer is a good proxy for the social cost of each class of labor (Schultz, 1964).
Once all the private costs are adjusted to their social values, it remains to compare then with the
benefit of decreased petroleum imports. Because the ethanol costs are denominated in national
currency and oil is priced in dollars, an exchange rate is needed to compare the costs to the
benefits. With the use of a described methodology the author estimates the real exchange rate.
Final adjustments are made to the social cost of ethanol by considering the fuel efficiency
differences between equal volumes of gasoline and pure alcohol fuel and for cost, insurance, and
freight charges and gasoline refining charges (Kahane, 1985). There is no formal macro-analysis
of the trade and exchange impacts of the program in this analysis.
Final results are shown in Table 2 for the Center-South Region and for autonomous and annexed
distilleries.
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