Brazilian Biofuels Programmes from the WEL Nexus Perspective

EURO PEA N R EPO R TONDEVELOPMENTBrazilian Biofuels Programmesfrom the WEL Nexus PerspectiveProf Christianne Maroun, Prof Régis Rathmann and Prof Roberto Schaeffer (Federal University of Rio de Janeiro)MOBILISING EUROPEAN RESEARCHFOR DEVELOPMENT POLICIES

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveContentsContents 4Tables & figures 5Abbreviations 61 Introduction 72 Brief history of Brazil’s biofuel programmes 92.1 Proalcool 92.2 PNPB 103 Implementation and leverage mechanisms of Proalcool and PNPB 123.1 Change model 123.2 Action model 143.3 Comparison between PNPB and Proalcool change and action model 154 Sustainability of the programmes in relation to inclusive and sustainablegrowth 194.1 Land 204.2 Water 304.3 Energy 335 Interaction of the different components of the value system in theimplementation of Proalcool and PNPB 396 Final considerations 41References 444

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTables & figuresTablesTable 1.1 Biofuel production in Brazil and its share in final energy consumption, 2003 and 20107Table 3.1 Comparison of PNPB and Proalcool change models 16Table 3.2 Comparison of PNPB and Proalcool action models 17Table 4.1 Production cost, leasing value, revenue and margins for the sugar cane business inthe state of São Paulo, 2002–2010 25Table 4.2 Production costs, leasing value, revenue and margins for soybean business in thestate of Mato Grosso, 2002–2010 25Table 4.3 Real average remuneration and real income (expressed as real minimum salaries)for rural workers in the states of SP and MT, 1996–2010 (R$/month) 27Table 4.4 Production, productivity, specific and total water demand for sugar cane and soybeancrops, assuming the projected expansion of the national biofuel programmes (2010–2019) 32Table 4.5 Water availability in the Amazon and Paraná basins based on demands for water,2010 and 2019 32Table 4.6 Energy balance of ethanol 35Table 4.7 Inputs and outputs in producing bio-diesel from soybeans in Brazil 37Table 5.1 Sustainability of Biofuels in Brazil* 43FiguresFigure 4.1 Evolution of the soybean area harvested in Brazil (1990/2000/2010) 20Figure 4.2 Evolution of the sugar cane area harvested in Brazil, 1990/2000/2010 21Figure 4.3 Evolution of land prices in preferential areas for sugarcane production in the Stateof São Paulo between 1996 and 2010 (R$/ha) 23Figure 4.4 Evolution of land prices in preferential areas for soybeans production in the state ofMato Grosso between 2002 and 2010 (R$/ha) 24Figure 4.5 Evolution of diesel prices and minimum prices for bio-diesel between 2010 and 201928Figure 4.6 Availability of soybeans (thousand tonnes) according to the different biodiesel/dieselblend scenarios between 2010 and 2030 30Figure 4.7 Lifecycle of production and use of ethanol from sugar cane 34Figure 4.8 Energy balances of the production of ethanol from different feedstocks 36Figure 5.1 Interaction of the different components of the value system in Proalcool and PNPB395

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveAbbreviationsALVANPATCATRBNDESCEIBCINALCNALCNPEFAOFFVGDPGHGIEAIGBEISGLCALDCLDVMNCMTPNEPNPBPROBIO-DIESELPTR&DSPTRSWELAverage Leasing ValueNational Petroleum AgencyAverage Total CostAverage Total RevenueBrazilian National Development BankInter-Ministry Executive CommissionInter-Ministerial Commission for AlcoholNational Alcohol CommissionNational Council for Energy PolicyFood and Agriculture OrganizationFlex-fuel VehicleGross Domestic ProductGreenhouse GasInternational Energy AgencyBrazilian Institute for Geography and StatisticsInclusive and Sustainable GrowthLife Cycle AssessmentLeast Developed CountryLight-duty VehicleMultinational CorporationMato GrossoNational Energy PlanNational Programme for the Production and Use of Bio-dieselBrazilian Bio-diesel NetworkWorkers’ PartyResearch and DevelopmentSão PauloTotal Recoverable SugarWater–Energy–Land6

Brazil’s biofuel programmes viewed from the WEL-nexus perspective1 IntroductionThe successful inclusion of biofuels in Brazi’s fuel structure was the result of a combination ofleverage mechanisms (CNPq, 1980; BRASIL, 2005, 2007a; MAPA, 2006) which actedsimultaneously and comprehensively in the different parts of the ethanol and bio-diesel valuechains.The Brazilian National Alcohol Programme for the production of ethanol – Proalcool – wasbased on enormous state intervention that included: shaping agricultural and industrial policiestoward the goals of the programme; investing public resources in research and development(R&D); regulating and giving incentives to the private sector to pursue innovation and invest inethanol-related activities; and giving incentives to car owners to shift to ethanol-fuelledvehicles (ANP, 2010a). As the programme evolved, the increased production of ethanol from2003 was based on a technological innovation. The intensive use of electronics embedded inadvanced systems for controlling the fuel mixture and ignition made it possible to launchvehicles with ‘flexible’ (flex-fuel) motors. Such motors, without any interference on the part ofthe driver, can use gasoline (with 20% to 25% of ethanol) (ANP, 2011a), pure hydratedethanol, or even mixtures of these two fuels in any proportion, in accordance with efficiencyand drivability requirements and compliance with the legal limits for exhaust emissions(Joseph, 2007).Most new vehicles sold in Brazil are equipped with such motors. 1 Consumer acceptance comesfrom the fact that the ‘flex’ car gives drivers greater freedom to choose fuel at the pump, sothey can opt for the cheapest. For this reason, besides the compulsory addition of anhydrousethanol to gasoline, 2 ethanol production has practically doubled in Brazil since 2003 (see Table1.1).Initially launched with the compulsory addition of 2% in volume to diesel oil (B2), since 2008the National Programme for the Production and Use of Bio-diesel (PNPB) has made it obligatoryto add a fixed percentage of bio-diesel to mineral diesel, currently 5% volume (ANP, 2010a).To a large extent, it was possible to bring forward the use of B5 by mobilising bio-diesel’svalue chains. For instance, in 2010 total bio-diesel output in Brazil (2.4 billion litres), as well asthe present production capacity of the 67 authorised plants (5.2 billion litres per year) (seeTable 1.1) is significantly higher than the captive demand, taking as a basis total dieselconsumption in that same year (ANP, 2011c).Table 1.1 Biofuel production in Brazil and its share in final energy consumption,2003 and 2010Ethanol production(million litres)Bio-diesel production(million litres)% biofuel in final consumptionby energy source2003 2010 Change 2008 2010 Change 2003 201012,623 25,130 +99% 1,167 2,397 +105% 3.4% 6.3%Source: The authors based on BRASIL, 2010, 2011; UNICA, 2011a.Ethanol may be obtained from any biomass containing significant amounts of starch or sugars.The process for sugar-based production, such as sugar cane, is simpler and involves one lessstage since the sugars are available in the biomass. Normally, the process is based on theextraction (by grinding or diffusion) of sugars, which go directly to the fermenting process.After fermentation the resulting liquor is distilled, just as in the case of starch-based1 Introduced in Brazil in March 2003, flex-fuel type vehicles represented approximately 2.7% of the total produced inBrazil in that year. However, approximately 80% of the vehicles produced in the country in 2009 were of the flex-fueltype (ANFAVEA, 2010).2 Added to gasoline in a range of 22% to 24% since 1998, the mandatory addition has been fixed at 25% since 1 July2007, and this is still in force (ANP, 2011b).7

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveproduction. In the case of bio-diesel production, the raw material is vegetable oil. In thepresence of a catalyst, plus ethanol or methanol, this goes through an esterification process;the resulting products are bio-diesel and glycerine (BNDES, 2008).In Brazil, the production of ethanol and bio-diesel is based mostly on sugar cane and soybean.In 2010, sugar cane occupied over 8.6 million ha of the country’s arable areas (82% in theSouth/Southeast/Midwest and 18% in the North/Northeast), with a production of 689 milliontons and productivity of 80.2 tons per ha. Taking into account the yield in total recoverablesugar (TRS), 58% was allocated to the fuel market and 42% to the food market (sugar)(MAPA, 2011). In 2010 soy supplied 84% of the vegetable oil demand for bio-diesel production(ANP, 2011c), i.e. over 12 million tons of soybeans (18% of total production in 2010 3 ) wereallocated to biofuel production.Although the use of biofuels may have many favourable environmental and social aspects (e.g.biodegradability and renewability; no sulphur; reduced greenhouse gases (GHG) emissions;market regulation; job creation) (CNPq, 1980; MAPA, 2006), the increase in the use of biofuelsto substitute for fossil fuels has raised several sustainability issues (Coelho et al., 2006; Pousaet al., 2007; Goldemberg et al., 2008a; Goldenberg and Guardabassi, 2009; Hall et al., 2009;Lehtonen et al., 2009; Rathmann et al., 2010, 2011).The objective to meet basic human needs in Brazil (to eradicate poverty via real income gainsfor rural workers, job creation, etc.) was common to both of the country’s biofuel programmes(CNPq, 1980; MAPA, 2006). Were these programmes successful in this respect? To whatextent did they satisfy the three dimensions of inclusive and sustainable growth (ISG)? Theanalysis of topics such as social conflicts, land redistribution, investment climate, GHGmitigation, among others, is addressed in this paper.Many authors have studied the sustainability of the Brazilian biofuel programmes (Lehtonen,2009; Rathmann et al., 2010), but this paper focuses on how the analysis changes when thewater and land issues are also included, since energy has been the subject of many previousstudies. This sustainability analysis was carried out using the Water–Energy–Land (WEL)nexus.Analysing and comparing the programmes for biofuel production and use in Brazil, specificallyProalcool and PNPB, leads to a better understanding of how these can contribute to creatingdifferent paths towards sustainable development in Brazil and in other developing countries.The paper is structured as follows. Section 2 offers a brief historical overview of Proalcool andPNPB. Section 3 analyses both programmes using a programme theory approach, whichincludes two interlinked models: the change model and the action model (Linnér et al., 2010).The sustainability of the programmes regarding the three dimensions of ISG is analysed inSection 4, which addresses water, energy and land issues. Section 5 studies the interaction ofthe different components of the value system in the implementation of Proalcool and PNPB.Section 6 concludes.3 In 2010, soybean production in Brazil was 67.8 million tons, occupying an area of 23.2 million ha (MAPA, 2011). It istherefore the largest national agricultural crop area.8

Brazil’s biofuel programmes viewed from the WEL-nexus perspective2 Brief history of Brazil’s biofuel programmesThe history of the Proalcool and PNPB programmes reveals conceptual differences in themotivation for their development. While Proalcool was a clear effort to guarantee a market fora specific industry (sugar cane) and to seek an alternative fuel to gasoline as a way to achieveenergy security, PNPB was created mainly for reasons of social inclusion and regionaldevelopment.This section provides a brief description of the development of these two programmes.2.1 ProalcoolThe first and second ‘oil shocks’ of the 1970s threatened Brazil’s so-called, ‘economic miracle’.About the same time, the country’s sugar industry invested heavily in modernisation inresponse to high sugar prices in the international market in the early 1970s, subsequentlyjeopardised when sugar prices almost collapsed in the mid-1970s. The combination of thesefactors, together with other government objectives, such as energy security, led to thecreation of Proalcool (CNPq, 1980; Rosillo-Calle and Cortez, 1997).The successful inclusion of ethanol in the Brazilian fuel structure was the result of enormousstate intervention that included: shaping agricultural and industrial policies toward theprogramme goals; investing public resources in R&D; regulating and giving incentives to theprivate sector to pursue innovation and invest in ethanol-related activities; and givingincentives to car owners to shift to ethanol fuelled vehicles (Puppim de Oliveira, 2002).Proalcool followed four different phases. In the first phase (1975–79), the objective was toinstall distilleries in existing sugar mills and to produce anhydrous ethanol to be blended withgasoline. This phase was marked by a difficult relationship between the government and themultinational corporations (MNCs) producing cars in Brazil, and also within the government asseveral key officials opposed the programme. It was largely thanks to governmentdetermination that the ethanol-fuelled cars were a success (Rosillo-Calle and Cortez, 1997),although it is important to note that the military dictatorship ruling Brazil at that timefacilitated top-down interventions.Some authors call the second phase of Proalcool the ‘Honeymoon Phase’ (1979–85), whenethanol succeeded as a gasoline substitute, consolidating the programme. According to Hiraand Oliveira (2009), the specific policies the government implemented in this phase were: Establishing higher minimum ethanol fuel blends with gasoline (progressivelyincreased to 25%) Guaranteeing lower prices for ethanol than for gasoline Guaranteeing minimal prices to bio-ethanol producers Creating credit lines for sugar mills to expand capacity Requiring ethanol to be available at gas stations Maintaining strategic reserves to stabilise supply Establishing several policies to push ethanol-based car productionIn response to the intervention and the positive environment (high petroleum prices in theinternational market, among others), pure ethanol-fuelled cars accounted for more than 90%of all new cars sold in Brazil in the mid-1980s, with the remaining fleet running on a blend of25% ethanol and 75% gasoline. Fuel distribution systems were adapted and ethanol becameavailable at most service stations (Nardon and Aten, 2008).In 1986 petroleum prices fell from US$30–40 to US$12–20 a barrel, pushing down the marketprice of ethanol. At the same time, in an attempt to curb inflation, the newly electedgovernment launched an economic programme that included a reduction in incentives for9

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveethanol production. Lower oil prices and the resulting lower ethanol retail prices, coupled withthe elimination of incentives, made ethanol production somewhat unattractive. However,demand for ethanol continued due to the number of existing ethanol-fuelled vehicles, which ledto an ethanol supply crisis (Nardon and Aten, 2008). The Proalcool programme lost credibility.By 1997–98, sales of pure ethanol vehicles had dropped to only 1,000 (Hira and Oliveira,2009). The period from 1985 to 2002 can be seen as its ‘downward slide’.The current phase, which started in 2003, and is not specifically a government programme, ismarked by the revitalisation of the use of ethanol as a fuel due to the introduction of flex-fuelvehicles (FFVs) in Brazil. In August 2002, the government gave this emerging market a majorspur when it re-classified FFVs as eligible for the same tax breaks as ethanol-fuelled vehicles.Government-supported R&D has been key to the growth in the number of FFVs in Brazil (Hiraand Oliveira, 2009).2.2 PNPBOver the years, Brazil has promoted the introduction of bio-diesel in the country’s energy mixthrough various socioeconomic, energy and environmental policies and measures (MAPA,2006). Although Brazil began to discuss the use of vegetable oils for fuel purposes as far backas the 1920s, it was not until 2002 that the country specified that bio-diesel should beobtained from oilseeds, under the aegis of the Brazilian Bio-diesel Network (PROBIO-DIESEL)(BRASIL, 2006). Then, in December 2004, PNPB was established, basically defining targets forblending bio-diesel with mineral diesel (MAPA, 2006). 4Its main objective was to guarantee the economic and technical viability of producing andusing bio-diesel. Its major goal was social inclusion and regional development via thepromotion of small family agricultural units and the encouragement of technological research(Pousa et al., 2007; Hall et al., 2009; Takahashi and Ortega, 2010).According to the Brazilian Federal Government, other reasons behind PNPB were (BRASIL,2005, 2007a; MAPA, 2006): Potential improvement in the country’s trade balance, since Brazil is a net importerof diesel Availability of many oilseed plants suitable for bio-diesel production withoutaffecting food security Perfect substitutability between bio-diesel and mineral diesel Greater energy efficiency associated with bio-diesel compared to diesel in order toreduce CO 2 emissions by 78% for the same consumption levelPNPB also created the Social Fuel Stamp. Bio-diesel industries must purchase part of thefeedstock from small farmers, sign commercial agreements with those farmers and providethem with technical assistance in order to receive the Social Fuel Stamp (MDA, 2007).The most important action from PNPB was the introduction of bio-diesel in Brazil’s energymatrix by means of Law (No. 11097) (BRASIL, 2005), which assigned the responsibility to theNational Council for Energy Policy (CNPE) to change the mandatory bio-diesel mixture. Asmentioned before, the current mandatory bio-diesel mixture is 5% by volume (MAPA, 2011).This ability to meet the 5% target earlier was largely due to the mobilisation of the country’sproductive base. Bio-diesel production reached 2.4 billion litres in 2010, while current capacityis 5.2 billion litres a year, from 67 authorised plants (ANP, 2011a).4 All the blend percentages referred to in this paper are by volume. Initially, 2% (B2) was voluntary from 2005 to2007, and became mandatory from 2008, rising to 5% in 2013 (B5). However, the CNPE made mixing 3% (B3)mandatory from 1 July 2008. This rose to 4% on 1 July 2009 and to 5% from 1 January 2010.10

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveThe expansion of bio-diesel supply in Brazil is promoted by auctions. By September 2010, theBrazilian National Petroleum Agency (ANP) had held 19 auctions (ANP, 2010b). 5 According toANP (ibid.), the main raw material used in Brazil for bio-diesel production is soybean oil, withabout 84% (in volume), followed by 13% for bovine fat and 3% for cottonseed oil (data forDecember 2010). Despite the low yield of vegetable oil obtained from soybeans, the scaleprovided by a highly organised production chain, mechanised production and state-of-the-artfacilities, enabling growth in all regions of the country, ensures that its cultivation is highlyresponsive to increasing demand (Santangelo et al., 2011).5 Since 2005 ANP has held bio-diesel auctions, through which the refineries and distributors buy bio-diesel to mix withmineral diesel. Initially, the objective was to generate the auction market and thus promote the bio-diesel productionin sufficient quantities to meet the mixture determined by law. Currently, auctions are still being conducted to ensurethat all diesel sold in Brazil contains the requisite percentage of bio-diesel (ANP, 2010b). Only the bio-diesel producersthat have the ANP marketing authorisation can participate in the auctions. This means that such agents need todemonstrate the chemical quality of their bio-diesel (Santangelo et al., 2011).11

Brazil’s biofuel programmes viewed from the WEL-nexus perspective3 Implementation and leverage mechanisms ofProalcool and PNPBProalcool and PNPB used a series of leverage mechanisms and other components that were thebasis of success. In order to facilitate the analysis of these components and to understand howthey interacted in specific contexts to produce results, we separate them this paper using theProgramme Theory approach.Programme Theory consists of two interlinked models. The first, the change model, includesgoals and outcomes, leverage mechanisms and the intervention. The change model reflects aprogramme’s planning momentum. The second, the action model, is a systematic plan forarranging institutions, resources, legal frameworks, and support mechanisms to reach a targetpopulation and deliver services (Linnér et al., 2010).This theory is used here as a tool for identifying the combination of ‘push and pull’ componentsof the two programmes, facilitating a comparison between them as well as the analysis of theinstitutional demands (network of implementing agencies) necessary for their implementation.3.1 Change modelGoalsProalcool was created in 1975 and its explicit goals were to (CNPq, 1980): Increase the net supply of foreign exchange through reducing the demand forimported fuel Reduce income disparities among regions Reduce income disparities Increase national income through the deployment of underused resources Increase the growth of the domestic capital goods sectorIn addition, there were at least two hidden goals (Hira and Oliveira, 2009; Goldemberg andMoreira, 2009). The first was that the military government perceived energy dependence as anational security concern, which Proalcool could help to address. The second was to avoid awidespread bankruptcy crisis in the sugar industry, which was at that time one of the mainnational economic activities.In the case of PNPB, all the evidence and recent studies (Pousa et al., 2007; Hall et al., 2009)lead to the conclusion that the goals were indeed those stated by the government, includingthe potential improvement in the country’s balance of trade since Brazil is a net importer ofdiesel (Rathmann et al., 2011). There is no evidence that the government intended to favour aspecific industry or had other hidden goals, at least in the initial phase. In the context of ademocracy led by the Workers’ Party (PT), PNPB was to implement in a technically andeconomically sustainable way the production and use of bio-diesel, with an emphasis on socialinclusion and regional development via generation of income and jobs. The main objectives ofPNPB were to: Implement a sustainable programme, promoting social inclusion Guarantee competitive prices, quality and supply Produce bio-diesel from different oleaginous plants in diverse regionsPNPB aimed to address these issues simultaneously, and at a global level (Rathmann et al.,2011).12

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveOutcomesAmong the immediate outcomes expected of Proalcool and PNPB were the guarantee of amarket for ethanol and bio-diesel respectively; the production and the modernisation of theexisting distilleries in the case of Proalcool, and the configuration and implementation of aproduction chain for bio-diesel involving different raw materials and different regions of Brazilin the case of PNPB. The intermediate outcomes of Proalcool consisted in R&D and theproduction of cars which could run on ethanol, involving car manufacturers, governmentresearch institutions and academia; and the ultimate outcome was to have all vehicles runningon pure ethanol. In the case of PNPB, the ultimate anticipated outcome was theimplementation of a production chain capable of producing bio-diesel at competitive prices, atthe same time ensuring social inclusion and regional development.As in most interventions, the outcomes of Proalcool and PNPB did not result from policiesalone. There was a convergence of group and national interests and values that, together,spurred the outcomes of Proalcool and the current outcomes of PNPB (which is ongoing). Thedevelopment of Brazil’s ethanol production, distribution, transportation system and use by carowners proceeded in a series of incremental, non-linear steps, including reversals and suboptimalchoices (Nardon and Aten, 2008).OutputsThe most important outputs of Proalcool were the high government subsidies for the ethanolproduction and consumption chain and the creation of a market for ethanol with the obligatoryinclusion of a percentage of ethanol in the gasoline sold in the country. There were huge publicinvestments in R&D, along with incentives to the private sector to pursue innovation and investin ethanol-related activities. To complete the chain, incentives were given to car owners toshift to ethanol-fuelled cars.In general, PNPB outputs were similar, i.e. subsidies for the production chain, creation of amarket for bio-diesel by establishing minimum bio-diesel fuel blends, research. The explicitgoal of social inclusion is included the creation of the Social Fuel Stamp (MDA, 2007).Leverage mechanismsIn both Proalcool and PNPB, the primary leverage mechanisms were efforts to create and keepa market for ethanol and bio-diesel, bearing in mind that since the 1930s ethanol had in smallproportions been added to gasoline in the domestic fuel market as a mechanism for regulatingsugar prices. Other leverage mechanisms were increasing biofuel production in Brazil andfostering technological development in the ethanol/bio-diesel sector.According to CNPq (1980), there was no official plan to shape the leverage mechanisms ofProalcool in terms of its explicit objectives. On the other hand, PNPB was widely discussedwithin the government with the participation of several ministries. As a result, the leveragemechanisms were well shaped and an action plan involving several areas of the governmentwas set.InterventionIn the case of Proalcool, the intervention was based on a set of subsidies for the agroindustrialchain for ethanol production and use, as well as the establishment of mandatoryminimum ethanol-gasoline fuel blends.The following items built the basis of the intervention in the case of Proalcool: Guarantee of lower prices for ethanol vs. gasoline at the pump by taxing highlypetroleum-based fuels, and as such creating a cross-subsidy whereby gasolineconsumers would pay for part of the costs of the programme Guarantee of minimal prices for bio-ethanol producers Creation of special credit lines for sugar mills to expand their capacity Mandatory availability of ethanol at gas stations Maintenance of strategic ethanol stocks to stabilise supply13

Brazil’s biofuel programmes viewed from the WEL-nexus perspective Establishment of several dedicated policies to push ethanol-based car productionIn the case of PNPB, the intervention was much less incisive due to the different politicalcontext in which the programme was created and implemented, i.e. under a democratic regimerather than a military dictatorship. The industrial bio-diesel producers and importers benefitfrom tax breaks as well as from the ability to participate in public auctions administered by theANP through the Social Fuel Stamp. Tax reductions depend on the region where the rawmaterial is produced, the type of raw material and the kind of farm involved in the producingit.PNPB also provides research incentives for projects by promoting technology developmentthroughout the production chain and motivating scientific research networks (Hall et al.,2009).3.2 Action modelThe action model consists of a systematic plan for arranging institutions, resources, legalframeworks, and support mechanisms to reach a target population and deliver services (Linnéret al., 2010).Target populationThe principal target groups in the case of Proalcool were the sugar cane industry, carmanufacturers, public companies (e.g. Petrobras) and existing government institutions(including research institutions, financial institutions such as Banco do Brasil and the BrazilianNational Development Bank (BNDES)), academia, and car owners. The target groups related toPNPB were also public companies, financial institutions and academia. The industries targetedby PNPB were basically the agribusiness sector, with special attention to family farmers, atleast at the outset. These groups were expected to act in ways that would contribute to theoutcomes.Implementing organisationsAny intervention relies on one or several organisations providing resources, coordinatingactivities as well as recruiting, training and supervising staff (Linnér et al., 2010). In thecase of Proalcool, a National Alcohol Commission (CNAL) was created to develop andcoordinate the programme. Other organisations had a very important role such as Banco doBrasil, BNDES, Petrobras, among other state companies and institutions. Following theexample of Proalcool, PNPB created an Inter-Ministry Executive Commission (CEIB) comprising13 ministries and coordinated by the Civil House. There is also a Managerial Group responsiblefor conducting actions related to the operation and administration of the programme. TheCNPE, which decides the blend bio-diesel/diesel, and the ANP, which is responsible forconducting the auctions for the bio-diesel supply, are also important organisations in theimplementation of PNPB.Of all the institutions involved in the implementation of the two programmes, special attentionshould be given to Petrobras, which was engaged in various efforts to support both Proalcooland PNPB.ContextAs already mentioned, Proalcool was primarily a response to the oil crises in the middle andlate 1970s, when oil prices reached a record high, and fuel demand in Brazil was increasing asthe economy was growing rapidly.During that time, sugar cane activities, one of the country’s main economic activities, were incrisis due to the low sugar prices on the international market. These factors led groups withstrong interests in these activities to pressure the government for alternatives to avoidwidespread bankruptcy in the sector. At that time, Brazil’s nationalist military government(between 1964 and 1985) saw energy-related issues as a matter of national security. In amilitary dictatorship all decisions and interventions are centralised and implemented far more14

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiverapidly than in a democratic regime. On the other hand, PNPB was created in a democraticcontext, during the government of the PT, in the context of international negotiations toreduce GHG emissions.Institutional frameworkThe institutional framework also needs to be analysed. As mentioned earlier, the decree thatcreated Proalcool also created the CNAL, which was responsible for the coordination andimplementation of the programme. The existence of a strong state company like Petrobras,which was involved in the programme, was crucial for the development and success ofProalcool. Regarding rules and norms, the most important was the establishment of minimumethanol–gasoline fuel blends (progressively increased to 25% ethanol and 75% gasoline).The CEIB was also created to coordinate PNPB, as well as a Managerial Group. The CEIBdeveloped a work plan for PNPB implementation including specific roles for the relevantgovernment institutions. An important law was also promulgated in order to establish the legalframework of the programme (Law n. 11.097-05).3.3 Comparison between PNPB and Proalcool change and action modelAs mentioned, the main objective of Proalcool was to reduce the impact of the first and second‘oil shocks’ of the 1970s on Brazil’s balance of payments, which threatened the country’s‘economic miracle’. Given the country's dependence on imported oil, the increase in oil pricescaused the deficit in public accounts, which meant that resources destined for investment hadto be used to shore up the deficit. Given that economic growth was based mainly on capitaland labour-intensive segments, there was widespread support for increasing ethanolproduction.As distinct from Proalcool, the main reason behind the requirement to blend bio-diesel withdiesel was the potential to generate jobs and income in poor rural areas with the use of a widerange of oilseeds (particularly castor beans) (MAPA, 2006; Pousa et al., 2007). Other reasonswere: (a) the potential improvement in the country's trade balance, since Brazil is a netimporter of diesel; (b) the availability of many oilseed plants suitable for bio-diesel productionwithout affecting food security; (c) the perfect substitutability between bio-diesel and regulardiesel; (d) the energy efficiency of the bio-diesel production cycle; and (e) the CO 2 mitigationpotential associated with the use of bio-diesel as a replacement for regular diesel (MAPA,2006; Hall et al., 2009). PNPB aimed to address these issues simultaneously, and at a globallevel.The focus of PNPB on rural development is based on the assumption that benefits can accrueto the poor by organising small-scale producers to meet the volume and reliability needs ofconversion facilities (MAPA, 2006). The programme was designed to promote regionaldevelopment, especially through greater market insertion of family farms in the Northeast(MAPA, 2006; Hall et al., 2009). At the end of 2003, this region accounted for 49.6% of familyfarmers in the country. It is also the country’s poorest region, with only 25% of the per capitagross domestic product (GDP) of the South and Southeast regions (MAPA, 2006).In this respect, MAPA (2006) estimated that for each 1% increase in the participation of familyfarmers in the bio-diesel market, it would be possible to generate about 45,000 direct and180,000 indirect jobs. Moreover, the focus on family farmers was supposedly beneficialbecause while large-scale agriculture employs an average of one worker for every 100 ha,family farming employs one for every 10 ha. Furthermore, the Bio-diesel Production CapacityReport produced by the Inter-Ministerial Commission, on which the implementation of thePNPB in 2005 was based, indicated that if all the oilseed produced in the Northeast for biodieselcame from family farmers, the introduction of B5 would create 1.3 million farm jobs.This level of employment would be reached mainly by growing alternative crops, such asjatropha and castor beans. In this case, the average monthly per capita income of familyfarmers would rise from US$53.00 to US$233.30, or a total of US$130 million in extra incomegenerated in the Northeast in 2013 (ibid.).15

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveAnother justification for PNPB was to improve the trade balance, since Brazil has historicallyimported diesel (BRASIL, 2011a). In 2009, US$1.67 billion was spent on importing 3.51 billionlitres of diesel, representing about 7.9% of national consumption (MAPA, 2006). Starting withthe mandatory addition of bio-diesel to mineral diesel, there was a fall of 39.7% in demand fordiesel imports between 2008 and 2009 (BRASIL, 2011a).Again, given that Brazil is a net importer of diesel, as well as the focus of the programme onrural development, there was broad support mainly from the agricultural sector, which saw itas an opportunity to make farming more profitable in view of the increasing devaluation of themain agricultural commodities (Hall et al., 2009). On the other hand, the oil industry initiallyopposed the implementation of PNPB. Petrobras has now taken over the governance of PNPB,demonstrating Brazil’s support for the continuation of the programme.Tables 3.1 and 3.2 summarise the Change and the Action Model, which we used to identify thecombination of ‘push and pull’ components in Brazil’s biofuel programmes.Table 3.1 Comparison of PNPB and Proalcool change modelsChange model Proalcool PNPBGoals To increase foreign exchange To implement the production and To reduce income disparitiesamong regions and individuals use of bio-diesel in BrazilTo implement a sustainable To increase national incomethrough deployment ofunderused resourcesprogramme, promoting socialinclusion and regionaldevelopment To increase growth in the To guarantee competitive prices,domestic capital goods sector To avoid bankruptcy of thesugar cane industry To reduce dependence onenergy importsOutcomes Guaranteed market for ethanol Modernisation of existingdistilleries Research and production ofcars which could run on pureethanolA light-duty vehicle (LDV) fleetrunning on pure ethanolOutputs High subsidies for ethanolproduction and consumptionchain Mandatory inclusion of specificpercentage of ethanol in thegasoline sold in BrazilFinancial support for R&DRegulation with incentives tothe private sector to pursueinnovation and invest inethanol-related activitiesIncentives for car owners toshift to ethanol-fuelled carsquality and supplyTo produce bio-diesel fromdifferent oleaginous plants indiverse regionsGuaranteed market for bio-dieselConfiguration andimplementation of a productionchain for bio-diesel involvingdifferent raw materials anddifferent regions of BrazilImplementation of a sustainableprogramme, promoting socialinclusionGuaranteed competitive prices,quality and supplyProduction of bio-diesel fromdifferent oleaginous plants indiverse regionsSubsidies for bio-dieselproduction chainVoluntary and then mandatoryinclusion of a specific percentageof bio-diesel in the diesel sold inBrazilCreation of the Social Fuel Stampto spur social inclusion in the biodieselproduction chain16

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveChange model Proalcool PNPBDeterminants, Create a market for ethanol Create a market for bio-dieselleverage Increase ethanol production Increase bio-diesel productionmechanism ormediatingvariable Foster technologicaldevelopment in the ethanolsector Foster technologicaldevelopment in the bio-dieselsectorIntervention Guaranteed lower prices forethanol vs. gasoline at thepump Guaranteed minimum price forethanol producers Creation of credit lines for sugarmills to expand capacity Mandatory availability ofethanol at gas stations Maintenance stocks to stabilisesupply Establishment of policies topush ethanol-based carproduction Establishment of higherminimum ethanol fuel blendsBio-diesel producers or importersbenefit from tax reductionsBio-diesel producers or importersable to participate in publicauctions administered by ANPCreation of the Social Fuel StampTax reductions depend on: regionwhere raw material produced;type of raw material; and type offarm involved in producing rawmaterialVoluntary then mandatoryinclusion of a minimumpercentage of bio-diesel in thediesel sold in BrazilTable 3.2 Comparison of PNPB and Proalcool action modelsAction model Proalcool PNPBTarget Sugar cane industry Family farmerspopulation Car manufacturers Agribusiness companies State companies (e.g.Petrobras) Companies using large volumes ofdiesel fuel (e.g. Vale do Rio Doce) Government institutions (e.g. State companies (e.g. Petrobras)BNDES, Bank of Brazil) Government institutions (BNDES, AcademiaBank of Brazil) Car owners AcademiaImplementing CNAL CEIBorganisations Inter-Ministerial Commission Managerial Groupfor Alcohol (CINAL) CNPE Bank of Brazil ANP BNDES Bank of Brazil Petrobras BNDES Other state companies and Petrobrasinstitutions Other state companies andinstitutionsContext Oil crisis in the middle and Democracy contextlate 1970s, when oil prices Government of the PTwere extremely high Social issues are government Fuel demand in Brazilincreasing with rapid economicgrowthpriority Sugar cane activities in crisisdue to the low prices in theinternational market Nationalist militarygovernment which sawenergy-related matters asnational security issues17

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveInstitutionalframeworkCreation of CNAL, responsiblefor coordinating andimplementing the programme.Creation of CINALStrong participation ofPetrobras, BNDES, Bank ofBrazilEstablishment of higherminimum ethanol fuel blends(progressively increased to25%)Establishment of policies topush ethanol-based carproduction CEIB Managerial Group Law n. 11.097-05 Strong participation of Petrobras,BNDES, Bank of Brazil18

Brazil’s biofuel programmes viewed from the WEL-nexus perspective4 Sustainability of the programmes in relation toinclusive and sustainable growthThe use of biofuels may have many favourable environmental, social and economic aspectsthat can help to create an alternative and more sustainable development path, taking intoaccount the three dimensions of ISG. Biomass and the use of biofuels contribute to ruraldevelopment (Goldemberg et al., 2004a), can serve to regulate markets and, contribute toreducing GHG emissions in a cost-effective way by diversifying the sources of fuel.A number of studies on the sustainability of Brazil’s biofuel programmes have been publishedover the years, often taking diverse approaches to the issue (Goldenberg and Guardabassi,2009; Hall et al., 2009; Rathmann et al., 2011; Nardon and Aten, 2008; Goldemberg et al.,2004b; Szklo et al., 2005; Macedo et al., 2008; Luo et al., 2009; Pacca and Moreira, 2009;Garcez and Vianna, 2009). Here, we use the WEL-nexus approach to identify the strengths andweaknesses of the two Brazilian biofuel programmes in relation to achieving ISG.To identify these drivers, in terms of land and water requirements, we base our analysis on theforecasts of biofuel production according to the Ten-year Energy Expansion Plan 2019,produced by Empresa de Pesquisa Energética (Energy Research Company) (BRASIL, 2011b).According to this Plan, in the 2011–2019 period, ethanol production in Brazil is expected to risefrom 25.1 to 73.3 billion litres. During this same period, exports of Brazilian ethanol areexpected to grow exponentially, from the current 3.4 billion litres to 9.9 billion litres in 2019.In order to meet this demand, sugar cane production in 2019 is estimated to reach 1,135million tons (an increase of 64% in relation to 2010); with a productivity gain of 1.5% peryear, this will require an additional farming area of 11.9 million ha. It is assumed that thisexpansion will take place in areas that are currently used for extensive cattle rearing/ranching,especially in the Mid-west, by concentrating this activity in smaller areas. Finally, theprojections assume that the available arable area would permit sugar cane production in Brazilto be increased more than tenfold (BRASIL, 2011b).With regard to bio-diesel production, this should rise from 2.4 to 4.2 billion litres between2011 and 2019 – an increase that simply keeps pace with the growth in demand for diesel,maintaining at 5% the mandatory percentage of bio-diesel added to mineral diesel (BRASIL,2011b). As a result, if the 84% participation of soy oil in total bio-diesel output is maintained,by 2019 a total production of 19.8 million tons of soybeans would be required for theproduction of biofuel. Assuming an annual productivity increase of 1.5%, it would be necessaryto add about 3.4 million ha to the area currently under cultivation.In view of such growth projections for Brazil’s biofuel programmes, the aim is to determine,based on the production systems of both sugar cane and soybeans in the states of São Pauloand Mato Grosso respectively, whether these forecasts are feasible. For this purpose, weundertake a qualitative evaluation based on measuring the previous impact of gearing up theBrazilian biofuel programmes to see whether the predicted expansion is sustainable.It is therefore necessary to test:1 Whether there was an alteration in the dynamics of land prices, and consequently inagricultural production costs, to the extent of making sugar cane and soybean productionless profitable, thus constituting a barrier to the expansion of cultivation with an agroenergeticobjective.2 Whether, in the event of reduced profitability, rural producers reduced the level of realwages for rural workers to mitigate the effect of this loss.3 Whether maintaining the forecast for B5 diesel up to 2019 bears a relationship both tothe sector’s competitiveness vis-à-vis mineral diesel, and to the existence of limits to theexpansion of soy-based bio-diesel production.19

Brazil’s biofuel programmes viewed from the WEL-nexus perspective4 Whether water availability constitutes a limit to the projected expansion of agro-energycrops.Finally, with regard to the Energy dimension, our analyses are based on Coelho et al. (2006)and Macedo et al. (2008) for sugarcane-based ethanol, and on Rathmann et al. (2011) andGazzoni et al. (2006) for soy-based bio-diesel.4.1 LandThe dynamics of land prices with the profitability of agro-energy cropsThe analysis of the dynamics of land use starts with the comparison between different periods,namely 1990/2000/2010, based on Municipal Agricultural Production data compiled by theBrazilian Institute for Geography and Statistics (IBGE) for sugar cane and soybeans (Lima andTeixeira, 2010; IGBE, 2011). The aim is to determine whether the further development ofbiofuel programmes in Brazil, based on these farm products, has intensified the allocation offarming areas to such crops.The evolution of the areas under soy production (Figure 4.1) shows that the Mid-west isconsolidating its position as the main producer. A greater concentration of production in allproducing states is observed, especially in Mato Grosso, in the western region of Bahia, and inTocantins, Piauí and Maranhão. In addition, there is a new agricultural frontier in the state ofPará.This greater concentration in Mato Grosso is influenced, among other factors, by (a) theevolution of soybeans prices in the international market; (b) the availability of land at lowerprices than in other producing states, such as Rio Grande do Sul and Paraná; and (c) theconsolidation of a regional bio-diesel production complex (MAPA, 2011).In relation to the bio-diesel production complex, 21 of the 67 bio-diesel plants are installed inMato Grosso and account for 22% of the total production capacity authorised by the NationalAgency for Oil, Natural Gas and Biofuels (ANP, 2011b). The option to situate the productionbase close to supply (soy) reduces logistics costs. This factor has also influenced the decisionof investors to close down plants located in regions where there is no guaranteed large-scalesupply of oilseeds (Rathmann et al., 2011).Figure 4.1 Evolution of the soybean area harvested in Brazil (1990/2000/2010)Soybean AreaHarvested -HectaresSource: IBGE, 2011.20

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveWith regard to the evolution of sugar cane production, the state of São Paulo is increasing itsparticipation in the national output (Figure 4.2). Moreover, its production is becoming far moreconcentrated, which also occurs in the North-East coastal area (a traditional sugar-producingregion); in the region of Campos (Rio de Janeiro) and the ‘Triângulo Mineiro’ (Minas Gerais);and in expansion areas, such as the states of Goiás and Mato Grosso do Sul.The growth and concentration of sugar cane production are related both to the furtherdevelopment of ethanol production and to the increase in sugar prices in the internationalmarket. As previously mentioned, ethanol production has more than doubled since theintroduction of flex-fuel vehicles. Also, since 2003, the price of a 50kg bag of sugar hasincreased by about 250% in the international market (IEA, 2011a).Figure 4.2 Evolution of the sugar cane area harvested in Brazil, 1990/2000/2010Area Harvested-HectaresSource: IBGE, 2011.In view of the growing incorporation of land for the production of sugar cane and soy in Brazil,especially in the states of São Paulo (SP) and Mato Grosso (MT), it is plausible to formulate thehypothesis that this has made land scarcer, causing a rise in market prices.In order to test this hypothesis, price series for land in these states were obtained from theInternational Energy Agency (IEA, 2011a) and FGV Dados (2011). In the case of SP, based onthe agro-climatic zones for the sugar and alcohol sector, the representative municipalities ofAraçatuba, Presidente Prudente, Ribeirão Preto and São José do Rio Preto were chosen as thesample (Governo de São Paulo, 2011), for which annual series of land prices between 1996and 2010 were obtained; from these were derived average prices for land suitable for sugarcane in SP. In the case of MT, half-yearly series between 2002 and 2010 were obtained forland prices in the municipalities of Campo Verde, Canarana, Diamantino, Sapezal and Sorriso(IMEA, 2011); these were later annualised.In SP there are four categories of land used for cultivation (IEA, 2011b):1 First-class cropland: potentially suitable for annual and perennial crops, and for otheruses. It supports intensive management both in terms of cultivation practices and soil21

Brazil’s biofuel programmes viewed from the WEL-nexus perspectivepreparation. This is medium- and high-productivity land, machine-workable, flat, andwith deep, well-drained soil.2 Second-class cropland: though potentially suitable for annual and perennial crops, it hasmuch more serious limitations than first-class cropland. It may present mechanisationproblems due to steep slopes. However, the soil is deep, well drained, with good fertility,though sometimes with a need for some soil correction.3 Pastureland: unsuitable for farm crops in the short term, it is potentially suitable forpasture and forestry. It is low-fertility land, flat or uneven, with simple to moderaterequirements regarding preservation and management practices to produce biofuelcrops.4 Rough land (‘Terra de Campo’): land with natural vegetation, whether or not primary,and with limited possibilities for use for pasture or forestry; the best use is for shelteringflora and fauna.Ideally, sugar cane production requires first-class cropland, but second-class land can also beused, using non-mechanised harvesting and improving the soil. One might therefore expectthat the pressure on land prices placed by sugar cane production, among other factors, wouldbe greater on these two land categories. However, a strong correlation was observed (Figure4.3) among the prices of all four categories. This is, therefore, a Ricardian rent differential,whereby the price of more productive land is given by the marginal land price (Sandroni,1999), in this case second-class land, pasture and rough land. This dynamic results from theincrease both in the price of sugar in the international market and in the demand for ethanol inthe domestic market, which makes it possible to include less fertile lands for growing sugarcane. 6In addition, the acceleration in the price of preferential land for the production of sugar cane inSP is significant, especially after the inclusion of flex-fuel vehicles in the national car fleet.Taking the most productive land (first-class land) as an example, the price per hectare risesfrom R$4,600 in 2002 to R$14,600 in 2010 (Figure 4.3). Finally, it should be pointed out that56% of arable land in the state of SP is leased, and that 72% of such areas are owned by largeeconomic groups, thus reducing the supply of rural areas in the state and contributing to theincrease in land prices (Olivette et al., 2011).In fact, the increasing sugar cane production in SP led to a sharp rise in land prices. Accordingto Marques (2009), in the case of sugar cane production both by rural producers and by sugarfactories, leasing prevails to the detriment of farmers cultivating their own land. For example,in 2008, approximately 60% of the total area allocated to sugar cane production in SP wasleased.6 In fact, although the best soils for sugar cane are deep, well structured, fertile soils with a good retention capacity,due to its hardiness sugar cane develops even in less fertile soils, such as pasture and rough land soils, provided thesoil is improved (EMBRAPA, 2011a).22

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveFigure 4.3 Evolution of land prices in preferential areas for sugarcane production inthe State of São Paulo between 1996 and 2010 (R$/ha)Note: * resent value as of 1 August 2011.Source: The authors based on IEA, 2011b.In MT, arable land is classified as cropland, pastureland and rough land. The last twocategories have the same characteristics as the land found in SP, i.e. not very fertile, andunsuitable for cultivation in the short term; for that reason it is considered marginal land inrelation to soybean production. Moreover, in the case of MT, pastureland and rough land isgenerally found in water-scarce regions, while water is fundamental for growing soy, especiallyduring germination-emergence and flowering-formation of beans (EMBRAPA, 2011b). 7This aspect contributes to a lower correlation than that observed between the different typesof land for sugar cane production in SP, with the exception of rough land and pastureland(Figure 4.4). Even so, there is a significant correlation between the three types of land until2006, when there is an increasing gap between the prices of cropland and the other types.This occurs because of the increased production of bio-diesel, the concentration of farmland inthe hands of few owners, and the rise in international soy prices (Gasques et al., 2008).Where soybean is allocated to the production of bio-diesel, there is a significant growth in localdemand thanks to the start-up of bio-diesel plants in MT. In 2006 and 2007, seven plantsstarted up, with an annual production capacity of 113 million litres of bio-diesel; this required aproduction of 632,000 tons of soybeans per year, and a cropland area of approximately203,000 ha, that is, 4% of the total arable land in MT in 2007 (ANP, 2011b; CONAB, 2011).A significant impact on the price of cropland may also be attributed to the fact that 50% ofagricultural areas in MT are leased, and 20% of such properties are concentrated in the handsof large groups (IMEA, 2011). In the 2009/10 crop, the 20 largest soy-producing groups wereresponsible for the cultivation of 1.2 million ha of soybeans, that is, 20% of the total area of6.1 million ha planted (ibid.). In 2004, these groups were cultivating 533,000 ha, which7 During the first period, both excess and shortage of water are harmful in terms of obtaining good uniformity in theplant population. Soy seed needs to absorb at least 50% of its weight in water to ensure good germination. In thisphase, the water content in the soil should not exceed 85% of the maximum water available, nor should it be below50%.23

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiverepresented 9% of the area. This points to a reduction in the supply of farmland, thusincreasing its scarcity and pushing up its price.In Figure 4.4, a significant rise may be observed from 2006 in the price of arable land: theaverage price of such land was R$2,600 per hectare, but rose to an average of R$7,200 perhectare in 2010.Figure 4.4 Evolution of land prices in preferential areas for soybeans production inthe state of Mato Grosso between 2002 and 2010 (R$/ha)Note: * present value as of 1 August 2011.Source: The authors based on FGV Dados, 2011.Given the concentration of production in leased land, and considering the opportunity cost forland in SP, which is increasing, there was a considerable rise in the average cost of leasingland between 2002 and 2010. Moreover, the appreciation is related to the greaterconcentration of agricultural production, to the rise in international sugar prices, and tocompetition in the use of land for food and biofuel production (Rathmann et al., 2010). Therise in the price of land resources led to a sharp increase in the average total costs of thesugar cane business, at rates above the change in the average total revenue, causing losses inthe business margins (Table 4.1). In fact, the profitability of the activity, which was 14.5% in2002, became negative (-21.7%) in 2010. This also explains the debate currently taking placeregarding rising ethanol prices and the risk of shortage (MME, 2011).Many industries are integrated with the agricultural sector, producing sugar cane on their ownland for conversion into sugar or ethanol. Moreover, they have upstream activities, includingcommercialisation segments of these final products. In this case, the negative margin could beabsorbed by these segments (transformation and industrialisation), and so might not occur tothe extent that land ownership would exceed the cost of leasing. In fact, the negative marginin the segment analysed justifies the increase of the share of processing sugar cane into sugarrather than ethanol in 2010 (UNICA, 2011a). Finally, some analyses showed positive marginsin the sugar cane business in other states, including Goias, Mato Grosso and Mato Grosso doSul (14%, 14%, 10% and 13% respectively) (IEA, 2011b; Marques, 2009), which relate to thelower cost of land in these states and hence to the expansion of sugar cane production. Thismeans that only a national-level analysis of the activity would test the economic sustainabilityof ethanol production.24

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTable 4.1 Production cost, leasing value, revenue and margins for the sugar canebusiness in the state of São Paulo, 2002–2010Average leasingvalue (ALV)Average totalcost (ATC)ALV/ATCAverage totalrevenue (ATR) aBusinessmarginYear (R$/ha/year) (R$/ha/year) % (R$/ha/year) %2002 526 1,934 27.2% 2,214 14.5%2003 578 2,309 25.1% 2,490 7.8%2004 604 2,414 25.0% 2,184 -9.5%2005 526 2,998 17.6% 2,465 -17.8%2006 857 3,415 25.1% 3,096 -9.3%2007 683 3,799 18.0% 2,523 -33.6%2008 890 3,662 24.3% 2,136 -41.7%2009 783 3,696 21.2% 2,640 -28.6%2010 843 3,814 22.1% 2,988 -21.7%Change2010/2002+60.2% +97.2% - +35.0% -Note: a obtained by multiplying the average annual productivity (in tons) of the sugar canecrop by the real average price paid to the producer (R$/ton with 145kg of TRS).Source: The authors based on IEA, 2011a, 2011b; Marques, 2009.The increase in the price of cropland was also significant in MT, being reflected in the averageleasing value from 2007. In this case, the greater concentration of soybean production,associated with the concentration of land ownership in the hands of few economic groups,enabled the latter to benefit from a 342% rise in revenue from land in the 2002–2010 period.However, the average total costs of the business rose proportionally less than leasing values(Table 4.2). This was due mainly to the following factors: (a) the exchange-rate appreciationobserved in the period, which led to a drop in the relative costs of fertilisers and agriculturalchemicals used in soy production, and (b) the growing use of direct planting methods inrelation to traditional cultivation. This technique requires less fertiliser and reduces the needfor soil operations, thus leading to savings in the use of machines (CONAB, 2011; IAC, 2005).Table 4.2 Production costs, leasing value, revenue and margins for soybean businessin the state of Mato Grosso, 2002–2010ALV ATC ALV/ ATC ATR a BusinessmarginYear (R$/ha/year) (R$/ha/year) % (R$/ha/year) %2002 102 837 12.2% 1,170 39.8%2003 150 1,143 13.1% 1,734 51.7%2004 175 1,293 13.5% 1,630 26.1%2005 162 1,457 11.1% 1,167 -19.9%2006 138 1,316 10.5% 923 -29.9%2007 259 1,405 18.4% 1,183 -15.8%2008 399 1,885 21.2% 1,826 -3.1%2009 420 1,847 22.8% 2,041 10.5%2010 349 1,611 21.7% 1,992 23.6%Change2010/2002+242.0% +92.4% - +70.2% -Note: a obtained by multiplying the average annual productivity (in tons) of the soy crop bythe real average price paid to the producer (R$/ton).Source: The authors based on FGV Dados, 2011 SEPLAN, 2010.25

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveIn this context, the significant increase in the average price paid to soybean producers, from2008, 8 created positive profit margins for businesses. There is a 56% increase in the pricesreceived for soybeans between 2007 and 2010, vis-à-vis a 15% fall in the costs of thebusiness in the same period. That is, specifically for the production of MT, the change in pricesreceived for soybeans more than exceeded the increase in the average leasing value in termsof the average total business costs. Therefore, the longer the positive margin for the croplasts, the greater will be the space for expansion of bio-diesel production in MT.Impacts of the profitability of the agro-energy business on rural workers’ wage levelsRural–urban migration in Brazil has been increasing because of the fall in real average incomefor rural labour. In 1996, the average rural income was approximately 1.35 minimum salariesper month, in real terms, falling to 0.89 minimum salaries per month in 2010; this caused adrop in the working population in rural areas from 14.2 to 10.8 million people (IPEADATA

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTable 4.3 Real average remuneration and real income (expressed as real minimumsalaries) for rural workers in the states of SP and MT, 1996–2010 (R$/month)São PauloMato GrossoYear Real minimumsalary(R$/month)Real averageremuneration(R$/month)Income inminimumsalariesReal averageremuneration(R$/month)Income inminimumsalaries1996 279 165 0.59 142 0.511998 303 203 0.67 155 0.512000 308 214 0.70 179 0.582002 325 237 0.73 216 0.662004 361 319 0.88 280 0.782006 450 440 0.98 387 0.862008 477 550 1.15 519 1.092010 528 668 1.26 696 1.32Change2010/1996+89% +306% - +392% -Source: The authors based on IPEADATA, 2011a, 2011b; IEA, 2011c; FGV Dados, 2010.In relation to the national trend – depreciation in rural income, which in fact led to intensivemigration from the rural areas to the cities – the states of SP and MT are exceptions. In both,agricultural income grew more than the national average; and to a large extent, this can beobserved since 2006 in SP, and 2008 in MT. Coincidentally, these are years in which thebiofuel production programmes, based on the predominant agricultural crops of each state(sugar cane and soy), led to a sharp increase in production.Finally, the real gain in income for the rural worker in the state of SP is negatively correlated (requal -0.94) to the business profit margin. Therefore, the hypothesis that sugar caneproducers reduced rural workers’ real wage levels in order to mitigate the effect of the declinein the profitability of their business is rejected. On the other hand, the correlation in the stateof MT is positive and strong (r equal to 0.92), to the extent that there was an increase both inrural workers’ income and in the profitability of the soy-growing activity. That is, the economicsurplus was, to some degree, redistributed to the rural workers.Limits to the expansion of biofuel production in BrazilThere are innumerable potential barriers to the expansion of a biofuel programme. This studyfocuses on analysing the limitations through arguments relating to the availability of arableland; the competitiveness of biofuel vis-à-vis fossil fuels; and competition for land for thepurposes of producing biofuel and/or food.Brazil has an arable area of approximately 340 million ha, distributed as follows: (a) 200million ha for pasture; (b) 55 million ha for cultivation; (c) 7 million ha occupied by plantedforests; and (d) 5 million ha in reforestation areas (Nassar et al., 2010). This means that 73million ha could be available for agricultural production, of which 31.8 million would besuitable, in terms of climate and soil conditions, for sugar cane, and 44.9 for soy (MAPA, 2006;EMBRAPA, 2008). Of these, 11.9 million and 3.4 million ha would be allocated to sugar caneand soy production respectively, in order to meet the biofuel production goals for the 2011–2019 period (BRASIL, 2011b).For the period 2011–2019, land does not therefore constitute a limit to the desired expansionin biofuels production. However, the objective of soy and sugar cane processing may be thefood industry. Therefore, the raw material opportunity cost needs to be analysed since thecompetition for raw materials for both sectors may pose a constraint on the expansion ofethanol and bio-diesel production.In the case of bio-diesel, the cost of raw material constitutes a large part of the final price.According to the IEA (2004), it represents between 85% and 92% of the total cost. Moreover,projections indicate that the prices of conventional oilseeds will continue to rise, resulting, in27

Brazil’s biofuel programmes viewed from the WEL-nexus perspectivethe next ten years, in opportunity costs for bio-diesel that are higher than prices for mineraldiesel (Figure 4.5).Figure 4.5 Evolution of diesel prices and minimum prices for bio-diesel between2010 and 2019CASTORSUNFLOWERSOYBEANPALM OIL FRYING TALLOW RESIDUEOILSDIESELSource: The authors based on BRASIL, 2011b.Figure 4.5 compares price estimates for bio-diesel from several raw materials and theprojection of the average diesel oil price on to the consumer across Brazil’s geographicalregions. In this scenario, only fatty acid sludge is capable of supplying bio-diesel at priceslower than mineral diesel throughout the ten-year period. Among the cultivated raw materials,palm oil and castor oil (‘CONAB prices’) are those that permit prices closest to those estimatedfor diesel, followed by soy oil.This means that no oilseed produced on a scale large enough to meet the fixed demand (B5) inthe bio-diesel market is currently competitively priced compared to mineral diesel. Ethanol iscompetitive vis-à-vis diesel in Brazil, but the opportunity cost of not using sugar cane toproduce sugar has pushed up ethanol prices in the periods between harvests, or whenever theprice of sugar rises in the international market. This has been the case since 2006, withaccumulated appreciation of 108% in the London Exchange (from US$314 per ton on 5 July2006 to US$655 per ton on 5 July 2011) (IEA, 2011d). In this scenario, the opportunity cost ofsugar cane, if the appreciation of sugar in the international market is maintained, does notraise any doubts about the capacity to expand production, but about its conversion into asufficient quantity of ethanol to meet the intended expansion.Given the competing use of agricultural products for the production of food and fuels, oneshould test the potential limits for the production of biofuel in the context of domestic andforeign demand for food. In the case of bio-diesel production, we tested whether there arelimits to its expansion because of soybean availability by constructing three scenarios forconsumption and addition of bio-diesel to diesel, also taking into account the national andinternational supply of and demand for soybeans.Using 2008 as the base year and the 2010–2030 period as the horizon, in all three scenarioswe relied on the reference diesel consumption figures of the National Energy Plan for 2030(PNE 2030) (BRASIL, 2007b). For soybean production we adopted the evolution of supply,28

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveproductivity, 10 and internal and external demand provided in Nassar et al. (2010). We alsoassumed the current macro and microeconomic equilibrium, 11 as well as continuation of thecurrent breakdown in allocation of soybeans for food purposes 12 for the internal market(mainly for cooking oil) and export market, which at the end of 2008 was 31% and 39%,respectively (CONAB, 2011). Finally, we disregarded expansion of soybean production to areasdedicated to other crops, i.e. competition for land use (Rathmann et al., 2010), andincorporation of marginal lands.Scenario A assumes the maintenance of soybeans in the composition of inputs to produce biodieselat 84% along with the projection of the PNE 2030 for mixture of bio-diesel with diesel(B5 up to 2011, B6 between 2012 and 2019, B7 from 2020 to 2029 and B12 in 2030).Scenario B assumes that as from 2012 all existing bio-diesel production capacity (now partlyidle) will be used, allowing the blend level to reach B8 that year, rising to B10 in 2015, B15 in2020 and B20 in 2030. Finally, Scenario C assumes the same mixture projection as in ScenarioA, but tests the premise that the diversity of oilseed crops in Brazil will ensure that the biodieselproduction chain need not affect food and economic security, by establishing a limit onsoybeans to make bio-diesel of 50% of total inputs.In this last case, according to Goldemberg et al. (2008b), cotton can supply part of the oil nowprovided by soybeans, because its supply is dictated by the market for fibre to make textiles,the main product of economic value made from cotton. Therefore, nearly all the cottonseedcan be processed to produce oil. According to the author, sunflower and rapeseed are alsofast-expanding crops, so they can play a greater role in supplying feedstock oils. For thesereasons, in Scenario C we consider that cottonseed will supply 15% of the demand for oil,rapeseed and sunflower seed will together account for 16% and tallow will account for 19%from 2011.The high current participation of soybean oil to make bio-diesel undermines the premise of theavailability of a wide range of oilseeds, because no other vegetable-oil source yet has reachedthe scale to meet even current industrial demand. Although Brazil produces bumper harvestsof soybeans, the allocation of this crop to produce bio-diesel would be limited to B7 inScenarios A and B (Figure 4.6). Since it is not plausible to jeopardise food security (heredefined as domestic consumption), increasing the blend of bio-diesel in diesel would requirereducing exports and/or expanding production by incorporating new areas either by replacingother crops and/or expanding to marginal areas (Rathmann et al., 2010). In this case, therewould be imbalances of both a macroeconomic nature (loss of foreign exchange) and amicroeconomic one (increased prices of land and other staple food crops, such as maize, beansand rice, among others). Both such outcomes would be undesirable.10 It is estimated that the yield will increase by 38% between 2010 and 2030, with average productivity rising from2.34t. / ha to 3.34t. / ha (CONAB, 2011).11 The macroeconomic equilibrium can be understood by the participation of soybeans in total Brazilian exports(approximately 10% of the total in 2009) (SECEX/MDIC, 2010).12 This includes both for human and animal consumption, in the former case particularly in the form of cooking oil.29

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveFigure 4.6 Availability of soybeans (thousand tonnes) according to the different biodiesel/dieselblend scenarios between 2010 and 2030Availability of soybeans(thousand tonnes)20.00010.0000B5 B6 B6 B7B12-10.000-20.000-30.000B8B10B7B12-40.000-50.000-60.000-70.000B15B20Scenario A Scenario B Scenario CSource: The authors based on Nassar et al., 2010; SECEX/MDIC, 2010.It is clear, then, that the premise that there is a wide range of oilseeds available to producebio-diesel is false. For it to be true, the other oilseed crops would need to be grown on muchlarger scales, in the absence of which the addition of bio-diesel would be limited to B5.The maintenance of the mixture of bio-diesel in diesel at 5%, according to the Ten-year EnergyExpansion Plan up to 2019, is thus associated not only with the absence of competitiveness forsoy-based bio-diesel in relation to mineral diesel, but also with national and internationaldemand for the oilseed for food purposes.4.2 WaterAlthough Brazil is in a comfortable situation in relation to water resources, when compared tofigures for other countries it is clear that these resources are unevenly distributed across theterritory. About 80% of the available water is concentrated in the Amazon HydrographicRegion, where the population density is lowest and the figures for consumptive demand arealso low (ANA, 2011). For this reason, it is important to verify the impact of the increase in theproduction of biofuels on water availability in the 2011–2019 period in those regions withgreater demand for water in view of their population density and production processes.Water may be required for consumptive and non-consumptive uses. In relation to the first typeof use, which is characterised by consumption in certain production process where the water isnot returned to the watercourse, the most significant uses in terms of withdrawal in 2010 werefor irrigation and urban supply, representing 49% and 26% of the total (ANA, 2011).In 2010, 349,000 agricultural establishments in Brazil had some irrigation system, occupyingapproximately 5.2 million ha of the 55 million ha used for permanent and temporarycultivation. In other words, given that the purpose of irrigation is to supply water foragriculture, 9.5% of the total national area allocated to this purpose had some form of30

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveirrigation technology installed in 2010 (IBGE, 2009). Agricultural areas in the states of SP andMT are served by the Paraná hydrographic basin, and in the case of MT, mainly by the Amazonbasin. The Paraná River basin concentrates the largest irrigated area per hydrographic region,with 1.48 million ha (ANA, 2011).The adoption of irrigation systems in these two states has been increasing, especially in the1996–2010 period. In SP, there was a 7.5% annual rate of increase in the area covered byirrigation, and 15.1% in MT. In SP, about 1 million ha, or 15% of the agricultural area, isirrigated. In the case of MT, this area amounts to 238,000 ha, which corresponds to 12% ofthe cultivated area (IBGE, 1999, 2009, 2011).The purpose of installing irrigation equipment is to ensure a regular supply of water in order toavoid a drop in productivity due to unequal water distribution. It is not just a matter ofsupplying water during dry periods, but also supplying it in adequate amounts to avoid waterstress (Carmo et al., 2007). Telles (1999) addresses the importance of proper irrigationmanagement, as the water used in the agricultural sector does not return to its sources, orreturns to such sources affected by pesticide contamination.In this context, the demand for water per hectare of sugar cane and soybean produced in thestates of SP and MT respectively in 2010 was modelled using CROPWAT 8.0 software. Thissoftware, developed by the United Nations Food and Agriculture Organization (FAO), is used toquantify the demand for water and for irrigation per agricultural crop, based on soil andclimate conditions, and the crop productivity record in the region under study (FAO, 2011a,2011b). Thus, in view of the conditions mentioned for SP and MT, which were obtained fromCONAB (2011), EMBRAPA (2008) and FAO (2011b) for 2010, an average demand of 16,991 m 3and 6,440 m 3 of water per hectare cultivated was calculated respectively for the two crops. Ifwe take the benchmark productivities of 86.4 tons per hectare for sugar cane in SP, and 3.0tons per hectare for soybeans in MT (CONAB, 2011), it is possible to derive the averagedemand of 197 m 3 of water per ton of sugar cane in SP and 2,147 m 3 per ton of soybean in MTin 2010 (Table 4.4).In order to estimate the demand for water per crop in 2019, an average growth in productivityof 1.5% per year from 2011 onwards was initially considered for both sugar cane and soy.According to EMBRAPA (2008), approximately 70% of the increase in average productivity inthe soy crop in MT in the 2006–2010 period resulted from the increased availability of water inthe plantations, i.e. the increase in the total irrigated area. It is also estimated that, in thecase of the SP sugar cane crop, 62% of the rise in productivity in the same period resultedfrom the increase in the total irrigated area. 13 Thus we can estimate the evolution in theaverage demand for water for the sugar cane and soybean crops in m 3 per hectare and in m 3per ton in the 2010–2019 period (Table 4.4). In addition, an increase in the output of thesecrops at the same rate as the projected growth in biofuel production was considered, on theassumption that there will be no shift of any additional sugar production to ethanol or ofadditional soya meal and soybeans to bio-diesel. Therefore, in the 2010–2019 period, therewould be a 64% increase in sugar cane production, and 75% in soy production.In view of these assumptions, taking into account the projected increase in ethanol and biodieselproduction for the sugar cane and soy crops in SP and MT, we project a total waterdemand of 108,638 m 3 and 67,509 million m 3 respectively in 2019 (Table 4.4).13 Assuming the annual growth rates in the irrigated area in SP and MT will be maintained at 7.5% and 15.1%respectively, the total irrigated area in 2019 is estimated at 1.6 million ha in SP, and at 561,000 ha in MT.31

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTable 4.4 Production, productivity, specific and total water demand for sugar caneand soybean crops, assuming the projected expansion of the national biofuelprogrammes (2010–2019)Crop/stateProduction(thousand tons)Crop yield(tons/ha)Specific waterdemand(m 3 /ton)Total waterdemand (millionsof m 3 )2010 2019 2010 2019 2010 2019 2010 2019Sugar cane (SP) 356,360 581,150 86.4 98.8 197 187 69,687 108,638Soybeans (MT) 18,766 32,841 3.1 3.4 2,140 2,056 40,151 67,509Source: The authors based on CONAB, 2011; EMBRAPA, 2008; FAO, 2011a; 2011b.It is now necessary to verify whether the total amount of water required for the expansion ofthe sugar cane and soybean crops in SP and MT by 2019 would be limited by the availability ofwater resources in the Paraná and Amazon basins respectively.Initially, for projection purposes, it was assumed that the surface water availability in Brazil in2010 would be maintained. In this case, taking into account all Brazilian basins with 95%permanence, this availability was 5,658,599 million m 3 (ANA, 2011). In addition, the surfacewater availability of the Amazon and Paraná hydrographic basins, which supply the states ofMT and SP, was assumed to be constant. The demand for water in 2010 and 2019 for bothsugar cane and soybean production was obtained from Table 4.5, and refers to the waterneeded for the expansion of biofuel production based on these crops. Finally, water availabilityshould also take into account other uses, namely industry, domestic consumption, and cattlerearing/ranching. Based on these different demands, Table 4.5 shows the percentage of wateravailable per hydrographic basin.Table 4.5 Water availability in the Amazon and Paraná basins based on demands forwater, 2010 and 2019Amazon Basin Paraná BasinWater availability (10 6 m 3 /year)* 4,161,081 361,182Water demand for sugar cane/SP (10 6 m 3 ) 2010 N.A. 69,6872019 N.A. 108,638Water demand for other uses/SP (10 6 m 3 ) 2010 N.A. 15,0582019 N.A. 19,124% water available 2010 N.A. 76%2019 N.A. 65%Water demand for soy/MT (10 6 m 3 ) 2010 40,151 NA2019 67,509 NAWater demand for other uses/MT (10 6 m 3 ) 2010 1,476 NA2019 1,874 NA% water available 2010 98% NA2019 97% NANote: * water availability comprises the average annual flow of the rivers in the hydrographicbasin. NA: not applicable.Source: The authors based on ANA, 2007, 2008; FAO, 2011a, 2011b.It can be seen that the expansion of agricultural production in the states of SP and MT, with aview to increasing biofuel production in Brazil as projected, would not encounter limitations inthe availability of water. Nor, in the short- and medium-term should the price of water shouldgive rise to concern. Water regulations regarding its payment and price are still in the earlystages in Brazil especially given the lack of conflicts related to water shortage in someimportant water basins. In this context, the impact of the price of water in the economicequation of the biofuels production is still negligible and was not a concern in the presentstudy. However, in the case of SP, although the amount of water does not seem to be an32

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveissue, about 80% of the rivers are in critical, worrying or very worrying conditions regardingpotability (ANA, 2007). In this case, resources should be managed so that the potable waterresources are not entirely used for the expansion of sugar cane, for which water quality is notcritical, as it is for human consumption.4.3 EnergyIt is essential to evaluate the energy balance of a given product, in this case ethanol and biodiesel,in order to assess the sustainability of its production and usage. Testing the energybalance is even more important in relation to the WEL-nexus analysis.Energy and GHG balances are required to evaluate the net effects during the complete well-towheelcycle of ethanol, i.e. ethanol production from sugar cane and its use as fuel for transport(Macedo et al., 2004). The same rationale applies to bio-diesel.The advantage of biofuels displacing their fossil-fuel equivalents depends on the relativemagnitude of the input versus the savings of fossil fuels resulting from the biofuel use (Macedoet al., 2008). There are a couple of methodologies used for evaluating energy balance. Themost commonly used is the Life Cycle Assessment (LCA), a method for determining theenvironmental impact of a product (good or service) during its entire lifecycle from extractionof raw materials through manufacturing, logistics and use to scrapping and recycling (Luo etal., 2009). In the case of the energy balance, LCA in agriculture focuses primarily on nonrenewableenergy inputs in the product’s lifecycle, from the extraction of the natural resourceto the use and disposal of the product (Takahashi and Ortega, 2010).The LCA is based in the ratio of renewable energy output and fossil-fuel energy input related tothe components of the production and use of the biofuel. The evaluation of avoided emissionsdepends on the equivalences between the renewable fuel and the fossil fuels replaced; and ontheir respective lifecycle emissions (Macedo et al., 2008).Among the biofuels, ethanol is attracting most attention; large-scale production already existsin Brazil and it can be easily blended with gasoline to operate in spark ignition (SI) engines(Macedo et al., 2008). There are many different studies related to GHG emissions, energybalance and environmental issues involved in the ethanol production and use (Goldemberg etal., 2008a; Macedo et al., 2004, 2008; Luo et al., 2009). We will present a comprehensivereview of the existing literature for LCA of ethanol and use the results as a basis for the WELnexusanalysis for this biofuel.The lifecycle of the production of ethanol from sugar cane, with heat and electricity generationfrom bagasse using the current technology applied in Brazil, is presented in Figure 4.7.33

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveFigure 4.7 Lifecycle of production and use of ethanol from sugar caneSource: Luo et al., 2009.Macedo et al. (2008) developed the energy balance and GHG emissions reductions of theproduction and use of ethanol from sugar cane in Brazil in 2008 using the average conditionsin 2005/2006. The situation for a conservative 2020 scenario was also evaluated. The dataused for the fossil energy consumption in the sugar cane production, harvesting andtransportation and the fossil energy consumption in the production of ethanol are presented inTable 4.6.34

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTable 4.6 Energy balance of ethanolFossil energy consumption in sugar cane production, harvesting and transportation (MJ tc -1 )Item 2005/06 Scenario 2020Agricultural operations 13.3 14.8Harvesting 33.3 46.9Sugar cane transportation 38.6 44.8Inputs transportation 10.9 13.5Other activities 38.5 44.8Fertilisers 52.7 40.0Lime, herbicides, insecticides 12.1 11.1Seeds 5.9 6.6Machinery 6.8 15.5Total 210.2 238.0Fossil energy consumption in the production of ethanol (MJ tc -1 )Item 2005/06 Scenario 2020Chemicals and lubricants 19.2 19.7Building 0.5 0.5Equipments 3.9 3.9Total 23.6 24.0Energy balance, external flows (MJ tc -1 )2005/06 Scenario 2020Fossil inputSugar cane production/transportation 210.2 238.0Production of ethanol 23.6 24.0Total fossil input 233.8 262.0Renewable outputEthanol 1926.4 2060.3Bagasse surplus 176.0 0.0Electricity surplus 82.8 972.0Total renewable output 2185.2 3032.3Renewable output/fossil input (ethanol + bagasse + electricity) 9.3 11.6Source: The authors based on Macedo et al., 2008.Table 4.6 suggests that a considerable increase is expected in the fossil-fuel energyconsumption in the 2020 scenario (from 210.2 MJ in 2008 to 238 MJ in 2020), mainly due todiesel consumption associated to the growth of mechanical harvesting, trash recovering andincrease in the use of machinery (this item more than doubles for the 2020 scenario) (Macedoet al., 2008). Burning cane fields, still a common practice in Brazil, is a major concern becauseof the associated environmental and health hazards. This issue is being treated by theenvironmental agencies and will probably be resolved in the medium term through laws andagreements between government authorities and the sugar cane industry, increasingmechanical harvesting and the use of machinery. For example, in São Paulo, State Law no.11.241/2002 forbids the burning of straw for the purpose of manual sugar cane harvestingfrom 2021 (IEA, 2002).Higher use of residues in ferti-irrigation would significantly reduce the demand for mineralfertilisers. Macedo et al. (2004) also explain the slight changes in energy consumption for theproduction of ethanol (Table 4.6) for the 2020 scenario by the improvement of ethanol yield.The results of Macedo et al. (2008), as well as other results found in the literature review,show that the energy balance of ethanol is extremely positive. Fossil energy ratio was 9.3 for2005/2006 and may reach 11.6 in 2020 using existing commercial technologies (ibid.).Urquiaga et al. (2004) found the value of 8.06 for the fossil energy ratio for ethanol in 2004.According to Coelho et al. (2006), the production costs of ethanol from sugar cane are low notonly because of geographic conditions but also because of the favourable energy balance.35

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveFigure 4.8 presents a comparison between energy balances of the production of ethanol fromdifferent raw materials, reaffirming the advantage of using sugar cane to produce ethanol.Figure 4.8 Energy balances of the production of ethanol from different feedstocksSource: Coelho et al., 2006.There seems to be a consensus among researchers that ethanol has a very positive directinfluence on mitigating GHG emissions (Goldenberg and Guardabassi, 2009; Hira andOliveira, 2009; Macedo et al., 2008; Pacca and Moreira, 2009; Abdullah et al., 2009). Themitigation occurs through using ethanol as a substitute for gasoline in the transportationsector, as well as through the generation of electricity using sugar cane bagasse that replacesfossil-fuel power generation. Bagasse is burned to produce steam and electric/mechanicalenergy to fuel the process (co-generation process). There is significant potential to generatesurplus electricity. After meeting the steam and electricity needs of the process, up to 80 kWhof electricity per ton of cane can be sold to the grid if existing low-pressure boilers (22 bar,which yield 20 kWh/t of cane) are replaced by high-pressure ones (up to 80 bar). Outputs of120 kWh/t can be reached with better technology and recovery of by-products. Gasificationtechnology under development is expected to reach 300 kWh/t of cane.The exact figures for GHG emissions mitigation vary depending on the assumptions used tocalculate them (e.g. % of ethanol in gasoline, final consumer use of ethanol in FFV vehicles,technologies applied, among others).According to Macedo et al. (2008), for anhydrous ethanol production the total GHG emissionwas 436 kg CO 2 eq/m 3 ethanol for 2005/2006, decreasing to 345 kg CO 2 eq/m 3 in the 2020scenario. Avoided emissions depend on the final use: for E100 use in Brazil they were (in2005/2006) 2181 kg CO 2 eq /m 3 ethanol, and for E25 they were 2323 kg CO 2 eq /m 3 ethanol(anhydrous). Both values would increase about 26% for the conditions assumed for 2020, duemostly to the large increase in sales of electricity surpluses. For these calculations the ‘seedto-factory-gate’approach was adopted, which encompasses the sugar cane production andprocessing through to fuel ethanol at the mill gate (ibid.).Although the use of ethanol as a fuel in Brazil was not the result of a long-term concern for theenvironment, it is widely accepted and documented that the overall positive environmentalaspects of Proalcool far outweigh its potential damage (Rosillo-Calle and Cortez, 1997). Fromthe LCA results found by Luo et al. (2009) it can be concluded that in terms of abioticdepletion, GHG emissions, ozone-layer depletion and photochemical oxidation, ethanol fuelsare better than gasoline. On the other hand, gasoline is a better fuel in terms of humantoxicity, eco-toxicity, acidification and eutrophication (ibid.)36

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveWhile the energy balance of ethanol has been widely studied, there appears to be no reliablecomprehensive study using the same methodology to address the energy balance for bio-dieselusing different feedstocks. There are more than 100 native plants species identified withpotential of the production of bio-diesel, but the present study focuses on the energy balanceusing LCA of bio-diesel from soybeans, which was developed by Gazzoni et al. (2006) andrecently updated by Rathmann et al. (2010). This choice is based on the fact that soybeansrepresented 84% of the raw material for the production of bio-diesel in Brazil in 2010 (ANP,2011b).Rathmann et al. (2010) show that the total amount of fossil energy needed to produce 810 kgof soy-based bio-diesel is 18,197 MJ. Hence, the final energy balance is positive for soy at74,192 MJ ha -1 . This means that in growing soybeans, for each unit of fossil energy that entersthe system, 5.1 units of energy are produced (ibid.). The data used in this study are presentedin Table 4.7.Table 4.7 Inputs and outputs in producing bio-diesel from soybeans in BrazilEnergy inputs and outputs for growing soybeansFactor Quantity MJLabour 6.3 hours 1,056Machinery 20 kg 1,508Fuel 66 litre 2,765Phosphorous 20 kg 348Potash 20 kg 264Lime 2,000 kg 2,355Boron 1 kg 17Seeds 50 kg 1,676Herbicides 0.47 litres 197Insecticides 2.1 litres 880Transport 252 285Soybean yield 4,500 kg -Total inputs - 11,351Output - 30,545Energy inputs to produce 810 kg of bio-diesel from soybeansFactor Quantity MJElectricity 139,46 kWh 582Steam 697,384 kcal 2,920Cleaning water 82,562 kcal 348Internal heat 78,519 kcal 331Direct heat 227,296 kcal 951Losses 134,724 kcal 566Stainless steel 6.1 kg 365Steel 12 kg 553Cement 29 kg 230Total - 6,846Energy outputs in the production systemOutputs Quantity MJOil 810 kg 30,545Steam 3,690 kg 61,844Total Outputs 4500 kg 92,389Inputs Agricultural 11,690Industrial 6,846Total inputs - 18,197Overall balance(Outputs – inputs)- 74,192 (1: 5.1)Source: Rathmann et al., 2010.37

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveAs noted, there seems to be a consensus among researchers that the production and use ofethanol as a fuel have a very positive direct influence on GHG mitigation (Coelho et al., 2006;Pousa et al., 2007; Goldemberg et al., 2008, Goldemberg and Guardabassi, 2009; Hira andOliviera, 2009), which occurs through the use of ethanol as a fuel to substitute for gasoline inthe transportation sector, and through the generation of electricity using sugar-cane bagassethat replaces fossil-fuel power generation.In the case of the production and use of bio-diesel, the literature contains wildly divergentestimates of the change in CO2 emissions, ranging from +183% to -78% (Abdullah et al.,2009; Dyer et al., 2010; Qiu et al., 2011; Sheehan et al., 1998; Delucchi, 2006). There is,however, reasonable consensus that this substitution causes a net reduction of otherpollutants, such as CO, SO2 and particulate matter.To a great extent these divergences are due to the different oilseed possibilities considered,each of which has different growing methods and regional peculiarities (Abdullah et al., 2009;Dyer et al., 2010). Besides the differences between crops, the lifecycle emissions of bio-dieselcan also vary according to: (a) the efficiency of fertiliser use; (b) the types of vehicles,engines, roads and trip characteristics; and (c) the operating profile (load) and characteristicsof the engine. For example, Yee et al. (2009) reported a 38% reduction in CO 2 emissions ofpalm-based bio-diesel in Malaysia compared to mineral diesel.The estimates of Sheehan et al. (1998) corroborate the premise that soy-based bio-dieselreduces CO 2 emissions by 78.4% (MAPA, 2006). However, other sources omit the fact that thispotential is based on B100 (i.e. total replacement of mineral diesel by bio-diesel). By aproportional calculation, a blend of 20% bio-diesel would reduce the potential emissionreduction to 15.6%, and at the 5% level the reduction would be approximately 3.9%.It can thus be concluded that biofuels produced in Brazil are sustainable from the perspectiveof climate change since they reduce GHG emissions.38

Brazil’s biofuel programmes viewed from the WEL-nexus perspective5 Interaction of the different components of thevalue system in the implementation of Proalcooland PNPBCountries that could produce sugar cane can profit from the lessons learned during theimplementation of Brazil’s ethanol programme. There were questionable initial policy decisions,market-supply difficulties, severe social and environmental problems to be solved andtechnological challenges to overcome (GTZ, 2005). But today, over 30 years since Proalcool(or its derivative, related to flex-fuel vehicles) began, most of the initial problems have beensolved, and the experience illustrates how a nation with the characteristics of a developingcountry, such as Brazil, can change its energy mix.Although PNPB is a far more recent programme with a chain of production being structuredand the economic, social, and environmental issues still being studied in search of the bestsolutions, it can also offer lessons for other developing and least developed countries (LDCs).In all phases of Proalcool and PNPB, government interventions, and the focus on valuesystems, were very important in order to increase ethanol and bio-diesel production andconsumption, as well as to develop their respective technologies. Both programmes in Brazilwere successful to some extent (Proalcool more than PNPB) because of a combination ofleverage mechanisms that acted simultaneously and comprehensively in the different parts oftheir value-chains (see Figure 5.1).Figure 5.1 Interaction of the different components of the value system in Proalcooland PNPBFrom a policy perspective, a key question concerns whether policy interventions can reshapepower structures so as to enhance ‘biofuel sustainability’ in Brazil or in other producing regions(Lehtonen, 2009).39

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveThe development of Proalcool followed a trajectory similar to that of other large-scale, capitalintensiveagricultural efforts, and Brazilian policy-makers believed it was failing to reducepoverty and social inequities, which were among the explicit objectives of the programme (Hallet al., 2009). This perception is largely because large economic groups dominate theproduction of biofuels in Brazil and the small distilleries in the case of ethanol, and theinvolvement of family farmers in the case of bio-diesel is very small (Santos and Rathmann,2009).Although one might have expected PNPB to have explicit environmental goals, the Decree thatimplemented PNPB is based on the viability of the production and use of bio-diesel, but doesnot mention sustainability concerns. Also, in defining vegetable oil as the primary material forbio-diesel production, the Decree demonstrates a proclivity towards Brazil’s agriculturalexpansion (Garcez and Vianna, 2009).The comparison between the two programmes suggests that, despite the differences in theirchange models, action models and maturity of the programmes, the outcomes to date are verysimilar. These reflect the general type of results observed in developing countries, with astrong focus on large-scale, capital-intensive agricultural sectors, which affects to some extentthe ISG principles.Besides trespass of ISG principles, the usual barriers for economic development in mostdeveloping countries, such as macroeconomic deficiencies, regulatory problems anduncertainty, precarious infrastructure, poor public services, informality, among others, thereare five factors to be taken into account in feasibility evaluations for such agricultural systems(GTZ, 2005):1 Land with soil and climate suitable for the crop to be planted2 Enough capital, even subsidised, in the first phase3 Suitable technology4 Management knowledge in order to turn productive resources into economicallysustainable activities5 Inclusion in a productive chain of agribusiness (value-systems investments)40

Brazil’s biofuel programmes viewed from the WEL-nexus perspective6 Final considerationsAn analysis of the sustainability of the expansion of Brazil’s biofuel (ethanol and bio-diesel)production programmes requires an integrated evaluation of the water, energy and land-useaspects (Harmsen, 2011). The issue is to verify whether the sugar cane and soybean cropsystems confront limitations in creating a different and sustainable development path as theyexpand (BRASIL, 2011b) with respect to: (a) water availability and its consequences; (b) theimpacts of the existence of economically viable land to be incorporated into the crop system;(c) the expansion of the rural workforce; and (d) energy efficiency in the biofuel productioncycle, as well as other environmental considerations.First, it was observed that in Brazil, the availability of agricultural land does not present alimitation to the expansion of the planned ethanol and bio-diesel production. Using the mainsugar cane and soybean-producing states as a proxy, namely SP and MT, the main limitationto incorporating land is not its physical existence but rather the impact of the increased costresulting from its appreciation, over time, on the profitability of the crops, and consequently onfinal prices for ethanol and bio-diesel.Moreover, a second-order effect of the impact of the increased cost of land is the use ofmarginal lands (pasture and rough land). These areas require more use of agricultural inputs(fertilisers, correctives, herbicides, among others) per hectare cultivated, which areresponsible for significant environmental impacts.In the case of ethanol, the sharp fall in the profitability of the business explains why theindustry is increasingly focused on producing sugar, to the detriment to ethanol; this ispushing up the price charged by the plants to fuel distributors in Brazil. In this context, theindustry argues for the export of ethanol (UNICA, 2011b); but despite such public statements,its strategy is to obtain more profit than the domestic market offers. On the other hand, on 17August 2011, the government obtained approval in the Chamber of Deputies of ProvisionalMeasure 532/11, which, among other provisions, reduces the mandatory percentage for theaddition of anhydrous ethanol to gasoline from 25% to 20%. Moreover, it intends: (a) toincrease Petrobras’ participation in the Brazilian ethanol market from the current 5.3% to 12%by 2015; and (b) to create incentives for investments in expanding the captive capacity forethanol production by the private sector directed to the domestic market (Câmara dosDeputados, 2011). These measures are geared to holding back ethanol prices, and avoiding apossible supply shortage. On the other hand, in the case of bio-diesel, although the soygrowingbusiness shows a positive profit margin, the final product is still not competitiveagainst its substitute, in this case, mineral diesel. However, the maintenance of the bio-dieseladdition to mineral diesel at 5% in volume up to 2019 may also be attributed to thecompetition of the raw material (soybeans) as a foodstuff for domestic and internationalmarkets.Despite the impact that the increase in biofuel production has had on agricultural production,and hence on the demand for rural labour, in SP there has been a rise in workers’ real averageremuneration. This occurred even with the fall in the profitability of the sugar cane business,and resulted from the imminent prohibition of burning sugar cane straw prior to harvesting,which relates to manual harvesting (IEA, 2002). The adaptation of the sector to mechanicalplanting and cutting techniques requires higher-paid specialised labour. In the long term, thiswill probably lead to unemployment among temporary workers, which is not yet occurring inthe SP sugar cane sector. In fact, despite the decrease in the manually harvested area, from55% in 2005 to 49% in 2010, there were more jobs in the sector during the last harvest,explained mainly by the start-up of 10 new ethanol and sugar plants in 2010. That is to say, ifthe rise in average remuneration is explained by the increased number of qualified workers inthe sector, the short-term rise in the total payroll is explained by the growth in sugar caneproduction in view of the increase in its opportunity cost, as a consequence of both the sugarprices in the international market and domestic demand for ethanol.41

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveIn the case of MT, the rise in rural workers’ real average income is associated with theincreasing profitability of the soy-growing business, which is explained by the rise ininternational soybean prices and in domestic demand for bio-diesel production. Moreover, theintroduction of direct planting techniques and mechanical harvesting is also growing in thebusiness, which explains, in the short term, the rise in the average real income for ruralworkers.In the long term, the intensive mechanisation of the sugar cane and soy-growing business willreduce the number of employees in these activities. Mechanised harvesting both requires fewerworkers per hectare planted and also alters the employees’ profile, creating opportunities forskilled workers such as tractor drivers, drivers in general, mechanics, harvester drivers, andelectricians, among others. As a result, uneducated and unskilled workers, who form the greatmajority, especially in sugar cane plantations, are most likely to end up out of a job. Thistrend, which goes hand in hand with the concentration of land ownership – as observed in theparticipation of farming on leased land in the total area planted with sugar cane and soy in thestates of SP and MT – increases social pressures in rural areas, leading to rural–urbanmigration and, above all, to conflicts due to the demand for land redistribution (agrarianreform). 14 In protest against the concentration of land ownership, and against unemploymentamong less-qualified rural workers, the highest number of land invasions since 2004 wasrecorded in 2011, with 97 farms invaded, of which 46 were in SP and 17 in MT (INCRA, 2011).The biofuel expansion plan, even if it is based only on increasing sugar cane and soybeanproduction in two states (SP and MT), would encounter no barriers in respect of wateravailability in the Paraná and Amazon basins. However, the rise in water needs for sugar caneproduction in SP would lead to competition for scarce potable water resources, thusthreatening the supply of water for human consumption.In terms of the energy dimension, the literature review shows that the energy balance ofethanol from sugar cane is extremely positive, as is the energy balance for soy-based biodiesel.Therefore, the expansion of Proalcool and PNPB are to be welcomed from thisperspective.In brief, we conclude that the production of ethanol from sugar is sustainable in terms of theWEL nexus as well as socially and environmentally, because: (a) land and water are availableto support the expansion of sugar cane cultivation; (b) there have been associated increases inincome and rural development; (c) its energy:profit ratio is positive; and (d) the potential ofemissions mitigation relative to gasoline is positive (Table 5.1). In terms of economicsustainability, although ethanol is cost-competitive with gasoline, it has become less profitable,which jeopardises its long-term economic sustainability.Soy-based bio-diesel is also sustainable in terms of water, energy and land, andenvironmentally, for the same reasons as for ethanol (Table 5.1). However, the system iscurrently not socioeconomically sustainable. While it is profitable, bio-diesel is not competitivein terms of cost with diesel, because there is a strong rise in the price of soybeans in theinternational market. However, although the rural workforce has seen increased incomes, thevery week inclusion of family farming systems in the production of bio-diesel is negative interms of rural development.14 This refers to the concentration of land ownership in Brazil, where 1% of rural properties constitute approximately30% of all the rural area, and 31.6% of properties occupy only 1.8% of the total rural area (Nascimento and Saes,2009).42

Brazil’s biofuel programmes viewed from the WEL-nexus perspectiveTable 5.1 Sustainability of Biofuels in Brazil*Ethanol Bio-dieselLand occupation vs. fossil fuels ↑ ↑Price of land vs. fossil fuels ↑ ↑Rural worker income vs. fossil fuels ↑ ↑Rural development vs. fossil fuels ↑ ↑Cost vs. fossil fuel + -Water availability + +Energy balance + +GHG emissions reduction vs. fossil fuels + +Note: * taking into account the items analysed in this paper.Key: (↑) increases; (↓) decreases; (+) positive; (-) negative.From the policy perspective, in all phases of Proalcool and in PNPB, government interventionsand the focus on value systems were very important to increasing ethanol and bio-dieselproduction and consumption, as well as to developing their respective technologies. In neithercase, however, did policy attach priority to promoting appropriate and less intensiveagricultural practices.In the case of PNPB, this concern is even more important. It shows the possibility of perverseeffects and also the importance of heeding the sustainability dimension of developmentprogrammes. Its original goals included the implementation of a sustainable programme,promoting social inclusion and regional development; and the production of bio-diesel fromdifferent oleaginous plants in diverse regions. After five years, the results have been the largescale,capital-intensive focus on soybean as the dominating feedstock (84%); the majority ofauthorised bio-diesel production capacity is in the Mid-west region; and the role of familyfarmers is limited to producing basic grains (Garcez and Vianna, 2009). Keeping the above inmind, lessons from Brazil can indeed be applied and its experiences reproduced in many otherregions. The principal lessons from the Brazilian biofuel programmes that other countriesshould take into account in order to preserve the initial objectives of inclusive and sustainablegrowth are: Availability of a low-cost marginal lands to be incorporated in the production ofbiofuels Investment in crops that have a positive energy balance and consequently reduceGHG emissions Investment in suitable technologies adequate to the reality of the country in termsof social, economic and cultural aspects; Investment in the entire value system of the biofuel to be produced Creation of incentives to favour social inclusion and regional development in aneconomically sustainable way Development of adequate legislation and enforcement to reduce localenvironmental impacts associated with feedstock production and biofuelmanufacture. Creation of specific funding with international investment, which can turn theprogramme a ‘transparently observable’ phenomenon, with periodic evaluationsagainst sustainable development criteria; minimising the influence of pressuresfrom sectors, economic fluctuations and political issues, in the programmes. Implementation of strict monitoring plans to guarantee that programme outcomesare not derailed from the initial commitments given that, in most interventions,outcomes do not depend solely on policy.43

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