Ethyl alcohol as a motor fuel in Brazil: A case study in industrial policy

Abstract

The Brazilian Pro-Alcohol Program is an ambitious effort to replace imported gasoline with ethyl alcohol derived from domestically grown sugar cane. It involves an intricate and politically difficult combination of economic policy in the agricultural and industrial sectors, incentives to private innovation and investment, and public investment in agricultural research and industrial innovation. The decentralized execution of the program depends on effective integration of economic and technology policy. Although an outstanding technical success, the Pro-Alcohol program became an economic white elephant when world energy prices unexpectedly plunged in the mid-1980s. Oil prices would have to return to $23–$30 a barrel (1986 dollars) for the program to cover even its operating costs, making it a costly insurance policy against what today seems to be an unlikely contingency. What is more, conservation of diesel fuel has not kept pace with that of gasoline and fuel oil, so that much of the gasoline saved by Pro-Alcohol has had to be reexported at a discount. In its early stages, Pro-Alcohol offered extremely generous investment incentives and price guarantees in order to encourage the expansion of cane production and distillery capacity. Alcohol prices were set so as to eliminate any subsidy to the Brazilian motorist. Export of cane produced on contract for the program was forbidden, so as not to disrupt the world sugar market. These arrangements have resulted in a heavy implicit tax on the Brazilian motorist (compared to the cost of imported gasoline), a windfall for distillery owners, and an uncertain supply of sugar cane and hence of alcohol. But the Brazilian government is boxed in. The Program involves so many segments of Brazilian society that it has been impossible to curtail, and indeed encouragement to the manufacture of alcohol-burning cars continued well past any possible economic justification.