Brazil has head start on ethanol production by Michael Deibert : NM IMC

By Michael Deibert
Cox News Service

RIO DE JANEIRO, Brazil - When President Bush recently visited the National Renewable Energy Laboratory in Colorado, he stressed the need for the United States "to end our addiction on oil" and explore alternative fuels.

The United States doesn't have to look far to find an example of a major nation that has done just that. Brazil, South America's largest economy, launched an ethanol motor fuel program in 1975 and, against heavy odds, has developed a cost-efficient alternative to gasoline.

It appears now as though Brazil's sugar industry, once viewed as a remnant of the country's colonial past, may have a prominent place in the world's energy future.

About half of the country's 21,000 square miles of sugar cane under cultivation is used to make ethanol that, according to the World Bank, is being produced at a cost of $1 per gallon compared to $1.50 for gasoline.

Getting to that point required decades of steady pressure from Brazil's government, in ways that would be hard to duplicate in the United States.

In the 1970s, with Brazil being hit hard by Mideast oil shocks, the ruling military dictatorship launched a national program to reduce the country's dependence. It encouraged the construction of ethanol plants by doling out low-interest loans to sugar companies, financed a national distribution network and imposed subsidies to keep the price of the fuel low.

By the mid-1980s, most new cars sold in the country ran exclusively on ethanol, and the share of Brazil's energy needs filled by imported crude fell from around 80 percent in the late 1970s to about 45 percent in 1990.

When gasoline prices fell again in the late 1980s, though, demand for ethanol stalled.

In the late 1990s, the government of President Fernando Henrique Cardoso ended government subsidies for Brazil's sugar industry, spurring the sector to new competition and innovation.

"After the end of state protection, a number of sugar mills went bankrupt, but now they are coming back and they are fully restructured," says Bruno Soares, an attorney with the New York business law firm Chadbourne & Parke.

The government also switched its emphasis from alcohol-only to "flexible fuel" vehicles, mandating that all gasoline must be mixed with at least 25 percent ethanol. Now cars that can run on ethanol, gasoline or a mixture of the two account for 70 percent of all cars manufactured there.

That has made motorists happy, because they can easily shift to whichever fuel is cheaper.

Investing in innovation

With at least 300 sugar mills in Brazil employing an average of 2,000 people at each facility, Brazil's politicians also have seen the advantages of investing in innovation.

"For the government, each mill creates a lot of employment," says Frederico Humberg, executive director of the Brazilian agribusiness company Bunge Ltd.

However, the conversion has not been without its hitches, especially supply problems.

In January, Agriculture Minister Roberto Rodrigues announced that the country's sugar cane industry would need an estimated $10 billion worth of investment by the year 2012 to meet rising demand. That reflected the need to build 73 new mills to convert raw sugar into ethanol, and to plant another 10,000 square miles of cane, nearly a 50 percent increase.

Also, the percentage of ethanol required in auto fuel recently was temporarily lowered to 20 percent because of limited supply.

Still, Brazil plans to raises its profile as an ethanol exporter to the world. The country exported $600 million worth of ethanol last year, and that figure is expected to more than double to $1.3 billion by 2010.

Brazil is going to "replace other players," says Soares. "Brazilian ethanol is cheaper, more efficient."

Customers such as Japan and Sweden hope that using cleaner-burning ethanol will help them meet their obligations under the Kyoto Protocol to cut emissions.

"Over time, we are trying to reduce our ... emission of" greenhouse gas, says Guido Mantega, president of the Brazilian Development Bank, and "the demand for ethanol will increase as countries attempt to adhere to Kyoto."

The U.S. government's interest in ethanol is embodied in the energy bill Bush signed last year, which mandates doubling the amount added to gasoline to 8 billion gallons by 2012 still only a tiny fraction of the approximately 146 billion gallons of gas the country consumes each year.

In February, the top executives of Internet search giant Google, Larry Page and Sergey Brin, visited ethanol maker Cosan's factory in the city of Piracicaba, Brazil, indicating their interest in investing in the fuel.

U.S. making its own path

But there's little prospect that the United States is ready to follow in Brazil's footsteps toward energy independence.

U.S. ethanol is made almost entirely from corn, not sugar. Because of the need to convert the corn's starch into sugar before creating a usable alcohol fuel, it costs 30 percent more than its sugar-based counterpart.

Adding to the costs, the motor fuel industry also would face a huge investment in a system to distribute ethanol nationwide and install new tanks and pumps at filling stations.

At the same time, the political clout of agriculture and the auto industry make it unlikely that the United States will remove some of the constraints that bind its ethanol market.

There's little chance of reducing the tariffs that keep much of Brazil's lower-priced ethanol out of the country. And slashing farm subsidies, which attracted more efficient producers to the ethanol market in Brazil, is seen as a non-starter in Washington.

Finally, politicians are extremely wary about hiking the nation's low gasoline taxes, which make gas a bargain at U.S. pumps compared to most other countries and make it more competitive with ethanol.