Journal Article

The Economics of Brazil’s Ethanol-Sugar Markets, Mandates, and Tax Exemptions

Dusan Drabik, Harry De Gorter, David R. Just and Govinda R. Timilsina

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 97, issue 5, pages 1433-1450
Published in print October 2015 | ISSN: 0002-9092
Published online December 2014 | e-ISSN: 1467-8276 | DOI: https://dx.doi.org/10.1093/ajae/aau109
The Economics of Brazil’s Ethanol-Sugar Markets, Mandates, and Tax Exemptions

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Sugarcane in Brazil is processed into sugar and/or ethanol, often in flex plants that can switch between the two products. We develop an economic model of flex plants, export demands, and two domestic fuel demand curves for a blend of ethanol with gasoline consumed by conventional cars, and ethanol consumed only by flex cars. We analyze the market impacts of the following policies: the blend mandate; fixing gasoline prices below world prices; the high gasoline tax; and a higher tax exemption for ethanol blended with gasoline. Because Brazilian and U.S. ethanol prices have become linked, a change in Brazilian ethanol policy or a shock in world sugar markets can now impact U.S. ethanol and corn prices. We show that in theory, each policy analyzed has an ambiguous impact on ethanol and sugar prices. Empirically, however, a low gasoline tax and a high tax exemption for ethanol used in the fuel blend reduce ethanol and sugar prices; this contradicts conventional wisdom. Overall, we find that policy reforms implemented in 2010 offset the ethanol price increase by about 27% due to outward shifts in fuel transportation and sugar export demand curves, and due to a reduced sugarcane supply caused by bad weather. Our model illustrates the importance of Brazil's ethanol policies on world commodity markets; it also provides insight into how the Brazilian government can adjust policies to better control domestic inflation while minimizing impacts on investment.

Keywords: Bagasse; blend mandate; Brazil; E25 demand; E100 demand; ethanol; flex-plant; sugar; sugarcane; tax exemptions; Q18; Q28; Q42; Q48

Journal Article.  10334 words.  Illustrated.

Subjects: Renewable Resources and Conservation ; Energy Economics ; Agricultural Economics

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