Sweet.

Photographer: Paulo Fridman/Bloomberg

Can Brazil Get Its Ethanol Mojo Back?

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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Brazilian airline Gol set out earlier this year to launch the world's first commercial flight powered partly by renewable fuel made from sugar cane.

Fermenting ordinary sugar into jet fuel ended up being the easy bit. Surviving Brazilian policy makers was another story.

By June, the international regulator, ASTM, had signed off on commercial use of farnesane, a new Brazilian-made jet fuel ginned up by biotech firm Amyris and French energy major Total. But the Brazilian wonks are a nationalistic lot and demanded tests of their own. Barred at home, Gol had its homemade fuel jetted from Sao Paulo to Orlando and triumphantly flew back, the other way.

If only Brazil's struggling ethanol industry had such a flight plan. Farnesane, which scientists say will sweeten the skies by releasing drastically fewer greenhouse gases, would probably not exist without the innovations of Brazil's clever sugar and ethanol makers.

For the past six years, however, the world's signature manufacturers of clean-burning renewable fuels have lived on razor's edge.

Some 60 ethanol plants have shuttered this year alone and "blue slips," Brazil's unemployment notices, are multiplying: Nearly half of the more than 36,000 industrial jobs erased last month were in the sugar and alcohol industry, reports Valor Economico.

What's worse, they are victims of the wonks and activist bureaucrats whose good intentions to goose growth and contain inflation have only compounded their troubles. The road to ruin was paved by the government of President Dilma Rousseff, a micro-manager who converted state-run companies into the useful idiots of misguided economics.

Exhibit A: Petrobras, the oil major, which was ordered to cap gasoline prices to contain inflation and kickstart the flailing economy, which has averaged only 1.6 percent growth over four years. Petrobras is now the world's most indebted, publicly-traded oil company and has seen its share price dip to a 10-year low, to $7, around the price of a good beer.

The other casualty is ethanol. Ginned up into a national industry during the oil price shocks of the 1970s, ethanol distilled from sugar cane has long been Brazil's smart hedge against the volatile energy market. Now it's more like an investor's sinkhole.

When oil prices spiked, Brazilians put the sugar-based combustible in their flex-fuel cars, now 88 percent of the total fleet, which can run on gasoline or ethanol. And since ethanol packs about 30 percent less energy per liter than gasoline, the government compensated with a gasoline tax of about 28 Brazilian centavos (around 11 cents) per liter. It was worth it, said then-President Luiz Inacio Lula da Silva, who called ethanol-driven Brazil the "green Saudi Arabia."

But then came pre-salt oil. In 2007, Brazil announced a giant find of oil cached under four miles of sea, sediment and salt. It went straight to politicians' heads. "We don't know exactly how much oil there is, but we have firm indications that God is Brazilian," announced Dilma Rousseff, then Lula's chief of staff.

Lula cashed in green Saudi Arabia for the "winning lottery ticket" of so-called pre-salt oil. "With the pre-salt find, ethanol was forgotten," says Adriano Pires, an energy expert with the Brazilian Center for Infrastructure. "The entire Brazilian fleet filled up on gasoline."

Now all eyes are on Joaquim Levy, the orthodox economist tasked with restoring economic growth by injecting some fiscal sanity in Brasilia, much as he did in 2003, when Lula took office amid market panic. One proposal fueling policy talk is to increase the dose of ethanol to gasoline, from 25 to 27 percent a liter, so boosting output.

A larger benefit might come from restoring the gasoline tax. That won't make Brazilians happy: They already pay one of every three reais they earn to government. But with pressure on emerging market nations to fight climate change by slashing greenhouse gas emissions, a levy on dirty fuels in favor of cleaner-burning ethanol might draw more sympathy.

Call it poetic justice. Crisis and opportunity costs were what launched Brazil's world-beating green energy industry and made it flourish. It's only fitting that they bring it back to life.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net