The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges

*Daniel Henrique Dario Capitani*

## **Abstract**

The chapter proposes to illustrate the challenges, concerns, and perspectives of ethanol production in Brazil. First, to give an overall of the sugarcane production and market conjecture, taking into account issues such as the public policies to promote biofuels improvement as well as those applied to energy markets and their connection (implications) with (into) sugar-ethanol market. Then, we propose the discussion of the challenges derived from sugarcane expansion from a sustainability perspective, as the environmental impacts, land use change and their impacts on crop productions and regional socioeconomics indicators, and the risk management strategies and tradeoffs between sugar-ethanol and second-generation ethanol-electricity cogeneration. Lastly, we bring a debate over the concerns and perspectives that are related to the development of this market, pointing out institutional risks that can affect strategies and competition in the production chain, such as policies to energy production, taxes changes, the increase in corn and sugarcane second generation ethanol production, and international trade agreements. Overall, there is an understanding that Brazilian ethanol production is following sustainable patterns. Currently, major challenges are related to the improvement of risk management strategies, as well as to create a more predictable scenario on the direction of public policies to the energy market.

**Keywords:** sugarcane, ethanol, sustainability, challenges, Brazil

## **1. Introduction**

Since the colonial period in Brazil, sugarcane is cropped in the country and represents an important agricultural market, responding to the largest volume of sugar and ethanol in the international trade flows. Instead, ethanol production being started in the 1930s, the production reached a significant scale only in the 1970s, after the crude oil crisis and the positive shock on this commodity prices, as well as from a drop in the sugar prices. In 1975, the federal government set up the National Alcohol Program (ProAlcool), proposing to change fuels matrix in the country and reduce the dependence on gasoline prices. In the beginning, a blend of 20% of anhydrous ethanol was mixed with gasoline [1].

However, this new strategy required intense government participation on two sides. First, supporting institutions and subsidizing sugarcane mills, aiming to reach the minimal volume of ethanol production to attend the needs of fuels consumption (gasoline) in the domestic market. Thus, it was necessary to establish policies to improve sugarcane yield, with the adoption of new technologies in the sugarcane mills, fuels distribution and refining system and the management of the production mix between sugar and ethanol [1–3].

Second, government had to incentive new technologies in the vehicles industries for the adoption of technologies to turn the motors adapted to the blend of ethanol and gasoline and, further, to become them able to function using only hydrated ethanol [1–3]. This last issue requires an amount of investment (and subsides) in this industry for innovations that lead them to reach a significant share of domestic vehicles market with only-alcohol-fuelled cars. In this sense, beyond the subsidies given by Brazilian government to the automobile industry to turn feasible this type of vehicle, the innovation was possible by the engagement of several research centers and universities in the proposition of new technologies.

Regarding these government interventions, in the first half of the 1980s, hydrated ethanol and only-alcohol-fuelled car production exhibited a significant increase. The consequence of the increase in ethanol production was the large surplus of gasoline, which resulted in exports and incurred in investments to make changes in the crude oil refining structure. However, considering that ethanol is derived from an agricultural feedstock that has its own climate and biological uncertainties to the production flows, associated with the fact that sugarcane growers received low prices, the ethanol surplus exhibits large variations by each crop year. This fact, associated with the establishment of a large fleet of passenger cars fuelled only by ethanol, resulted in ruptures in this market and led to a return of consumers' preference for gasoline vehicles instead of only-alcohol [2, 3].

This movement kept intense until the 1990s and the Brazilian economic opening in 1991, that allow the imports of much advanced technological vehicles in comparison to only-alcohol-vehicles. The consequence of that was a strong reduction in the demand for passenger cars fuelled by hydrated ethanol and a persistent crisis in the sugarcane market, which became most dependent by sugar production and its prices fluctuation in international market [1–3]. This scenario had be maintained until 2003, when the flex-fuel injection technology was developed and started to be produced by automobile industries in Brazil, leading to a new expressive change in the country's sugarcane and biofuels market.

In order to illustrate the events that follow the expansion of sugarcane and ethanol production in Brazil from 2000s, this chapter proposes to explore how these changes impact the market increasing as well as the concerns and challenges that emerged in the past two decades. Therefore, the chapter has three sections. First, one explores the growth in Brazilian sugarcane production, addressing the initial investments boom and the sequent crisis in the sector. Second part of the chapter brings questions related to sustainability of sugarcane and ethanol production as this market experienced a substantial increase. Finally, third part investigates different concerns related to the institutional risks derived from public policies to energy market and new challenges that are emerging in sugarcane and ethanol markets.

## **2. The growth in sugarcane production**

The increase in domestic hydrated ethanol consumption since 2003 had impact substantially the sugarcane cropping in Brazil. The country's average cropped land

### *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

in the late 1990s and early 2000s was lesser than 5 million hectares. From 2003 to 2011, sugarcane area exhibits a progressive increase, reaching more than 10.5 million hectares. This growth has partially changed the distribution of sugarcane over the Brazilian territory. The state of Sao Paulo, traditionally producer, had kept the first position, responding for 55% of production. The growth had been also given by the participation of other states nearby Sao Paulo and in the Mid-West, such as Minas Gerais, Parana, Goias, Mato Grosso, and South Mato Grosso, increasing their share in the production area from 20% in 2000 to 35.8% in 2021. On the other hand, traditional producing areas in the North East had exhibited a drop from 22% in 2000 to 7.7% in 2021 [4, 5]. In **Figure 1**, we observe that sugarcane cropland and production expanded until 2010/11 crop year, oscillating from then, as the yield variations. **Table 1** exhibits the distribution of sugarcane production and harvested land by states in 2021/22 crop year.

This faster increase in sugarcane cropped land raise the average crop year production from 300 mi tons, in the late 1990s and early 2000s, to 630 mi tons from 2010 to 2020 (harvested land is 5% lower, on average). This current amount is twice the sugarcane production in India, the second largest producer of this commodity in the World [4, 6]. The production level consolidates Brazil as the largest sugar producer and exporter, and the second largest ethanol producer and major exporter in the World [6].

The importance of this agricultural market goes beyond its global importance in sugar and ethanol supply. Sugarcane bagasse and straw have been largely used in sugarcane mills in Brazil to cogenerate electricity since the middle of 2000s [7, 8]. Biomass was responsible for 8.8% of electrical energy generation in Brazil in 2021 and sugarcane bagasse/straw represent the largest amount of biomass source [9]. This is particularly important, considering the electricity in the country. Additionally, it has become a potential alternative for energy supply in the Brazilian South East, a region with 87 million people and responsible for 55% of the country's GDP, which in turn has been suffering with more severe drought over the past winters and overloading the hydroelectric system. As most of the sugarcane harvest in Brazil occurs in the winter and in this area, the biomass is an important alternative to the country's energy


#### **Table 1.**

*Sugarcane production and harvested land by the Brazilian states in 2021/22 crop year.*

planning. **Figure 2** presents the importance of sugarcane biomass for electricity production in Brazil, as other renewable energy sources.

Further, this market has an economic and regional importance, once there are more than 400 sugarcane mills in operation all over the country, many of them in small cities and being responsible for a significant share of local product. In general, the sector is the third in importance for the country's agribusiness, after the soybean and livestock market, and has been responsible for 1.2 million formal employments.

Finally, this market presented some changed in its economic structure. The international financial crisis in 2008/09 had impacts in this market, leading to the need of

**Figure 2.** *Brazilian electricity generation by energy source, 2021. Source: [9].*

#### *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

financial restructuring in many groups of this industry, especially those that invested significant amount of capital to expand their industrial production capacity for sugar, ethanol and electricity cogeneration, dealing with a substantial increase over interest rate [10]. In addition, the consistent fall in the crude oil prices since 2008 and later, from 2011 to 2015, with the subsidies for fossil fuel consumption given by federal government through gasoline and diesel prices controlling had suppressed trade margins for sugarcane mills [11]. Finally, the agricultural expansion over nontraditional areas established a new learning curve and led sugarcane growers and mills to manage new agronomical practices in areas with different types of soil, weather, topography, and water resources [12]. All these facts had negative impacts over many of the established companies and, consequently, led to an increase in fusions and acquisitions, also attracting investments from external groups, most of them active in the petrochemical and infrastructure markets, with the participation of foreign companies.

Despite the evident changes in the macro and micro scenario of the Brazilian sugarcane market, there are still some issues that must be considered. Overall, it is possible to highlight three major issues that need more attention. First, how much the sustainability parameters have been attended by this production chain. In other words, it is necessary to find out if the sugarcane production has brought improvements in the environmental, social, and economic levels. A second question to be listed is the institutional relationship among the agricultural market agent's and the federal and state governments, evaluating the impacts of the public policies related to the environment, taxation, infrastructure, credit, electricity and fuels regulation and others, that may affect, in some way, the strategical decisions over the sugarcane market production, trade, and investments. Finally, the market reaching potential in the international trade and its challenges must be taken into account, as it can inhibit or stimulate the increasing of biofuels supply, especially considering the potential of Brazil to attend possible futures demand in the major markets, as European Unions and China, for instance.

Thus, some specific issues must be addressed. For example, the questions related to the land use change and indirect land use change, alternative biomass sources to produce ethanol, such as the own sugarcane bagasse or straw, or corn, considering the large increasing of this crop production in Brazil in more distant regions, whose production can be directed to local consumption. Therefore, the key is how to deal with such challenges, concerning with possible indirect impacts in the domestic production as well as the destination of ethanol or sugar for international trade.

## **3. The role of sustainability in the sugarcane production**

After the ethanol supply expansion in the 2000s, some issues of concern related to sustainability have been highlighted, based on traditional methods applied to agricultural and industrial production. The main questions referred to the impacts resulting from the established process over the sugarcane production chain and how the solution for the unsuitable practices was being taken into account for sugarcane producers and mills, as well as for the sector institutions and government [13].

Such issues were addressed based on agricultural practices, as the use of water resources, the use of fertilizers, the sugarcane burn before the manual harvesting, and the new technologies for mechanical seeding and harvesting. For industrial efficiency, actions were taken to improve residues management and fermentation process. For social and economic conditions, the reach for costs reduction regarding new

improvements in the agricultural and industrial process, the labor conditions, and the regional impacts of sugarcane production. And for general issues, the land use change resulted for production expansion, competition between food commodities production, and the possible impacts on biodiversity [13–23].

Regarding the use of fertilizers, sugarcane crop demands less fertilizer than other agricultural crop systems, especially in comparison to beet (destined for sugar in most of the developed economies) and corn (used for ethanol production in the USA, the largest producer in the World). In comparison to sugarcane crop in other countries, likewise Australia (160–200 kg N ha/year) and India (150–400 kg N ha/ year), Brazilian production use significantly lower fertilizer (60–100 kg N ha/year) [22]. Furthermore, the recycling of nutrients by the use of two industries' residues led Brazilian production to a more sustainable level [17]. These residues are the vinasse (or stillage) and filter cake, derived from ethanol and sugar/ethanol production, respectively, managed as nutrient sources, optimizes according the agronomical and geographical conditions, and reducing the number of residues [15, 19]. At last, an important issue is related to how the vinasse has been treated in the sugarcane mills in comparison to the past, a large amount of these residues was not even treated or recycled, causing environmental problems, especially in the regional hydric resources. In addition, vinasse is useful in the irrigation of sugarcane land in the period of water shortage [13, 15, 19].

The use of water resources in the sugarcane crop had been pointed out since 1975, after the fast increase of the area covered by this commodity due to the ethanol production with the establishment of ProAlcool. Given the semi-perennial characteristics of this crop as well as the climatic regime of Sao Paulo state and nearby areas (responsible for 75% of production), with the concentration of rainfall in the initial phases of sugarcane growing, sugarcane cropping is favored and the irrigation is less necessary. However, the supplementary irrigation is needed in the Northeast and in some areas of the Mid-West, which in turn have been optimized by the use of fertirrigation using vinasse, allowing less use of traditional irrigation and lower use of mineral fertilizers. Further, water withdrawal was significantly reduced by sugarcane mills, from 5.6 m3 t−1 to 1.5 m3 t−1 between 1990 and 2008. Thus, these elements has shown that sugarcane is an agricultural activity more efficient than others in terms of the use of water resources, with the main cropped land using, in general, rainfall as the water resource in the field [13, 24, 25].

The sugarcane harvest was traditionally done through the burning process, aiming the costs reduction, once the burned biomass leads to a more accessible and feasible manual harvesting. However, this process results in an increase in carbon dioxide and other GHG emissions, which leads to a worsening of air quality in the surrounding cities [13, 15, 17]. However, since 2014, with the voluntary signature of the "Environmental Protocol" by sugarcane mills members of the Brazilian Sugarcane Industry Association (UNICA), a significant decrease was noted in the sugarcane burning in the State of Sao Paulo, and the mechanical harvesting exhibited a substantial increasing in Sao Paulo, as well as in the sugarcane expansion areas in the Mid-West. In 2008, less than 25% of Brazilian production was harvested mechanically, while in 2021 the number jump to almost 90% [5]. Take into consideration the major municipalities in the sugarcane in Sao Paulo State, it is remarkable the advancing in mechanical harvesting from 2007 to 2019 (**Figure 3**).

As a consequence of this changing, the global warming potential (GWP) of ethanol production in Brazil decreased by 46% and the black carbon (BC) emissions were seven times smaller when the non-burned harvesting reached 50% of the total area.

*The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

**Figure 3.** *Ratio of mechanical harvesting in sugarcane fields in Sao Paulo state, 2007 and 2019 [26].*

Considering a scenario of 100% without sugarcane burning, the potential is the GWP decrease by 70% and BC will be 216 smaller [13].

Even in some areas with slope of 12% or higher, unapt for the mechanical harvesting, the protocol was adopted and the manual harvesting of green sugarcane has been taken into account. At last, two important issues may be pointed. First, mechanical harvesting leads to an increase in the amount of straw in the field, which can change the dynamics of soil erosion, soil nitrogen, soil water content and temperature, and soil carbon sequestration [17]. Unburned straw on soil can optimize the recycling of fertilizer nitrogen applied in the field as 105 kg ha/year [22]. In addition, an amount of this straw can be recovered and used in the electricity cogeneration or in the cellulosic ethanol production. Second, the change in mechanical harvesting has been demanding adjustments in agronomic management, such as the soil compaction and how to minimize the impacts on the yield and agronomic system [13, 22, 27].

Considering industrial efficiency, there is an effort to reduce the losses from fermentation with the improvement of distillation and dehydration technologies. Fermentation time reduced from 16 to 8 hours from 1975 to 2005 and the efficiency raised from 82 to 91% of the process [13]. Another important factor is related to investments on modern process of the mills' power section, especially recently, when electricity from biomass started to be traded in the spot electricity markets, as well as over renewable energy public [13]. The potential of power generation from sugarcane straw and bagasse is expressive, and can supply 15% of Brazilian energy demand [4]. This is most relevant considering that the mainly energy supply from sugarcane biomass occurs in the same period of the dry season in Southeast and Mid-West Brazil (area that includes 90% of domestic production), and is an alternative when the dam levels become to decrease and hydroelectrically energy prices rise.

The work conditions in the sugarcane activity have been taken into account since the rapid increasing of cropping after 1975. The concerns are related to the worker's health, labor journey, the payment by manual harvesting amount, the respect for labor legislation and the immigration of workers from the poorest areas (North and

Northeast) to work during the sugarcane harvesting. Indeed, these practices were not uncommon in the past, but from 2000s onwards a lot of progress was observed by improvements in the mills and their association's management, government laws and inspections, and the change in a mechanical harvesting system. Several studies point out an improvement in working conditions, with the creation of more qualified jobs in the field and industry (with higher payment), regional inequality reduction, a more restrict control in the labor journey as well as the establishment of properly places for rest and meals in the field [28–30]. In addition, the sugarcane sector exhibit a high ratio of workers formally registered in according to labor laws (95%), in comparison to 1981 (37.2%) and 2008 (81.4%), as well as with other traditional agricultural and services markets in Brazil [28]. However, there is still a concern related to the unemployment of workers in the manual harvesting, although some initiatives developed by mills association and public sector have been listed and applied in order to train and improve work skills of less qualified workers [31].

Several recent studies assessing the regional economic impacts of sugarcane activity in Brazil have been developed. Most of these studies used general equilibrium model or input/output models, simulating different scenarios considering the expected increase in sugarcane, ethanol, bioelectricity, and other factors and their direct and indirect effects on regional economic indicators, such as GDP and employment [20, 32, 33]. Overall, their suggestions have been pointing out that the positive effects on local economic activity tend to be greater in the expansion areas, where the growth in the harvesting areas can increase job offers and incur in the induced effects over other local trade activities. For example, considering a scenario of ethanol production increasing to 54 billion liters in 2030, there would be an increment of 2.6 billion USD and 53,000 new jobs nationwide [33]. In terms of GDP growth from 2000 to 2012, the municipalities with sugarcane processing increased their total real income by almost seven times, whereas the municipalities without sugarcane processing increased by less than six times [32]. In the traditional (and most economically developed areas) in Sao Paulo, the perspectives under new positive effects are more related with the dissemination of the second-generation ethanol (E2G). Additionally, in the Northeast, a development in the biomass electricity can significantly increase the employment and local GDP [20].

The discussion over socioeconomic and environmental impacts related to the sugarcane (ethanol) expansion in Brazil has started to consider the direct and indirect effects of land use change (LUC and ILUC) and the possible influences over other agricultural and livestock productions around the country. The area cropped with sugarcane had variated from 3 to 4% of the total current agricultural area, with half of all destined to ethanol production. Over the expansion period, from 2003 to 2011, the sugarcane area in Center South (responsible for 90% of the country's production) occurred mostly over pastures (close to 70%) and annual crops (25%). Forest areas, for instance, represented 0.6% of total area [13, 34, 35].

The most relevant empirical studies that proposed to examine the effect of biofuels (ethanol) on land use and food and fuel production in Brazil investigated the potential for transition in the livestock production practices and the impacts on the growth of sugarcane and ethanol production. Using partial equilibrium models and addressing data of agricultural, pastures and forest land distributions over the country, these studies simulated different scenarios of ethanol consumption and exports increasing, simultaneously with the dynamic of other agricultural and livestock markets. Overall, results suggest that in the scenarios with the greatest increase in ethanol production, sugarcane would expand from only 10 to 20% of the current area. Most

#### *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

of the area expansion would happen over existing pastures, which must assume a marginal increasing in intensification [34, 36, 37]. Thus, studies' findings suggest that even if ethanol production increase 100%, the direct impacts over other agricultural croplands would be little significant, with no risk to the country's food security.

The indirect effect of land use change (ILUC) and the hypothesis that the expansion of sugarcane indirectly causes deforestation in the Amazon forest is based on the fact that sugarcane intensification in the Center-South of Brazil contributes to an expansion of grain and livestock activities to North areas, surrounding the Amazon Forest. However, studies have shown that the dynamics between sugarcane, crops, and livestock are not clear and the presented hypothesis is a simplification and might be structured with strong arguments and data. The Brazilian Agroecological Zoning [38] points out to the existence of more than 60 million hectares currently available for these agronomical practices in Brazil, with no need for deforestation, e.g., corresponding for abandoned areas or degraded pastures suitable for sugarcane production. Further, both sugarcane and grains have shown significantly increasing on their yields in the past decades. Finally, the perspectives for an expansion in E2G ethanol may modify the previously listed hypothesis, once ethanol production could increase with no additional of the cropped area [13]. It is also important to point out that most of the sugarcane area is spread in the traditional areas, where grains production area not disseminated. Even in the Midwest, traditional grain producer, sugarcane area is less than 5% of soybean cropland [5].

The increasing production of biofuels has also promoted a debate on the effects of biofuels on food prices. A special concern with development countries is taking into account, once an increase in food commodities prices might affect the low-income population and evidence the problem of food security [39]. Thus, the relationships between food, energy, biofuels, and commodities prices have become a pertinent topic for discussion and improve the analysis related to the sustainability of biofuels production [40].

Few studies focused their analysis on understanding the impacts of ethanol (and sugarcane) expansion on food prices. Prior studies proposed to investigate their analysis to assess price and volatility linkages between ethanol, gasoline, oil and sugar prices [40] in the U.S. and international markets, suggesting that the volatilities among international crude oil and sugar prices have significant impacts in the dynamics of ethanol prices, even in Brazil [39, 41–46]. However, there are no evidences of opposite causality effects, e.g., that ethanol has any influence over energy prices. In the international market, this effect was tested by U.S. corn ethanol, but only in few periods the evidences point out to causality in the ethanol prices to the U.S. corn prices, although any other flows were identified, as, for example, impacts in the U.S. gasoline or other grain prices [43–47]. For Brazil, previous studies includes sugar prices together with energy prices and found that sugar can influence ethanol prices, as well as gasoline and oil prices, but no effects were identified in the other side [39–42, 46].

In addition, the Brazilian federal government policies in the fuels market (gasoline) represent a limitation on the domestic ethanol price fluctuations. More recently, new studies included more variables in the time series models, as other food commodities prices (soybean, corn, rice, cattle, wheat, and cassava), to measure the indirect effects, as well as exchange rate, which can affect the determinants of commodities exports or imports. The results suggest that none of these prices are significantly affected by ethanol or sugarcane prices. However, crude oil and exchange rates can influence commodities prices, once they affect the cost of production and revenue in

these markets [47–50]. Thus, there are no evidences that ethanol production in Brazil can affect the dynamics of domestic food commodities prices. In association with the findings from the studies that assessed the LUC and ILUC derive from sugarcane production in Brazil, these results show that food production systems in Brazil were affected by the boom in ethanol consumption in the country, as well as there are no evidences that this status can be modified in the short run.

## **4. Risk management, public policies, and institutional impacts over Brazilian sugarcane and ethanol production**

Another important issue related to the production of ethanol in Brazil is the particular structure of sugarcane sector, whereas sugarcane is the major feedstock for both sugar or ethanol production as well as sugarcane straw and bagasse from the sugar/ ethanol production are inputs for electricity production by many of the sugarcane mills. Thus, from one side, the decision is strongly related to the dynamics of sugar prices in the international market [51, 52], simultaneously by the dynamics in the fuels market in Brazil and World. On another side, although it does not influence the sugarcane (feedstock) crushing and the decision over the mill's production mix, the energy cogeneration approaches the interrelationship between this sector with major energy market, once it affects the costs and revenues of sugarcane mills [53].

From this productive conjecture, it is evident that strategies for ethanol production in Brazil are influenced from other markets, such as sugar, fuels, and energy. Therefore, uncertainties emerge in the both production and trade decisions, demanding governance, production, and trade optimization in the production chain. In addition, these uncertainties raise by inherent agricultural and market risks, as well from institutional risks derived by government policies related to the agriculture, fuels, and energy markets [54].

The challenges over the production mix decision include the current information and forecast for sugar and ethanol prices, the global and local demand by food industries and fuel consumers, the agricultural costs and yield of sugarcane, industrial costs of sugar and ethanol process, operational costs, and scale efficiency [55]. Thus, strategies are conducted according to ethanol and sugar stocks and prices, gasoline prices, electricity prices, cost of production for sugarcane, sugar and ethanol, conjecture of the international market (especially for sugar), and the mills cash flows needs. Overall, the decisions are taken at the beginning of the sugarcane harvesting and can be different yearly [56].

Uncertainties related to sugar and ethanol prices in Brazil require complex financial and productive strategies for sugarcane mills. Consequently, they need to develop optimized strategies for both industrial production as well as for trading these outputs [57]. Portfolio optimization demands a broad knowledge of stocks, production and trade. Simultaneously, sugarcane mills need to manage their financial strategies in the short run. For that, this market has to deal with production and price risk for feedstock (sugarcane) and their outputs (sugar and ethanol) [53].

This association between agriculture and price risks increases the challenges for the decision makers in this market. Sugarcane is an annual crop, and full harvest period in Brazil is from April to November. Thus, in a scenario of disequilibrium between sugar and ethanol production, concomitantly with the volatility of their international prices, can increase risks for the mills, whereas profit margins can move in different directions over the harvest period, worsening financial results for the

#### *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

industry [58]. For example, **Figure 4** shows the difference between sugar and ethanol monthly average profit margins over 2004–2014 collected by a sample of more than 120 sugarcane mills around Sao Paulo, Parana, Minas Gerais, Goias and South Mato Grosso. In this period, sugar prices exhibited a significant increasing worldwide, while domestic ethanol prices were dependent by gasoline price variation. As consequence, ethanol price risks seem to be higher than sugar price risks, especially in periods of government interference in gasoline prices [11, 54].

On the other side, institutional risks can derive from changes in policies related to sugarcane and energy markets that can be associated with tax changes and interventions in prices and trade. For the energy co-generation, investments were stimulated by Brazilian government in the National Planning for Agroenergy (PNA), National Planning for Energy 2030 (PNE), and Decennial Plan to Energy Expansion (PDE) [59]. However, the global economic crisis in 2008 increases interest rates, reducing investments. Additionally, considering that Brazilian government bioenergy auction did not differentiated electricity sources, a scenario of increasing in sugarcane mills costs [60] reduces the competitiveness of sugarcane bagasse and straw energy co-generation in comparison to other bioenergy sources, such as wind power, that received most part of investments along 2010 decade [61].

The global economic crisis in 2008 also affect the crude oil prices, which sharply decreased fossil fuels costs, such as gasoline and diesel, decreasing the competition for biofuels, such as ethanol. In Brazil, this event was associated with an increase in consumer price indexes, which was the trigger to changes in federal government policies for energy markets, controlling gasoline and electricity prices, aiming the reduction of the inflation rate. The price controlling policy is common in Brazil, since the country has a history of periods with high inflation rate. Even in the periods of regular price indexes, fuels prices are not entirely free in the country, once all crude oil derivatives in Brazil is set by the public company Petrobras [11]. When this practiced policy is highly interventionist, as followed between 2011 and 2015, there are significant divergences of domestic fuel prices from the international price. As consequence, ethanol prices, which are mostly derived from agricultural and industrial sugarcane

mills' cost of production, exhibit a barrier for their free fluctuation when the costs and prices go up. This practice also results in a lack of new investments in the oilrelated (and biofuel) sectors and fuel supply shortages, and it affects the profitability of Petrobras and the government debts [62]. **Figure 5** points out ethanol and gasoline prices for consumers in Sao Paulo state. The shadow area represents the period of intervention. As result, ethanol prices positive fluctuations are restricted and, consequently, its volatility is lower. Over the period before (after) intervention, volatility of gasoline and hydrated ethanol was 0.37 and 0.45 (0.68 and 0.64), and in the period of intervention, volatility was 0.19 and 0.26, respectively. Still, it is necessary to consider that prices seem to be more variable along in the intervention period, once the data are in real terms, e.g., they were evaluated by the consumer price index.

The recent period of high intervention in the fossil fuels market in Brazil led to major impacts for the Brazilian sugarcane industry, such as the increase in their cost of production, a decrease in the sector profit margins and difficulties to achieve financial credit. In this sense, the adoption of free prices in gasoline market in Brazil can positively affect the dynamics of biofuel market in the country [10, 11]. The current policy of Petrobras, adopted from 2016 to this current period is much more directed for the free market, although the fact of Petrobras act as a monopoly in the fuels refining in the country is an element that shed light that this market is not entirely free.

However, this practice is not guarantee in the short run, considering the impacts in the crude oil prices, as consequence of the Covid-19 pandemic effects in the global production chain, as well as the impacts of the conflict between the Russian Federation and Ukraine. Brazilian federal government has been requiring a change in the Petrobras prices policies for diesel and gasoline, although the company and stakeholders are still supporting the current free prices policies.

Despite the conjectural issues affecting the market in the past decades, especially from the massive intervention over energy prices, increasing uncertainties, and decreasing investments, Brazilian sugarcane market has also other challenges to overcome, related to structural issues, as the low increase in crop yield and the fast dissemination of mechanical harvest [12]. The first concern results in low levels of

#### **Figure 5.**

*Monthly gasoline and ethanol prices in Sao Paulo State, Brazil, 2001–2022, R\$/liters (prices in real terms, July/2022) [63].*

#### *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

research and development in this market in comparison to other crops, once the significantly smaller production volume. The second issue is a consequence from the fast adoption of mechanical harvest in the country fields, requiring an improvement in the learning curve of sugarcane producers to avoid soil compression. This can be noted by the decrease in sugarcane yield, from an average of 81.3 ton/ha in the late 2000s, to 73.3 in the late 2010s [5].

In addition, institutional risks may come from the relationship of Brazilian ethanol in the international market. Locally, from the recent corn ethanol production increasing, that could affect the classification of Brazilian sugarcane ethanol as advanced fuel. In 2021/22, 13% of Brazilian ethanol was derived from corn, and the estimative pointed to a volume of 20% in 2030 [4].

This increase is resulted of the expansion of winter corn in Brazil in the past two decades, especially in the Mid-West, an area far from the major sugarcane cultivated areas and from the major ethanol consumption market. This region has a large corn production, and the use of this product as feedstock for ethanol production is positive for local producers and industries, once the sugarcane ethanol is costly locally, whereas corn stocks tends to increase when prices go down. Therefore, the supply of ethanol production locally is less costly and allows a better risk management for corn producers, traders and industry in Mid-West, reducing economic impacts in this production chain and benefiting local ethanol consumers [64, 65]. Therefore, in a context that Brazil needs to gauge new markets, there is a need to guarantee that corn ethanol production is not in competition with sugarcane ethanol and is not a threat to the country position as exporter of an advanced product.

Externally, uncertainties come from the conduction of major countries' policies and mandates for the use of renewable fuels, especially the EU and China. Although U.S. and Brazil have been dominants in the ethanol international market, both countries are mostly trading with each other, depending from several variables that affects their stocks and production, as the prices of feedstocks, crude oil and sugar, the domestic demand and harvesting issues [66]. The expansion of international trade is dependent from the reduction of trade tariffs and the adoption of the intended mandate of biofuels by these countries. In China, the ethanol mandate for 11 provinces has been expanding the use of this biofuel, but the effects are still lower on the Brazilian exports [67]. However, this level can be increased by the adoption of similar policies in many of Asian markets, such as Philippines, India, and Vietnam. For European Union, the current policies did not incur to significant volumes of exports for Brazilian ethanol, but the New Green Deal and REDII set ambitious targets for renewable fuels [68] and new agreements between Brazil and EU could be positively for sugarcane production chain.

At last, another current challenge for this sector is the advancement in the second generation ethanol (E2G), which can affect the strategies in the electricity cogeneration, as well in the sugar ethanol production from the original sugarcane feedstock. In Brazil, the focus is in the subvention, support to research, and development of technological routes to promote investments and guarantee their feasibility. Thus, the focus is to promote economic sustainability for suppliers, involving all the production chain, which may be more effective before convincing potential consumers [64].

Based on this, initiatives promoted and supported by the government and private sector have been conducted between industries, universities and research centers, such as the BNDES-Finep Support for Industrial Technologic Innovation for Sugarcane Sector (PAISS) and Fapesp Bioenergy Program Research (BIOEN) [63, 69]. Currently, only few sugarcane mills in Brazil have adopted the technologies to produce E2G. Some of them reduced the volume after the beginning, due to the high costs or technical inefficiency, which require more time for the project maturity and the establishment of policies to support the investments, to promote a regular production, and to stimulate the consumption [69].

Therefore, the development of E2G in Brazil is dependent on the role of new technologies, energy policies, and investment availability [69, 70]. The efforts to maintain a suitable governance is conducted by the RenovaBio, a national policy for biofuels that established goals to mitigate carbon emissions in the fuels market and to promote the use of biomass in the country energy matrix. The major commitments of RenovaBio are the achievement of Paris Agreement goals; contributing to reducing GHG emissions and improving energy efficiency; improve the management of biofuels production, expansion and use; offer frameworks to manage the supply of several fuels in the domestic market; and improve the sustainability in the energy market. Moreover, RenovaBio introduces an innovative approach to creating and developing a market for carbon credit (CBIOs) [71–73].

Besides the concerns over the environment and energy security, RenovaBio brings a product that can attract new investors to this market, once it can be negotiated in the stock exchanges, as a forward contract. CBIO is calculated by the difference between fossil fuel CO2 emission and its biofuel substitute. The higher this difference, the more CBIO can be traded. Therefore, as E2G generates a smaller carbon footprint compared to first-generation ethanol, it can stimulate E2G viability. Thus, RenovaBio can potentially reduce ethanol prices and promote the expansion of advanced biofuel technology development and production in Brazil [72].

## **5. Conclusions**

This chapter proposes to address the challenges, concerns, and perspectives of bioethanol production in Brazil. From a market conjecture perspective, sugarcane cropping had a significantly increasing from 2003 to 2010 as a result from the implementing of flex-fuel vehicles in Brazil by 2002, which increased the demand for hydrated ethanol. The commodities markets boom also stimulated this movement over 2000 decades, where Brazil raise its sugar and ethanol exports, consolidating its position as a great player in both markets.

From this event, an extensive debate was carried out about the sustainability of ethanol production in Brazil, mainly based on the old practices adopted in the field, such as sugarcane burning, soil and water pollution, the working conditions and the impacts on food commodities prices. However, several studies conducted so far have been demonstrating that the sugarcane expansion in Brazil is quite well suited for the environmental, social and economic issues, following the precepts of sustainable development.

Overall, studies point out that environmental issues are under control. Residues have been treated in the mills, there is a short use of water resources in the cropped fields, the mechanical harvesting advanced in most part of the production area, reducing burning and promoting a tillage cropping system with the straw, reducing the nutrients losses and retaining carbon soil. Besides, from social side, there was substantial improvement in the working conditions. From the economics side, investments impact positively the regional GDPs and employment rate, where the LUC and ILUC have no significant impact in the food production or environment, as well as ethanol has no impact on other important commodities produced in the country, even if considering geographical crops distributions or food prices.

## *The Sustainability of Sugarcane Ethanol in Brazil: Perspective and Challenges DOI: http://dx.doi.org/10.5772/intechopen.108070*

However, after the remarkable increase and the improvement of sustainability aspects, there are challenges that Brazilian sugarcane market has to manage in the coming years. Economic and financial skills need to be improved to deal with sugar and ethanol production mix and trade, optimizing strategies over a crop year. Still, the decisions are subsidized by political and institutional issues, such as the intervention in fuel markets and the public auctions for renewable energy sources, such as sugarcane biomass. Nevertheless, other institutional issues can affect the market strategies, such as biofuel mandates in Brazil and other countries, and the linkages in their trade policies, and the CBIOs trade by Brazilian producers to mitigate GHG emissions. Lastly, the advancing in corn ethanol and E2G production can potentially change current production and trade in this market and bring new elements to deal with.

## **Author details**

Daniel Henrique Dario Capitani School of Applied Sciences, University of Campinas, Limeira, SP, Brazil

\*Address all correspondence to: danieldc@unicamp.br

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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## Section 3
