FAQ

A1. Ethanol fuel today
A2. Background on sugarcane farming and ethanol production in Brazil
A3. Institutional and tax aspects of ethanol production and use
A4. Institutional and economic aspects of sugarcane production
A5. Current expansion of sugarcane production
B1. Soil use (food and energy): the Brazilian context
B2. Brazilian environmental legislation on sugarcane, sugar, and ethanol production
B3. Production: conservation of soil and water resources, use of pesticides, farming practices and industrial waste
B4. Ethanol use: impact on vehicle emissions and greenhouse gas emissions
C1. Legislation on labor in the sugarcane agribusiness
C2. Employment scenario in Brazil and the sector’s place in this scenario
C3. Social responsibility practices
D1. Technology: development, scenarios, and perspectives

A1. Ethanol fuel today

A 1.1. What is ethanol fuel?

Ethanol and ethylic ethanol are synonyms. Both refer to a type of ethanol made up of two carbon atoms, five hydrogen atoms and one hydroxyl group. Unlike gasoline, ethanol is a pure substance, made up of one single molecule: C2H5OH.

In ethanol production, however, we must differentiate between anhydrous ethanol (or anhydrous ethylic ethanol) and hydrated ethanol (or hydrated ethylic ethanol). The difference can only be seen in the water yield from the ethanol: while anhydrous ethanol has a water yield of around 0.5% in volume, hydrated ethanol, which is sold at filling stations, contains around 5% water in volume (although Brazilian specifications establish these characteristics in mass, here it is expressed in volume, in line with international practice).

In the industrial production of ethanol, the hydrated form comes directly out of the distillation columns. In order to produce anhydrous ethanol, an additional process is required to extract most of the water.

A 1.2. How is ethanol fuel used in Brazil today?

Around 80% of Brazilian ethanol production is used as fuel, 5% is used in foods, perfumes and chemical processes, and 15% is exported.

Anhydrous ethanol is used in the production of what is called gasoline C, which is the only gasoline that can be sold in Brazil for vehicle use. Fuel distributors buy anhydrous ethanol from distilleries and gasoline A (“pure”) from refineries, mixing the two in proportions that can vary between 20 and 25% anhydrous. This means the fuel distributors are in fact formulators of gasoline C: they buy two products on the market (gasoline A and anhydrous ethanol, which cannot be sold separately to end consumers) and produce a new one, gasoline C, to be used in vehicles.

Hydrated ethanol is supplied directly for use by vehicles. This is the ethanol bought by the consumer at the filling station, used by vehicles that run exclusively on ethanol or vehicles with Flex-Fuel engines, which run on mixtures of gasoline and ethanol in any proportion. Flex engines can run exclusively on hydrated ethanol.

A 1.3. Is it true that ethanol has a negative energy balance; or rather, more energy is used in its production (sugarcane crops, transportation, and the industrial process) than we get out of the ethanol itself?

No, it is not true. This conclusion is an error that stems from analysis of corn ethanol in the USA. It is not the case for sugarcane ethanol, as produced in Brazil.

In the sugarcane sector in Brazil, the ratio between renewable energy produced and the fossil energy used is 8.9 for ethanol (2005). This figure is the highest for all biomass liquid fuel in the world. The various kinds of biodiesel are between 2.0 and 3.0.

For corn ethanol (from the USA) this ratio is in the 1.3 to 1.8 range. It was, in fact, evaluated below 1.0 (a negative balance), years ago, at the beginning of the North American program, but the processes has become more efficient. For sugar beet ethanol (as produced in Germany) or wheat (in some other European countries), the ratio is close to 2.0, and sorghum ethanol (from Africa) is estimated at a ratio of 4.0. The main reason is that the sugarcane industry does not use fossil energy in the industrial production process for ethanol, it only uses bagasse. This means the production process (and the product) in Brazil is more sustainable than the rest. This fact, which is well known in Brazil, is becoming known abroad, showing that ethanol is an excellent fuel in terms of saving oil and mitigating greenhouse gas emissions.

A 1.4. How significant are sugarcane and ethanol to Brazil’s energy framework?

Brazil used 13.4 million m3 of ethanol fuel in 2006 (production was 17.7 million m3), around 40% being used in automotive engines (Otto cycle). The sugarcane industry also generated 11.3 TWh of electric and mechanic energy, mostly self-produced (equivalent to 3% of all the electric energy consumed in Brazil). The use of bagasse as a fuel accounted for 20.2 million tons of oil equivalent (TOE).

In 2006 Brazil achieved self-sufficiency in oil, producing around 1.8 to 1.9 million barrels a day (bopd). In 2004 oil accounted for 40.4% of primary energy production in Brazil, with a significant share in transportation, industrial and non-energy uses sectors.

This self-sufficiency is backed by a major contribution from the sugarcane sector, accounting for 14.6% of Brazil’s domestic energy supply in 2006. In 2005 ethanol contributed around 160,000 bopd (13% of the total energy used in transportation), and bagasse used as an industrial fuel (food as sugar, citric products and others) and in the energy sector (ethanol production) reached around 410,000 bopd. Around 63% of this is used directly as fuel in the industrial sector (food): 260,000 bopd; in the industrial sector, bagasse supplies as much energy as fuel oil and natural gas together.

Therefore, even leaving aside thermal energy from bagasse used for ethanol production (around 150,000 bopd), the sugarcane sector replaces 420,000 bopd of fuel (gasoline, fuel oil or natural gas) in transportation and industry.

A 1.5. Can ethanol be used in existing gasoline vehicles in other countries?

Experiments carried out in several countries since the 1970s (Brazil, the USA, Canada, Sweden, China, India, Thailand, Colombia, Jamaica, and so on) have demonstrated the technical viability of ethanol-gasoline mixtures in vehicles (automobiles, pick-ups, motorcycles, etc.) originally designed to run on gasoline, without the need for any alterations to the engine or the vehicle. Practically all the global vehicle manufacturers say that mixtures including up to 10% ethanol are acceptable. Mixtures are normally the fastest and most practical way to begin an ethanol fuel program. Although the setting of the ethanol level in the mixture is established chiefly by availability of the product and economic and political factors, fuel specifications may also be a determining factor in the process.

In Brazil the ethanol content in gasoline is higher than in other countries, and varies from 20% to 25%. Consequently, vehicles leave the factories prepared for this mixture, or if imported they are adapted as necessary (engine calibration and the replacement of some components). It is important to stress that all the gasoline distributed in filling stations in Brazil contains ethanol.

A 1.6. What special care is required in using ethanol-gasoline mixtures in older vehicles in countries where this practice is not common?

There is no obstacle to the use of ethanol-gasoline mixtures in older vehicles. However, in these vehicles it is common for there to be deposits left by gasoline in the fuel supply system. Therefore, when using ethanol-gasoline mixtures for the first time in older vehicles, it is recommended that the fuel filter be changed, at least twice, more frequently that normal. As ethanol has a cleaning property on gasoline deposits, this prevents premature blocking of the filter and its unwanted effects on the engine’s performance.

Although most materials used in vehicles have for years been compatible with anhydrous ethanol used in the gasoline mixture, it is recommended that the state of rubber, plastic and metallic materials in direct contact with the fuel be checked regularly.

It is important that ethanol mixed in gasoline be anhydrous and be of the quality appropriate for this use. When ethanol-gasoline mixtures are used it is common for product quality specifications to be adopted both for the ethanol and the mixtures. Current Brazilian specifications can be found at the site of the National Oil, Natural Gas and Biofuel Agency.

A 1.7. How are the ethanol-gasoline mixtures prepared?

Ethanol and gasoline mix well. The simplest method, which is widely used in Brazil, is to mix it at the distributor’s base, in the tanker trucks that transport the product to the filling stations for sale to consumers. This process can be done manually, preferably supplying the desired volume of ethanol and then the gasoline, or it can be done automatically in the feed line to the tanker truck.

The preparation of the mixture requires the same care and security measures adopted in the handling of any other fuel. Contamination by water must be prevented to avoid engine problems.

A 1.8. Is it possible to use just ethanol as fuel?

Brazil has been a large global laboratory for testing ethanol as fuel, with over 5 million vehicles especially designed for this product having been produced. Although ethanol has a lower energy content that pure gasoline (approximately 65%), it has technical characteristics, such as a high octane level, that make it perfect for use as a fuel and partially make up for its lower energy content. In practice, vehicles running exclusively on ethanol perform better (higher power and torque) and a longer engine life than their gasoline counterparts. On the other hand, volumetric consumption increases by 20% to 30%, depending on the vehicle’s characteristics. The environmental benefits compared with fossil fuels are superior, because exhaust gas emissions and fuel vapors are less toxic and also because carbon dioxide (CO2) emissions from the production process and use of the product, which are chiefly responsible for the worsening of the greenhouse effect, can be absorbed by sugarcane through photosynthesis. Based on the experience gained from the exclusive use of ethanol in vehicles, the fuel has been used in aviation – as in the agricultural airplane IPANEMA produced commercially by Embraer since 2004 (www.aeroneiva.com.br). Ethanol can also be used as fuel in Flex-Fuel engines, industrial installations to generate thermal and electrical energy, and as an input in the generation of hydrogen, later used in fuel cell systems.

A 1.9. What are Flex-Fuel vehicles?

These are vehicles equipped with an engine management system that identifies precisely the gasoline and/or ethanol in the fuel tank and automatically adjusts the engine operation to the fuel. There are versions that use ethanol sensors in the tank or fuel supply line in the vehicle, which is more common in the USA, and others that identify ethanol through a sensor that measures the oxygen level in the exhaust gas, which is the system used in Brazil.

In the USA and some other countries such as Canada and Sweden, vehicles run both on pure gasoline as any mixture with ethanol up to 85% (E85) outside winter and 70% during winter (E70). In Brazil, these vehicles run on gasoline which already contains 20% to 25% ethanol and any mixture with higher levels of ethanol, up to 100% ethanol (E100). This difference in the design of Flex-Fuel systems is down to the characteristics of the existing fuel in each country, weather and availability of an auxiliary starting system in cold conditions.

The big advantage of the Flex-Fuel concept is that it enables ethanol to be used in conditions in which the product distribution infrastructure is restricted, as in the USA. It also allows consumers to opt for the fuel they prefer, as in Brazil.

Flex-Fuel engines have been adopted in hybrid vehicles, as well, which operate with a double propulsion system (electric engine and internal combustion engine), further enhancing their capacity to reduce emissions of CO2 and other pollutants.

A 1.10. Why has ethanol attracted so much interest worldwide?

Today the biggest interest in using ethanol as an energy source comes from the need to replace part of the oil used and to reduce greenhouse gas emissions. The possibility of reducing local pollution in urban centers, with a gasoline mixture, and to improve gasoline quality with its antiknock power are the main reasons for this interest. The work done in Brazil is particularly important because it has shown the possibility of achieving very significant production levels at competitive costs.

A2. Background on sugarcane farming and ethanol production in Brazil

A 2.1. When did sugarcane agribusiness begin in Brazil?

During Brazil’s colonial period, the Brazilian economy – which was dependent on Portugal – developed in cycles, according to the interests and fluctuations of the international market at the time. First came the Brazil-wood cycle, followed by the sugar and sugarcane, and finally gold. In Colonial Brazil each of these products went through their booms and busts.

In the First Reign year (1822/1831), the Regency years (1831/1840) and the Second Reign (1840/1889), Brazilian sugar on the global market faced competition from sugar from the Antilles – made from sugarcane taken by the Dutch who had been thrown out of Brazil – as well as competition from sugar made from sugar beet, which since the 17^th Century had been produced mainly in Europe. The high taxes imposed by the various governments on imports of the product were a serious obstacle to trade.

The Oligarchic Republic (1889-1930) represented the peak and the collapse of the export economy. In addition to coffee, which following massive expansion in the first decades then entered a crisis in the 1920s, other products, such as rubber, cocoa and sugar also had their cycles of growth and decline.

A 2.2. How did sugarcane develop in the years that followed?

The reorganization of the sugarcane business in Brazil – which undoubtedly drove the modern industry we have today – began right at the beginning of the 1930s and was only possible because of major State involvement for just over six decades.

A. Ethanol fuel: in Brazil and in the global context

In 1933, when the Sugar and Ethanol Institute (IAA) was created, the Government became exclusively responsible for countless initiatives which set the course for the sugarcane business. State intervention dominated practically the entire structure, being responsible for the production and trading cycle, setting prices, and establishing quotas, export and import levels.

A 2.3. What were the founding principles of State intervention?

The Sugar and Ethanol Institute was created in a context in which the government considered the following points: domestic sugar production sugar exceeded consumption; there was a global trend to limit sugar production; there was a need to balance the sugar market, and ethanol production was a viable alternative for the sugar industry. Hence, government policies were drawn up to organize the business and keep this important sector profitable.

A 2.4. In what context was the National Ethanol Program – PROALCOOL - created?

The National Ethanol Program (PROÁLCOOL) was created by Presidential Decree* at the end of 1975, “to meet the needs of the domestic and export market and those of the automotive fuel policy”.

PROALCOOL was designed to encourage the production of ethanol from sugarcane, manioc, or any other input. It is important to remember that Brazil had been gaining experience in the use of ethanol fuel since the 1920s. The program was based on the expansion of supply: it would be encouraged by the expansion of the supply of raw materials, especially on agricultural production, the modernization and expansion of the distilleries in existence, and the installation of new production facilities, annexes to mills or stand-alone units, and of warehouses.

The main driver of the program was the huge negative impact on the Brazilian economy caused by the two oil crises, in 1973 and 1978. As a result of the incentives offered under the National Ethanol Program, Brazilian ethanol production grew from 555 million liters in 1975/76, to 17.5 billion liters in 2006/07.

The National Ethanol Program was set up in two distinct phases: in 1975 and 1979**.

* Decree nº 76.593, of November 14^th 1975.
** Decree nº 83.700, of July 5^th 1979.

A 2.5. What did the first phase of the Program involve?

In November 1975, in what has been called the first phase of PROALCOOL, it was decided by Presidential Decree that the Executive would set it up. At the same time, the National Ethanol Executive Commission (CENAL) was set up to: establish what participation bodies linked directly or indirectly to the Program would have, in order to serve the expansion of ethanol production; define the criteria to establish were new distilleries would be set up; establish the annual schedule for different types of ethanol, specifying their use; decide on proposals and/or projects for the modernization, extension or building of distilleries under the objectives of the Program; and to define the criteria to be observed in establishing where warehouses would be set up.

The Sugar and Ethanol Institute (IAA) was responsible for technical and administrative support for the Executive Office at CENAL – which was responsible for analyzing proposals presented by interested parties, for the modernization, extension or building of distilleries – reporting on them for appreciation by the Commission.

It was also decided that investment and expenditure related to the Program would be financed by the banking system. Finance was mainly provided by Banco do Brasil, as the government’s finance arm, with interest below market levels at the time*. The National Oil Council (CNP) was responsible for assuring ethanol producers’ prices subject to premiums or discounts depending on the technical specifications for the type acquired. Prices were released by the IAA.

To guarantee trading of ethanol fuel, the CNP established delivery programs for the oil distributors and/or consumer companies, who got the product at a price set by the Council. Exports of residual molasses or ethanol of any type or grade were exclusively handled by the IAA or private companies, but only when authorized to do so by the Institute. The IAA was also responsible for establishing the technical specifications for residual molasses and ethanol of any type and origin. Finally, all the distilleries, annexed or stand-alone, whatever raw material they used, had to be registered with the IAA.

In this phase the focus was more on production at annexed distilleries, set up with sugar mills, basically in traditional regions. Between 1975/76 and 1978/99 production of ethanol fuel in Brazil was boosted from 555,600 cubic meters to 2,490,900 cubic meters, 2,095,900 cubic meters of which were anhydrous ethanol therefore, basically, to be mixed with gasoline.

* An appraisal of the impact of this finance on annual revenue for the sector was carried out by the US Department of Trade, as part of a compensation rights case opened by the International Trade Commission in Washington in March 1985, as will be seen later on.

A 2.6. What are the main characteristics of the Program in its second phase?

In 1979 the Federal Government decided to reformulate aspects of PROALCOOL to encourage hydrated ethanol production, to be used directly in passenger vehicles developed especially for this purpose. The National Ethanol Council (CENAL) was then created.

To guarantee the trading of ethanol for fuel use, the CNP was responsible for establishing product distribution programs for consuming companies and oil distributors. Prices of ethanol for fuels purposes were proposed by the CNP and set by CENAL.

In the second stage of the Program, production of hydrated ethanol grew more than that of anhydrous, from 395 million liters in 1978/79 to a maximum volume in 1991/92 of 1.7 billion liters. Annual sales of cars running exclusively on hydrated ethanol rose from 240,638 units in 1980 to a maximum of 698,564 units sold in 1986, reaching around 96% of new vehicles sold on the domestic market.

A 2.7. What norms were established for the transport, trading, and storing of ethanol fuel?

In July 1987*, the Brazilian government established rules for the transport, trading, and storing of ethanol fuel, establishing that the CNP identify and inform CENAL, by February 28^th of each

year, of total demand for the product for such purposes and for use as a raw material in the chemical industry for each harvest.

The IAA was responsible for allocating global volumes for ethanol production for other purposes, having met the demand set for the fuel product. Ethanol fuel was sold by producers directly to the oil product distributing companies and to Petrobras. The CNP established the allocation and sale system for volumes of ethanol amongst oil product distributing companies and Petrobras, bearing in mind the market supply dynamic.

Stockpiling of reserves of ethanol for fuel had to correspond to the minimum consumption volumes for two months for anhydrous and hydrated ethanol, with reference to the consumption forecasts for the end of each harvest. Petrobras was responsible for the acquisition of ethanol to form reserve stocks. If, at the end of the harvest period for each producer region, the stocks held by Petrobras are above or below reserve stocks, the CNP must make the necessary adjustments to sales by producer units.

The necessary resources to cover operating costs, losses, storing, transportation, ethanol fuel stock financial costs, including administrative costs equivalent to 2.0% (two percent) of the acquisition price of the product, were proportioned to Petrobras by way of a specific parcel (PPE) including ethanol prices and, when necessary, prices of oil derivatives, according to CNP Resolution. In 1991 the National Fuel System was created by law ** (SINEC).

* Decree nº 94.541, of July 1^st 1987.
** Article 4 of Law nº 8.176, of February 1991.

A 2.8. When, how and why did the State get out of the sugarcane business in Brazil?

State intervention in Brazil’s sugarcane business, which was justifiable when the various shifts in its history and global history are analyzed, could not go on indefinitely. A new management model, better suited to the principles of the modern State as an inducer of quality improvements, was called for. Above all, the provision in 1988’s Federal Constitution (article 174) demanded that governmental planning for the private sector be indicative, and not determinant*.

The IAA was closed down by Provisional Measure (PM) in 1990**. In the middle of 1988, Decree-Law *** had prohibited, as of June 1^st 1989, the use of Treasury resources in the purchase and sale of sugar for export and established that the Executive reformulate the organization of the sugar and ethanol sector, reducing the sugarcane business’ dependence on Treasury resources and also reducing Governmental intervention in the sector.

The reduction of State intervention gathered pace with the freeing up of sugar product exports in 1989, followed by the free-floating of prices for sugar of various types and of anhydrous ethanol, concluding with the freeing up of the last prices under official control: those for sugarcane, for standard sugar, and hydrated ethanol, at the beginning of 1999.

* Article 174 of the Federal Constitution states: “As a normative and regulatory agent of economic activity the State shall exercise in the form of Law the function of inspection, encouragement and planning, being determinant for the public sector and indicative for the private sector”.

** MP nº 151, March 15^th 1990, transformed into Law nº 8.029, of April 12th 1990.

*** Decree-Law nº 2.437, of May 24^th 1988.

A 2.9. What is Brazil’s current policy on the production and use of sugarcane, sugar and ethanol?

Today, the production and trading of sugarcane, sugar and ethanol is no longer subject to State control. Prices paid to producers are set by the market. Imports and exports of sugar and ethanol are free-floating, with the risk being taken on by business. There are no tariff barriers to exports and imports. Even the prices of hydrated ethanol at filling stations stopped being controlled against gasoline prices, also in 1999.

The competitiveness of sugar and ethanol in Brazil is not the result of Government intervention, but rather the country’s exceptionally favorable production, organizational and technological conditions. It involves structural competitiveness for production which is directly exposed to international competition, be it on the world markets or on the domestic market whose only protection is the tariff on imports, which for sugar is the Common External Tariff (TEC) for Mercosul (16%) and which for ethanol is zero, seeing as since March 2006 the rate has been set at 0%. Such protection is no way near to that consolidated by Brazil for the two products at the World Trade Organization, at 35%.

Sugarcane, sugar, and ethanol prices are free-floating and controlled by the market, and Brazil’s ethanol supply is more than enough for it to be used as fuel by the entire light passenger vehicle fleet in the country.

A 2.10. Is Brazil’s current stance on sugarcane, sugar and ethanol compatible with the World Trade Organization’s norms, especially as regards unfair trade practices, such as subsidies, dumping, and so on?

Yes. Since the end of the 1980s, governmental intervention in the sugar and ethanol sector has been reduced, with the gradual elimination of public policies that stemmed from controlling and supporting the production and trading of sugar and ethanol on the domestic and international markets. Deregulation reversed the situation created by the significant State intervention the sector was submitted to as of 1933, and which began as a result of the over-production crisis which global sugar went through at the end of the 1920s and the beginning of the 1930s.

The Ethanol Stock Finance Program is now the only support program enjoyed by Brazil’s sugar and ethanol sector, and nothing else has been in place since January 1^st 2002. Up to R$500 million a year is given over to it, and investments are in practice made according to the volume of resources used to equalize interest rates. The National Monetary Council establishes the payment periods, financial charges, guarantees, financial agents and other financial conditions for the program. Specific legislation currently does not cover public sources of finance for any measure supporting or underwriting sugarcane production for sugar, nor sugar production itself. Brazil’s sugarcane, sugar and ethanol stance is perfectly compatible with World Trade Organization agreements. However, unfounded accusations are still leveled at the country’s stance, the main ones of which are as follows:

a) Obligatory fuel mixing As is known, in Brazil anhydrous ethanol is mixed with gasoline as a requirement of environmental legislation. This has been the object of accusations on the part of those who are unfamiliar with the WTO’s rules. Some say that the mandatory mixing guarantees a market for Brazilian producers, which is illegal.

The production and use of ethanol as fuel in Brazil to partially replace gasoline reduces the harmful effects of environmental pollution. Brazil’s environmental legislation sets vehicle emission limits and the oxygenated level required in gasoline sold on the domestic market*. Technical knowledge attests that possible substitutes for anhydrous ethanol fuel do not have the same properties that qualify ethanol as an environmentally sustainable product. MTBE, an additive that was widely used in North American gasoline in the 1990s, has been banned from the North American market because it contaminates water and soil. ETBE, an additive used in some countries, mainly in Europe, in being based mainly on isobutylene, an oil sub-product, has significantly less potential to combat greenhouse gas than ethanol. In addition, to provide the same degree of oxygenation more than double the volume of ETBE is required, having a considerable economic impact. MMT, another additive to gasoline to increase octane levels, is a manganese-based chemical product which has also been used in some countries. However, its use has been associated with the reduced efficiency of catalytic converters in vehicles which control polluting gas emissions. That is, ethanol is the only product that, when mixed with gasoline, meets environmental and economic objectives.

Under the WTO’s rules, member countries have to guarantee that their regulations are not drawn up or applied to create unnecessary obstacles to international trade. Regulations must not be more restrictive than is necessary to achieve their objectives, such as national security, the protection of life, human health, and the environment. Mandatory mixing of anhydrous ethanol with gasoline traded in Brazil does not violates the Trade Barrier Treaty (TBT) at the WTO, as it serves the legitimate aim of environmental protection set by the Brazilian Government on vehicle emissions.

There are no requirements under Brazilian law that the anhydrous ethanol mixed with gasoline, or used directly, be made in Brazil. Similarly, there are no non-tariff barriers or tariff barriers on ethanol imports. Furthermore, the mandatory mixing of anhydrous ethanol with gasoline in Brazil does not represent a subsidy, as regards the WTO’s Treaty on Subsidies and Compensatory Measures, as it does not involve any financial contribution from the government, and nor does it constitute income or price sustention that influences imports or exports of the product. This is corroborated by the fact that the price of gasoline to end consumers, the price of ethanol, and the volumes of gasoline and ethanol supplied are all set by the market.

b) Different excise tax rates (IPI) for vehicles The different excise tax rates (IPI) on vehicles that run on ethanol and gasoline have also been attacked. Justified by the environmental gains afforded in terms of emissions from ethanol fuel burning, the Brazilian Government set different excise tax (IPI) rates for vehicles that run on hydrated ethanol and those that run on gasoline (in practice, gasoline mixed with anhydrous ethanol). This rate differentiation is based on vehicle class, defined by engine size.

With the launch of vehicles called Flex-Fuel, which can run on any mix of hydrated ethanol and gasoline (containing between 20% and 25% anhydrous ethanol fuel), this group of vehicles was, for excise tax purposes, set at the same level as vehicles that run exclusively on hydrated ethanol.

For vehicles with engines of up to 1,000 cc (cubic centimeters), which account for over 56% of total sales, there is no tax differentiation based on fuel used. For larger vehicles, from 1,000 to 2,000 cc and over 2,000 cc, the excise tax difference does not result in a significant advantage in the vehicle’s final price and therefore is not an influence in buying decisions. In most of the models available commercially, finishing and options have a much greater impact on the price of the vehicle than that created by the excise tax difference. This differentiation is no more than an attempt to build the environmental advantage offered by vehicles that use or can use exclusively ethanol into the price.

c) Flexibility in sugar and/or ethanol production There are those who say tat the simultaneous production of sugar and ethanol lends Brazilian sugar an artificial competitiveness that benefits producers and keeps the country on the international market. It must be noted, however, that what happens with ethanol in Brazil is no different than what happens in the rest of the world’s sugarcane economies, whenever sugar contained in molasses is sold. The only difference is that in Brazil the sugar contained in molasses is traded in the form of ethanol, today producing variable revenue according to the fluctuations of the market.

The simultaneous production of sugar and ethanol from sugarcane is exclusively a business decision, with no government involvement.

In reality, although ethanol and sugar prices on the domestic market in Brazil are dictated by the free market, given that the speed at which ethanol is traded is much slower than that for sugar (ethanol is produced in six to eight months, depending on the region and weather, and sold by the producers throughout the year), the cost of its storage is reflected in its market price, so that its price tends (particularly during crushing) lower than that for sugar.

In practice, considering the characteristics of the activity and the reality of the markets, the remuneration achieved from sugar makes up for the lower remuneration for ethanol. Therefore, ethanol does not subsidize sugar; on the contrary, sugar makes up for losses caused through stocking the fuel.

Diversification of an industry is not condemned by the WTO, even when it results in cost reductions. Economies of scale stem from the dimensions of the domestic sugar and ethanol markets in Brazil. Around 60% of the sugar produced each harvest is consumed domestically, in the form of sugar and ethanol.

In Brazil the crushing period was extended following extra investment over decades exclusively by the private sector to develop sugarcane crops. This is also a legitimate pursuit of competitiveness conducted exclusively by the private sector.

* Law nº 8.723/93, October 28^th 1993.

A 2.11. Has Brazil been formally accused of unfair trade in ethanol?

In February 25^th 1985 the USA’s International Trade Court acted at the request of the North American ethanol industry to investigate alleged dumping and the undue use of subsidies in Brazil’s exports of ethanol to the USA in 1984, therefore at a time near to the granting of the previously referred to credit benefits. The investigations were conducted by the US Department of Trade and audited by two independent, private companies.

The investigations concluded that the residual effect of the credit benefits on the cost of ethanol production in 1984 was only 2.6% . The largest part of this net subsidy, corresponding to 1.65%, then attributed to the financing at interest rates subsidized by PROALCOOL was not considered to be a subsidy on exports, but rather finance by the ethanol industry, whose product was in large part consumed on the domestic market. The Department of Trade concluded that “there were no critical circumstances” that supported the allegations.

Based on said result, on March 19^th 1986 the International Trade Commission rejected, by for votes to one, the allegations made by the North American sugarcane industry. Most of the credit incentives were discontinued in 1983, and PROALCOOL’s financing ended in 1985.

Taxes on the Sale of Automobiles

Taxes	1,000cc		- 1,000 a 2,000cc		+2,000cc
	Gas/Alc/Flex	Gas	Alc/Flex	Gas	Alc/Flex
Excise (IPI)	7,0	13,0	11,0	25,0	18,0
State (ICMS)	12,0	12,0	12,0	12,0	12,0
Social (PIS/COFINS)	11,6	11,6	11,6	11,6	11,6
Source: Anfavea

A3. Institutional and tax aspects of ethanol production and use

A 3.1. Is the setting up of a sugar or ethanol facility in Brazil conditional upon specific authorization by a public agency? Does the State interfere in sugar or ethanol production?

No. Article 170 of the Federal Constitution guarantees the free exercise of any economic activity, irrespective of public agency authorization, except in cases stipulated by law. In Brazil no law requires such authorization. However, as in any other economic activity, the company is required to obtain necessary licenses, such as environmental ones, and has to register at the proper public agencies, such as the Federal and State tax offices.

Similarly, the State does not interfere in the sugar and ethanol industry. Such interference would be unconstitutional, as the Constitution, in articles 1 and 170, considers free initiative and free competition to be fundamental principles. Article 174 of the Constitution states that the State’s involvement in planning economic activity is merely indicative for the private sector.

A 3.2. Are there any restrictions on foreign investment in the sugar and ethanol industries in Brazil?

No. The 1988 Constitution ended any distinction between domestic capital investment and foreign capital investment (with some exceptions). Hence, if the company is constituted according to Brazilian law, it will be guaranteed equal treatment, irrespective of the origin of its capital. It must be stressed that in regard to sugarcane production, the raw material for the industry, the law imposes certain limitations on foreign capital participation in the acquisition and leasing of rural property.

A 3.3. Does the State regulate the ethanol used as fuel?

Yes, but this regulation does not interfere in company production. Regulation is established by the National Oil, Natural Gas and Biofuel Agency (ANP) and, under Law nº 9.478/97 and nº 9.847/99, it is restricted to: a. specifying the quality of the ethanol fuel, whether it be that mixed with gasoline (anhydrous) or that resold directly at filling stations (hydrated); b. regulating the distribution and resale of fuel, including ethanol, observing the principles of free competition and the protection of consumer interests.

It must also be stressed that the mandatory mixing of anhydrous ethanol with gasoline sold in Brazil, at a proportion of between 20 to 25%, is stipulated by Federal Law nº 8.723/93, which deals with the reduction of vehicle emissions. That is, gasoline traded in Brazil must contain ethanol.

Currently, the ANP norms that are most relevant to ethanol are: a. ANP Resolution nº 36/2005, which establishes the specification for ethanol fuel for vehicles on the Brazilian market, whether it be anhydrous (mixed with gasoline) or hydrated. This norm requires the mixture of an orange colorant in anhydrous ethanol to distinguish it from hydrated ethanol. b. ANP Resolution nº 05/2006, which regulates the sale of ethanol to fuel distributors.

A 3.4. What is the tax on ethanol used as fuel on the Brazilian market?

a) Hydrated ethanol:

Hydrated ethanol fuel tax is concentrated on fuel producers and distributers. There is no tax on filling stations. Consequently, distributers are responsible for paying taxes that would have been paid by the filling stations.

To sum up, the tax on hydrated ethanol is as follows: * Federal Taxes 1. At the production companies:

1.1 Social Contribution on Sales and Social Contribution to PIS (Cofins/PIS): 3.65% on ethanol sales revenue; 1.2 Intervention Contribution in the Economic Domain (CIDE): Reduced to zero since April 2004: 2. At distributors: 2.1 Social Contribution on Sales and Social Contribution to PIS (Cofins/PIS): 8.2% on ethanol sales revenue.

* State Tax:

Tax on the Circulation of Goods (ICMS).

This is levied on production companies and distributers so that its rate on the price paid at filling stations varies between 12% and 30%. The State of São Paulo has adopted a rate of 12%. b) Anhydrous ethanol: * Federal Taxes 1. At the production companies: 1.1 Social Contribution on Sales and Social Contribution to PIS (Cofins/PIS): 3.65% on ethanol sales revenue; 1.2 Intervention Contribution in the Economic Domain (CIDE): Reduced to zero since April 2004.

2. At distributors:

2.1 As anhydrous ethanol is added to gasoline at the distributors, it is taxed as if it were gasoline from that moment on.

* State Taxes:

Tax on the Circulation of Goods (ICMS).

As ethanol is added to gasoline at the distributors, ICMS becomes the same as for gasoline. As a rule, ICMS on gasoline is levied at 25%. a) Exports: In the case of exports of ethanol, hydrated or anhydrous, none of the taxes above are levied as they are granted immunity under the Constitution.

A4. Institutional and economic aspects of sugarcane production

A 4.1. What is the sugarcane harvest like in the Center South of Brazil?

The Brazilian sugar and ethanol industry is a processor of an agricultural product, sugarcane. Sugarcane is a grass that, when mature, contains a high level of sugars (approximately 1/3 of the dry cane material). Sugarcane is a semi-perennial crop, as it can be cut and harvested, without the need for replanting, for five to seven harvests (five to seven years). After this period, it can be rotated for one harvest (with peanuts, for example), before sugarcane is planted the following year.

In the Center South of Brazil the sugarcane crop lasts for an average of eight months, beginning in April and ending in November. The sugarcane harvested cannot be stocked, and it must get to the processing companies within 72 hours of being harvested to prevent a loss in quality through bacterial and fermenting action. Sugarcane harvested over five days beforehand is not usually accepted, which is why ethanol from sugarcane is only produced for eight months of the year. In the other four months the facilities shut down and carry out maintenance procedures. As the demand for sugar and ethanol are constant throughout the year, enough ethanol has to be produced in those eight months to supply the market year-round, which imposes stock costs. Other typical features of agricultural production also have to be assimilated by the industry: crop losses or gains caused by weather conditions or other variables that could skew supply and demand.

A 4.2. Who are the owners of the land sugarcane is grown on?

Sugarcane is grown on land owned by the sugarcane mills, on land owned by stockholders, agricultural partners, sugarcane producers, and leased land. In São Paulo there are around 11,000 sugarcane suppliers.

A 4.3. What is the current area of sugarcane harvested for sugar production and for ethanol production? What is productivity like?

In Brazil the harvested area is 5.3 million hectares out of 6.3 million hectares of area cultivated. In 2006 around 50% of the sugarcane is used for ethanol and 50% for sugar.

In the Center South of Brazil the average ethanol production is 6.900 liters per hectare. In certain regions of São Paulo State some units achieve production in excess of 9,000 liters per hectare.

A 4.4. What products are obtained from sugarcane?

Three main kinds of sugar are produced from sugarcane: crystal sugar, demerara/vhp sugar, and refined sugar (granulated or amorphous), depending on the market. Anhydrous ethanol and hydrated ethanol are also produced, for use in fuels, perfumes, beverages, and chemical production. Sugar and ethanol are sold on the domestic and export markets. Since 2005 mills have been selling more and more electric energy, and this may grow faster than the other businesses in the next few years.

A 4.5. How is sugarcane paid for in São Paulo?

Sugarcane can be produced by the mill itself, on its own or leased land, or produced by agricultural companies that are linked to the economic group – or by third parties, called sugarcane suppliers.

Sugarcane suppliers always sell to mills near the farms, for two reasons: the loss of quality in the sugarcane if delivery takes a long time – see question 4.1 – and the high cost of long-distance transport. This restricts the number of mills the suppliers can trade with.

To prevent an imbalance in this relationship, in 199 a study carried out by the association that represents sugarcane suppliers in São Paulo (Orplana) and the association that represents the sugar and ethanol mills in São Paulo (Unica) created voluntary parameters for fair and proper remuneration for producers.

Called Consecana, the system is based on the principle of sharing net revenue between sugarcane suppliers and the mills from the sale of sugar and ethanol. It uses: 1. a technical quality evaluation of the sugarcane delivered by the supplier, understood to be the amount of sugar contained in it, which can be used in industrial processes; 2. average agricultural and industrial production costs; 3. the prices of end products - sugar and ethanol – on the domestic or export markets, throughout the harvest year (May to April the following year); 4. the production and trading characteristics for each mill in the harvest year. This comprises the quantity produced for each product (sugar and ethanol) and its use (fuel, exports, etc.). The system has been widely adopted throughout the State of São Paulo and is updated every five years, according to the technological development in the sector, in both agricultural and industrial phases.

Currently the distribution of revenue between suppliers and mills is: 1. sugar: 59.5% to suppliers and 41.5% to the mills; 2. ethanol: 62.1% to the supplier and 37.9% to the mills.

That is, contrary to the popular perception, agricultural costs are higher than processing costs, with suppliers getting most of the revenue.

A5. Current expansion of sugarcane production

A 5.1. What is domestic demand for sugar, and how much sugar is exported from Brazil?

Only a third of Brazilian sugar production is sold on the domestic market, of which 50% goes to direct consumption and the other 50% goes to the industrial market (sodas, candy, ice-cream, and so on). Demand for sugar has been growing at between 1.5% and 2% a year. In the 2006/07 harvest Brazil exported around 19.5 million tons of sugar (two-thirds of production). Exports account for over 45% of the open sugar market. Brazil is the main sugar producer and exporter in the world.

Sugarcane production in the 2006/07 harvest was approximately 425 million tons.

A 5.2. What is the demand for ethanol in Brazil, and how much ethanol is exported?

In the 2006/07 harvest, 14 billion liters went onto the domestic market and 3.5 billion were exported. Ethanol fuel in Brazil that year replaced over 40% of gasoline.

A 5.3. What is the supply of sugarcane, sugar and ethanol expected to be in 2012?

With the growth of flex-fuel vehicle sales and the competitiveness of ethanol against gasoline (with prices in the main 60% below those for gasoline), in 2012/13 the sugar and ethanol sector is expected to be processing approximately 700 million tons of sugarcane, producing 36 billion liters of ethanol and 39 million tons of sugar. The growth is supply will come from new units, the expansion of existing units and increased agro-industrial productivity. This growth is being achieved by the construction of dozens of mills.

Currently 50% of sugarcane is used in ethanol production. As ethanol production tends to grow faster, it is estimated that in 2012 over 60% of sugarcane will be used in ethanol.

Expansion is happening in pastureland areas, mainly in partially worn out areas, in the West of São Paulo State, in the area known as ‘triângulo mineiro’, in Goiás, and in Mato Grosso do Sul.

A 5.4. How much investment is needed and who is providing the finance?

Investment in a mill that processes 2 million tons of sugarcane per harvest is around US$140 million (agricultural and industrial).

The finance is of various origins, from the mills themselves, the State-owned development bank, BNDES, Regional Funds, trading companies, IPOs and partnerships.

A 5.5. What are the premises for this expansion to succeed, assuming there is a solid market for ethanol?

Worthwhile prices for sugarcane, sugar and ethanol are needed. Amongst external factors, keeping average international oil prices over US$45 a barrel (at the current technological stage of ethanol production in Brazil) is a driver of ethanol production and use.

Access to the export market (although this is secondary in regard to the domestic market) requires other countries to adopt the mandatory use of ethanol, bilateral agreements that establish favorable conditions of access to the product, the prevention of protectionism, the reduction of imports tariffs, the maintenance of most-favorable trading conditions, as in the Caribbean Basin Initiative, and the development of new technologies to expand international production of ethanol on a large scale in the long term.

For the domestic market, the unification of the State-VAT (ICMS) rate throughout the country at the same level as São Paulo State (12%), the maintenance of current tax levels on gasoline, improved autonomy with ethanol in Flex-Fuel vehicles and the creation of market mechanisms that reduce ethanol price volatility are important points.

Flex-Fuel vehicles are now a fact in the Brazilian market and will completely dominate the scenario in the next few years. So there is a large market for hydrated ethanol and the market segment to be taken over by the product will depend on its capacity to offer competitive prices and quality.

B. Sugarcane and ethanol production: environmental aspects

B1. Soil use (food, energy): the Brazilian context

B 1.1. Won’t the expansion of sugarcane production into enormous areas of Brazil cause difficulties for food production?

With 850 million hectares, Brazil has a lot of land that can economically sustain agricultural production, whilst maintaining large areas of forest with different biomasses. Farmed land today accounts for only 60 million hectares (only 7% of the country, with around 21 million hectares of soy and 12 million hectares of corn). Pastureland covers around 227 million hectares, including part that is now worn out, and forests (including commercial ones) cover 464 million hectares. An estimate from EMBRAPA* indicates that there are also approximately 100 million hectares suitable for agricultural expansion for annual species and also an estimated area equal to 20 million hectares is thought to be available through added technological development in livestock farming.

The sugarcane area now is only 0.6% of Brazil’s territory (0.3% for ethanol). So there is no conflict, in Brazil, between the use of land for food (which the country is already a major exporter of) and energy.

* Castiglioni, V.B.R. EMBRAPA. In. “Avaliação da Expansão da produção do etanol no Brasil”, CGEE-NAE, Brasília, 2004.

B 1.2. Nevertheless, could expansion threaten areas where important biomass is supposed to be protected?

The expansion of sugarcane in the last 25 years has been essentially in the Center South of Brazil, in areas far away from the Amazon Forest, the Atlantic Forest and the marshland in Pantanal. From 1992 to 2003 in the Center South, expansion was almost totally (94%) in existing units, and new agricultural frontiers were hardly involved. In São Paulo growth occurred with the substitution of other crops and pastureland. Now and in the next few years growth will be in the Center South, especially in the west of São Paulo, on the outskirts of Mato Grosso, in some areas in the State of Goiás, and mainly in worn-out areas of pastureland or fields. These areas in part occupied in the past (since Brazil was discovered and certainly well before PROALCOOL) tracts of the Atlantic Forest and the savannahs.

Expansion is not considered into any forest or protected areas, especially as current legislation would not allow it.

B2. Brazilian environmental legislation on sugarcane, sugar and ethanol production

B 2.1. Is environmental licensing required for sugar and ethanol production units in Brazil?

Yes. Amongst the Government’s tools with which it can protect the environment, item IV of article 225 of the Brazilian Constitution stipulates the need for a previous study into the environmental impact of any construction or potentially damaging activity. This study is defined by law and access to it is guaranteed to anyone.

Federal Law nº 6.938/81, which provides for National Environmental Policy, adopts the following as instruments of this policy: a) the appraisal of environmental impact b) the licensing and review of polluting or potentially polluting activities (art. 9, III and IV).

The licensing procedure is regulated by National Environment Council (CONAMA) Resolution nº 237/97, according to which licensing depends on the preparation of an Environmental Impact Study and the respective Environmental Impact Report (EIA-RIMA) by the interested party. The EIA-RIMA involves a highly detailed study that describes the venture, the production process (including products, sub-products and the generation of waste and effluent) and the appraisal of the environmental impact and potential impact of the venture, on its surroundings and the respective region, as well as the presentation of proposals to reduce these impacts. There are three types of license: the prior license (LP), approving the location and conception of the business, attesting to its environmental viability and setting out requirements that must be met for the following licenses; the installation license (LI), for the installation of the venture; and the operating license (LO), for the beginning of the venture’s activities. During the procedure public hearings may be held to discuss the venture with the community.

B 2.2. What is the environmental licensing process like?

Licensing is the responsibility of the State environmental authority, except for certain cases stipulated in law, such as when the venture or its impact extends beyond the limits of one State or the country (art. 10 of Law nº 6.938/81) . In the State of São Paulo, the country’s main sugarcane, ethanol and sugar producing region, a new installation with a sugarcane crushing capacity equal to or in excess of 1,500,000 tons must be preceded by a licensing request accompanied by EIA-RIMA (State Environment Department Resolution nº 42/2006). In practice, this capacity covers all new projects to be set up in the State in the next few years.

The Operation Licenses for sugar are valid for 3 years, and those for ethanol, 2 years. Renewal must be requested before they expire – when the unit must demonstrate it continues to satisfy the State and Federal environmental norms.

There are supplementary norms in the State of São Paulo on licensing, namely Law nº 997/76, regulated by Decree nº 8.468/76, and various other norms that were issued later. Environmental licensing norms for the sugarcane and other industrial sectors vary from State to State.

B 2.3. Are there any specific norms and requirements to control emissions associated directly to sugarcane, sugar and ethanol production?

Yes. These norms are generally in constant development. Today the most important ones regulate the burning of sugarcane crops, the use of bagasse in boilers and the use of vinasse as fertilizer.

B 2.4. What environmental demands are now made to control burning sugarcane crops?

Burning of sugarcane in the field is a centuries-old practice in many countries, designed to help in the manual cutting of sugarcane, and making it safer. It involves the controlled burning of the leaves and tips of the sugarcane. This burning, contrary to conventional wisdom, takes place in a small, well-delineated area, and is extremely fast (about 10 minutes) so that the sugarcane itself is not burned in the process. Alternatively, sugarcane can be harvested mechanically, doing away with burning.

The interest in reducing pollution (mainly carbon) and the risk of uncontrolled fire has led to a recommendation to abandon this practice. This cannot happen over night because a lot of workers are still employed in manual cutting (in 2006 around 70% of the sugarcane in Brazil was cut manually) and a very fast shift to mechanized cutting would create unemployment. Environmental and social interests can be accommodated by a gradual elimination of burning. The controlled burning of sugarcane crops id regulated federally by Decree nº 2.661/98. However, the State of São Paulo has a more restrictive law (State Law nº 11.241/02) . This is the only Brazilian State with its own law on the issue.

Both laws, besides ruling on authorization procedures, safety and environmental protection, set a timeframe for the elimination of the practice. The difference is that the Federal law rules on the gradual end of burning exclusively in areas that can be mechanized, whilst São Paulo imposes elimination across the board*, but with differentiated deadlines.

In practice the elimination of burning in the State of São Paulo has happened faster than required by law, and has now reached about 35% of the total sugarcane area.

* Non-mechanizable areas: 1. plantations of less than 150 hectares; 2. land sloping in excess of 12%; 3. areas with soil structures than make mechanization impossible.

B 2.5. Is there any regulation controlling the use of vinasse as a fertilizer for the crop?

Vinasse is a sub-product of the sugarcane distillation. Many years ago it was recognized that vinasse could be a valuable organic fertilizer (replacing potassium) and an important source of replacement water for the soil. Hence it has been used by the sugarcane industry in fertirrigation, replacing salts and other nutrients extracted by the sugarcane during growth and maturing. Fertirrigation, besides offering great benefits by reducing the need to use water and chemical fertilizers, is also an economical and sustainable way to recycle this sub-product.

B 2.6. Are there any norms for the emission of atmospheric pollutants from boilers fed by sugarcane bagasse?

Bagasse is the lignocellulosic waste from the sugarcane juice extraction process. Given the fact that it is fiber rich, it can be used as boiler fuel, replacing fossil fuels commonly used in Brazil (fuel oil and natural gas). Today it is considered an important sub-product in increasing energy produced by the mills. One of the main advantages of bagasse is that the product does not emit sulfur compounds (SOx) into the atmosphere.

In order to regulate the emission of atmospheric pollutants from industrial sources, the National Environment Council approved CONAMA Resolution nº 382/2006, setting national limits on the emission of particulate material and nitrogen oxide. The Resolution states that State agencies may set stricter limits when necessary.

Nominal thermal power (MW) MP (1) NOx (1) (such as NO2) Lower than 10 280 N.A. Between 10 and 75 230 350 Greater than 75 200 350 (1) the results must be expressed in terms of mg/Nm3 concentration, dry material, and 8% excess oxygen. N.A. – Not applicable

B 2.7. What are the regulations for water use in the turning sugarcane into ethanol and sugar?

The sugarcane industry in the Center South of Brazil uses very little water per tom of sugarcane produced and processed compared with other regions in the world. The industrial systems are practically all closed, with a high level of recirculation. In agriculture, sugarcane is not irrigated, using only rainwater. (See item B3.1) The State controls the use of surface or underground water resources through the proper environmental agencies. In the State of São Paulo the agency responsible is the Department of Water and Electrical Energy, under State Decree nº 41.258/96.

In addition, since 2007 the State of São Paulo has charged users of water resources for volume of water collected and consumed, and organic effluent released. This came into being under State Law nº 12.183/05, regulated by State Decree nº 50.667/06. Charging is decentralized by each of the 21 Water Basin Committees in the State of São Paulo, as they best understand the water resources’ availability, quality and collection for each region of the State.

Currently the charge is limited to R$ 0.01 per cubic meter collected, R$ 0.02 per cubic meter consumed and triple this sum total for each cubic meter of effluent released into the waterways. With the charge, there will be a natural incentive to make better use of water.

B3. Production: conservation of the soil and water resources, agrochemical use, farming practices, and industrial waste

B 3.1. What impact do sugarcane crops and ethanol production have on the availability of water in Brazil?

Although Brazil has the world’s largest water supply, with 14% of its surface water and the equivalent in annual runoff in underground aquifers, agricultural irrigation as a whole is not much used (~3.3 million hectares, out of 227 million hectares in the world). Sugarcane in Brazil is practically not irrigated, except in small areas where it is used as a supplement. This is an enormous advantage over other regions of the world. Consequently environmental problems over water quality caused by irrigation (the seeping of nutrients and agrochemicals, erosion) and its industrial use are considerably less common than in other parts of the world. Brazil’s environmental agency, EMBRAPA, classifies sugarcane as Level 1 (no impact on water quality). In the ethanol and sugar industries levels of water collection and release have been substantially reduced in recent years: from around 5 m3 per ton of sugarcane (in 1990 and 1997), to 1.83 m3 per ton of sugarcane in 2004 (in São Paulo). The efficiency of treatment for release was over 98%.

Permanent Protection Areas in riparian forests cover 8.1% of the sugarcane area in São Paulo, of which 3.4% have natural forest cover and 0.8% has been reforested. The implementation of programs to rebuild riparian forests and to protect springs and water courses may help promote vegetable biodiversity in the long term.

B 3.2. What impact has sugarcane had on the loss of farmland (erosion, quality) in the Center South of Brazil?

Sugarcane has expanded into the poorer areas (mainly extensive pasturelands in the savannah). It helps in the recovery of this soil, adding organic material and chemical-organic fertilizer, improving its physical and chemical condition and incorporating the soil into Brazil’s farmable land.

Sugarcane in Brazil is now recognized as having a relatively low impact as regards soil erosion (compared with soy and corn, for example). This continues to improve as burning and preparation techniques are reduced, causing lower losses compared with the direct planting of annual crops.

B 3.3. What is the impact of using agrochemicals (fungicides, herbicides, insecticides) on the sugarcane crop in Brazil?

Legislation in Brazil, including norms and controls from production to the use and disposal of material, covers all the important areas. Sugarcane has no special problems, benefitting from large biological disease control programs.

Sugarcane uses fewer pesticides than citrus crops, corn, coffee and soy. Insecticide use is low, and the use of fungicides is practically zero. Amongst the main sugarcane diseases and pests, control of blight (the main disease) and leafhoppers are biological. Blight has the largest biological control program in Brazil. Ants, beetles and termites are controlled chemically and it has been possible to reduce the use of a lot of agrochemicals using selective applications. Sugarcane diseases are tackled by the selection of resistant varieties in genetic improvement programs. This procedure has prevented widespread outbreaks such as the mosaic virus (1920), smut and rust diseases (1980s) and SCYLV (1990s). Improvements have produced plants that are resistant to herbicides, to smut disease, mosaic virus, SCYLV and sugarcane blight.

Weed control methods have often been modified as technological process has been made. In Brazil sugarcane still uses more herbicides than coffee or corn, fewer that citrus farming, and the same as for soya. There is a strong trend towards increasing areas that harvest sugarcane leaving the residual vegetation in the soil. Today it does not seem possible to totally eliminate herbicides in these cases, as had been hoped, especially given the rise of new disease.

B 3.4. What use is made of fertilizers in sugarcane crops in Brazil, and what environmental impact do they have?

Fertilizer use in Brazilian agriculture overall is low, although it has increased over the last thirty years, so reducing the need to open up new areas.

Amongst the large crops in Brazil (over 1 million hectares), sugarcane uses less fertilizer than cotton, coffee or oranges, and the same as soy. Usage is also low compared with sugarcane crops in other countries (Australia uses ~50% more).

The most important factor is nutrient recycling, with the application of industrial waste (vinasse and filter cake), considering the limits imposed by topography, soil, and environmental control. Soil potassium levels and productivity have increased. Recycling of nutrients is being optimized, including the use of residual sugarcane plant vegetation.

Many studies into the contamination of underground water by vinasse have shown that in general there is no impact by applications under 300 m3/hectare. CETESB’s Technical Norm P4.231 (the environmental agency linked to the São Paulo State Environment Department) regulates all relevant aspects in this regard.

B4. Ethanol use: the impact on vehicle and greenhouse gas emissions

B 4.1. What are the environmental benefits associated with the use of ethanol?

Ethanol is produced from renewable resources and used as a gasoline oxygenate it reduces greenhouse gas emissions. These two characteristics make it strategically important in tackling the greenhouse effect and global climate change, aligning the product with sustainable development principles. (See item B4.5)

Compared with oil and its derivatives, it is of low toxicity and high biodegradability, factors of the utmost importance in the event of accidental spills and leaks at sea, into soil, and surface and underground water. This means that the environmental impact of ethanol in the event of an accident will be substantially lower and the environment will recover faster when compared with fossil fuels.

Because of its high octane count, ethanol has been replacing toxic lead-based anti-knocking additives. In terms of atmospheric emissions, ethanol use contributes to a reduction of important pollutants, such as carbon monoxide (CO), sulfur oxides (SOx), particles (MP) and various toxic organic compounds such as benzene, toluene, xylene and 1-3 butadiene. In addition, several studies have shown that total emissions (volatile compounds and exhaust gases) present less potential to form smog than gasoline.

B 4.2. Is the emission of aldehydes by ethanol a problem?

In fact, the incomplete burning of ethanol in the engine emits aldehydes, mainly acetaldehyde. However, it is not well known that the use of any other fuels that have automotive applications – gasoline, diesel, natural gas, liquefied oil gas, vegetable oil, biodiesel, and methanol – also produce aldehydes, often in worse conditions. It must be remembered that fossil fuels produce large quantities of formaldehyde, which is much more aggressive than acetaldehyde. Studies carried out in Brazil by CETESB (www.scielo.br/pdf/rsp/v39n3/en_24804.pdf) on diesel vehicles have shown that the emission of aldehydes by these vehicles can be up to 40 times greater than for a vehicle running exclusively on ethanol. In Brazil and elsewhere the emission of aldehydes has been controlled with the aid of catalytic convertors, standard equipment that has been used for years by vehicles that need to meet pollution limits.

Air quality studies in regions where ethanol has been used, whether pure or mixed with gasoline, have not indicated that the emission of aldehydes resulting from its use has caused problems.

In the State of São Paulo vinasse use in the soil is regulated by Technical Norm P4.231 at the Environmental Sanitation Technology Company (CETESB) – an environmental agency linked to the State environment Department.

The Technical Norm enhances this common practice by establishing limits on the application of vinasse based on the potassium concentration in the soil. It also imposes a series of environmental protection measures, including accompaniment of the underground water in areas where vinasse is applied, preventing or controlling any pollution.

Every year farmers in the State of São Paulo have to present the CETESB with a vinasse plan demonstrating that they have complied with the norm. The technical improvement that the São Paulo Technical Norm has achieved suggests that it will become a national standard.

B 4.3. Is it true that the use of ethanol-gasoline mixtures increases NOx emissions?

NOx (nitrogen oxide) emissions may increase marginally when a fleet uses mixtures of gasoline with up to 10% ethanol. This variation, which is of around 1% on average, besides not being very being significant, is way below that observed for vehicles converted to use natural gas or diesel, the use of which has been promoted as ecologically sounder in many countries, but which may emit 200% more NOx than gasoline-powered engines.

B 4.4. Does the addition of ethanol to gasoline increase the emission of volatile compounds?

Although ethanol is a low-volatility fuel, on average five times less than gasoline, it increases the volatility of the gasoline mixture. The magnitude of this emission depends basically on the ethanol ratio in the mixture and the composition of the gasoline. This characteristic, which can be positive in temperate climates as it aids engine starts in the cold, has been much discussed, following the allegation that it increases the permeability of the fuel in components made from certain types of rubber and plastic, increasing the emission of volatile compounds. It is important to note that this effect can be minimized through the proper composition of the gasoline with ethanol in the ratio planned.

Given that there is a trend to examine increased mixture volatility, which not uncommonly results in an exaggeration of its impact, it is recommended that analysis be done in the context of total pollutant emissions for the fleet of vehicles under consideration. This new approach will show that whilst on the one hand these emissions could increase, on the other hand the benefits stemming from the mixture with ethanol to reduce exhaust gases more than make up for the negative effect.

B 4.5. Is it true that ethanol from sugarcane produced in Brazil is much more efficient in mitigating the greenhouse effect than ethanol from corn (or other cereals) produced elsewhere?

As seen in A 1.3, for sugarcane produced in Brazil the ratio between the renewable energy produced and fossil energy used was 8.9 for ethanol (2005), close to five times better than for corn.

Although greenhouse gas emissions from fossil fuel use in the production of biofuel are not the only ones in the process, they are much more important than the rest. This is why ethanol produced in Brazil has greenhouse gas emissions that are around four times lower than most others, made from corn or other cereals.

The result is an extraordinary performance for the sector, preventing greenhouse gas emissions equivalent to 13% of emissions from the entire energy sector in Brazil (based on 1994). For example, in 2003 greenhouse gas emissions saved by the sector were: - with ethanol replacing gasoline: 27.5 million tons of CO2 equivalent - with bagasse in sugar production: 5.7 million tons of CO2 equivalent For every 100 million tons of additional sugarcane in the next few years, 12.6 million tons of CO2 equivalent could be saved with ethanol, bagasse, and additional electrical energy.

The trend in the sector is to improve this performance still further, as there is a major effort being made to improve the energy efficiency of the production system, making more energy (mainly electricity) available for sale without increasing fossil fuel consumption.

C. Sugarcane and ethanol production: social impact

C1. Labor legislation in the sugarcane business

C 1.1. What is the applicable legislation on capital / labor relations for the sugarcane business?

The Federal Constitution, in chapter II – on social rights – article 7, stipulates the rights of urban and rural workers in 34 subsections. Below the Constitution, there is the Consolidation of Labor Laws (CLT), which is the basis of Brazilian labor legislation.

Rural work, although it is considered to be the same level as urban work (art. 7), is still ruled by Law nº 5.889/73 and by Decree nº 73.626/74. The sole paragraph in article 4 of the Decree mentioned sets forth the applicable CLT articles on rural work.

There are also other norms, resulting from the applicable capital / labor relations in the sector. For example, Law nº 605/49 (Paid Weekly Rest), Law nº 8.036/90 (Severance Fund Payment) and Law nº 8.213/91 (Social Security).

C 1.2. Which legislation is applied to worker safety and health?

In addition to the matter stipulated by the Federal Constitution and infra-constitutional legislation, the rural sector also complies with Regulatory Norm nº 31, of 03/04/2005 (Safety and Health for Work in Agriculture, Farming, Forestation, Forest Exploitation and Fish Farming) from the Ministry of Labor and Work, specific to rural work. This is considered now to be one of the most advanced norms in the world regarding rural worker safety.

For the urban sector there is a set of Regulatory Norms at the Ministry of Labor and Work which assures worker health and safety.

C 1.3. What is the union framework sugar and ethanol?

The economic and professional representation of the sector is set out by article 577 of the CLT: 1^st Group – Food Industries (sugar production) 10^th Group – Chemical and Pharmaceutical Industries (ethanol production) In the rural sector, sugarcane suppliers and agricultural companies (linked to the industries) are represented by the Rural Employer’s Association and the State Agricultural Federation. As for the workers, they are represented by the Rural Workers and Employees Unions.

In spite of principle of uniqueness, Brazilian legislation accepts representation through “differentiated categories”. Such categories – theoretically – exist based on the peculiarities that pertain to a certain group of employees, such as drivers.

C 1.4. What is the mechanism used in Collective Labor Bargaining?

The law allows the parties to enter into collective agreements. Such norms may be summarized in the Collective Labor Bargaining (Employer’s Association x Professional Union) and/or Collective Labor Agreements (companies and professional entities). These norms must be registered in the Regional Labor Sub-office and may be in force for 2 years.

The category’s base date establishes the compensation clauses, based on free negotiation criteria and social clauses. The refusal to negotiate or the inability to enter into a Collective Agreement/Bargain may lead the parties to establish a collective labor dispute (according to the most recent labor norms, as long as it is filed in mutual agreement by the parties).

The collective norms have a “complementary” nature the clauses, the object of the negotiation, cannot prevail over legislation. If there are two norms (agreement and bargaining for the same professional and economic categories) in force over the same period, the most beneficial conditions for the worker should prevail. In the latter aspect it is important to note that there is a doctrinal and jurisprudence disagreement regarding the criteria to be adopted in analyzing the most beneficial norm for the worker; to review it only in terms of the conflicting aspect, or the decision on the overall norm (the combining principle).

C 1.5. What improvements have been made in the sugar and ethanol sector regarding capital / labor relations?

Capital / labor development has been ongoing and significant. Through free negotiation, a series of benefits has been assured to workers over the last few decades, amongst which: medical, dental, optical, pharmaceutical assistance, life insurance, meals, food parcels, meal and transportation vouchers, social security, funeral and illness assistance, schooling assistance, breakfast, Christmas hampers, supermarket partnerships, loans, subsidized sales and access to credit cooperatives.

Along with these, the concern for personal development and professional training has always been present in the production units. Investment in technical training and conduct, as well as incentives for educational improvement are considered to be priorities in the continuous professional growth and improvement process.

C2. The Brazilian employment scenario and the sector’s position within it

C 2.1. What is the employment / unemployment status in Brazil today?

The unemployment rate in Brazil went up by 12.5% between 1996 and 1999 and has remained between 9 and 10% since 1999 (IBGE, PNAD – National Survey on Household Sample).

The metropolitan unemployment rates (IBGE, PME, surveys commissioned in Recife, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo and Porto Alegre) converge now on the PNAD results (in the same regions). In November 2006, the unemployed accounted for 9.5% of the Economically Active Population (EAP). The EAP includes formal and informal jobs, simply using the definition of “occupied people”.

The number of occupied people, in the same survey, increased by 3.0% on the same period in the year before. Men accounted for 55.8% of the occupied population, and women accounted for 44.2% . The population aged between 25 and 49 years old accounted for 62.9% of the total of people occupied.

48.4% of the occupied population worked between 40 and 44 hours a week, and 34.2% worked over 45 hours per week.

Officially registered workers in the private sector accounted for 41.5% of the occupied population; unofficial workers in the private sector accounted for 14.8%; independent workers accounted for 19.5%, not including domestic workers, armed service personnel, State government workers, and others.

The high rate of people outside the social security network (55%, in 2002) is a severe problem. The child labor index (10 to 14 years old) has been reduced (from 5.3% in 1992 to 2.4% in 2002) and the functional illiteracy index (less than three years in school) among workers has fallen from 37% to 23.9% over the same period.

A major problem for the job market is Brazilian legislation itself, which imposes significant burdens on employers, thus discouraging new job creation, especially for formally registered jobs, which explains the growth of the informal market.

Income distribution (occupied people, 2002) shows that 53% receive up to two minimum wages (half of those, less than a minimum wage) and 1.3% over twenty minimum wages.

C 2.2. What is the sugarcane industry’s share of the job market?

Brazilian agribusiness as a whole accounts for 20.6% of Brazil’s Gross Domestic Product – GDP - and creates 14% of all jobs in Brazil. The sugarcane sector has 6% of the Brazilian agri-industrial jobs and accounts for 35% of GDP, and rural employment in the State of São Paulo. Brazil’s sugarcane activity accounts for around one million direct jobs in total (765,000 formal direct jobs, Annual Listing of Employees and Salaries - RAIS 2002); around 520,000 people were working only in sugarcane production in 2002 (PNAD, 2003). The State of São Paulo has around 400,000 direct jobs in the sector, and 95% of these workers are officially registered, entitled to all the labor legislation rights, accounting for 40% of rural employment in the State. The absolute number of jobs in the sector fell in the 1990s (increased mechanization and better management) and has gone up again with the expansion of the sector in recent years.

Seasonality rates in agricultural jobs have gone down due to mechanization and higher investment in professional training. The estimate was 2.2 at the end of the 1970s, going to 1.8 at the end of the 1980s and reaching 1.3 in some mills in the mid-1990s. This trend is being boosted at the moment.

It is important to note that the formal job rates (officially registered) in the sector are much higher than the national average. PNAD and RAIS 2005 data show that the sector’s agricultural area accounts for 72.9% of the formal jobs in Brazil; in the State of São Paulo, it reached 93.8% (2005) (from 80.4% in 1992). These numbers show a clear trend, improving working conditions, less seasonality and better labor improvement.

C 2.3. How does workers’ compensation in the sector today compare with that in similar sectors in Brazil?

The differences in regional development show up in the indicators for the sector. The poorest regions have lower salaries and use more labor. In the agricultural area the average level of education in the North-Northeast is half (in years) that in the Center-South.

Taking into consideration formal and informal jobs (PNAD 2005 sample) compensation in Brazil is: All sectors: 801 R$/month; agriculture, 462; industry, 770; services, 821.

Sugarcane, agricultural area:

Brazil, 495; N-NE, 316; C-S, 697; São Paulo, 810. Industry, ethanol: Brazil, 960; N-NE, 600; C-S, 985; São Paulo, 1,196.

The figures for people in the industry and in sugar production are a little lower (around 20%) compared with ethanol.

In the Center-South, workers in the sugarcane crops have higher compensation than the ones in coffee and corn crops. This compensation is equivalent to that in citric farming, but lower than that for soy (which is highly mechanized, with more specialized jobs). In the North-Northeast, sugarcane compensation is higher than that for coffee, rice, bananas, manioc and corn; it is also equivalent to that for citric faming, and lower than that for soy.

Formal work compensation does not include bonuses or any other benefits.

C 2.4. What is expected to happen to employment levels with increasing automation and mechanization?

Amongst other things, the Sugarcane Technology Center has assessed the impact on employment of sugarcane harvesting without burning. Taking a hypothetical 100% level of mechanization in the State of São Paulo and 50% in the rest of the country, there would be a reduction of 165,000 jobs, compared to the fully manual system, for total employment levels in 2000. This is an ongoing, fast process in São Paulo. The use of residual sugarcane vegetation as an energy source could create new jobs in the agricultural area, as an alternative for the use of bundling machines (which are not defined as technology at the moment). Indirect jobs were not taken into account.

The reduction in direct agricultural jobs in the 1990’s was partly due to harvest mechanization. Planting is also being mechanized, although the implication for employment is lesser. This reduction expected fifteen years ago, when the discussion about limiting sugarcane burning and the consequent reduction of manual cutting began. The main expansion of the cultivated area is now happening outside the areas used by the existing mills, and this expansion has already been highly mechanized and is using local labor, maintaining the absolute number of jobs in the sector.

As with soy, there has been a great development in the quality of work (better trained workers, machine operators replacing sugarcane cutters), and in compensation in the sector.

C 2.5. Are there any inadequate working conditions in the sugar and ethanol sector in Brazil according to the ILO and Brazilian legislation?

First of all, it is necessary to acknowledge how improper conditions are understood and dealt with by the International Labor Organization and Brazil’s penal legislation (Penal Code)*.

After that, the answer is clear. There are no improper working conditions in the sugar and ethanol sector under these concepts, as there is no curtailment of freedom and there is a history of stringent compliance with the law, which has been enforced efficiently. Furthermore, the high rate of formal employment registration and a strong and careful civil society have illustrated this. It is also important to stress that the Ministry of Labor and Employment does not consider the sugar and ethanol sector in Brazil to be a segment that uses labor in conditions “similar to those of slavery”.

* The kind of work in question is called forced labor by the ILO and its main characteristic is the curtailment to freedom, which is the reason why it is sometimes wrongly called slavery. The curtailment to freedom referred to, according to the ILO, is usually seen in four patterns: servitude by debt, document withholding, difficult access, and the presence of armed guards. These characteristics are often accompanied by inhumane living and working conditions, and total disrespect for an individual’s dignity.

As for Brazil’s penal legislation, it deals with the issue in article 149 of the Penal Code and classifies it as placing workers in a condition similar to slavery, with the following key characteristics: forced work or extended working hours, whether in degrading conditions or by restriction of the workers’ movement by any means.

C3. Social responsibility practices

C 3.1. Are there any actions to systematically implement social responsibility programs to improve working conditions?

There have been many actions (in isolation or as part of more comprehensive programs) over the last decade. As a consequence, the mills in the State of São Paulo have maintained (2003) more than 600 schools, 200 daycare centers and 300 first-aid stations. At 47 units (São Paulo) more than 90% of them provided medical and dental assistance, transportation and group life insurance and over 80% provided meals and pharmaceutical assistance to staff. Over 84% had profit sharing programs, room and board and daycare centers.

An important step was the introduction of a system with Social Balance Indicators (the IBASE model) four years ago in many companies. The results at 73 companies (Unica, SP, 2003) have shown resources equivalent to 24.5% of the payroll being used in areas such as: 6.72 (profit sharing); 6.54 (catering); 5.9 (health); 2.3 (safety and occupational health); 1.9 (education, training and professional development). These indicators have been gradually used as a benchmark between the companies, boosting the introduction of programs.

Unica has joined the World Bank Institute and started a corporate social responsibility and sustainable competitiveness program. It is a course targeting the companies’ staff (directors, managers and associates) and students from the best universities in the State of São Paulo. In 2004 and 2005, 2,500 people attended training to assess the real conditions and prepare reliable diagnoses.

The sector takes part in the international survey “Business and Economic Development”, to identify the impact its companies have and to assess the sustainability of the model used. The results of this work – carried out with the Ethos Institute (Brazil , BSR – Business for Social Responsibility (USA), Institute of Social and Ethical Accountability (England) and Dom Cabral Foundation (Brazil ) – are key to reviewing the current situation. In 2006, 30 companies and 650 people (from all levels) took part. Over 30 companies will be included in the next one.

D. Technology: development and potential

D1. Technology: development, scenarios and perspectives

D 1.1. What role has technology played in ongoing cost-cutting in ethanol production since 1975?

Ethanol cost reductions in Brazil since the start of the program have been the result of technological and managerial improvements and investments in infrastructure. These reductions have been achieved through comprehensive discussions of the political and economic conditions (initial government support followed by deregulation; policies for liquid fuels; the creation of an important set of legislation/regulation for environmental and social subjects). Improvements in competitiveness have been supported by investments (production, logistics) and by a meaningful development and implementation of technologies.

D 1.2. What are the main technological development issues for ethanol production in Brazil?

Greater flexibility in the integrated operation of the two products (sugar and ethanol) has also improved a number of processes: 1980/1990: The introduction of new varieties of sugarcane developed in Brazil; new crushing systems; fermentation with much larger capacities; use of vinasse as a fertilizer; biological control of sugarcane blight; optimal agricultural operations; electric energy autonomy.

1990/2000: Start of surplus electric energy sales; better technical, agricultural and industrial management; new sugarcane harvesting and transportation systems; improvements in industrial automation.

Some overall results for the State of São Paulo have been: + 33% t sugarcane / ha; + 8% sugar in sugarcane

+ 14% conversion of sugar in sugarcane for ethanol

+ 130% productivity in fermentation (m3 ethanol / m3 reactor. day).

D 1.3. What is the expectation for new technologies over the next few years, with major impacts on costs and quality?

In addition to sharing technologies which are already commercial, innovation in processes for ethanol production and product diversification (based on sucrose and sugarcane lignocellulosic waste) should happen.

In 2000 the estimate was that the additional implementation of already commercial technologies could result in cost reductions of up to 13% in production in the Center-South.

New processes include “precision agriculture”; integrated sugarcane transportation and harvesting systems; much higher industrial automation; new separation processes (juice and final processing). Genetic modification of sugarcane is developing fast in Brazil (on an experimental scale, including field tests); the sugarcane genome was mapped in 2001 in São Paulo and dozens of projects (applications: functional genome) have been in progress in public and private institutions.

Product diversification has been sought, including sucrose-based products (in new companies, within the mills, or not) and ethanol chemistry, as well as the increase in sugarcane biomass energy production. Except for sucrose, the energy in one metric ton of sugarcane (adding the residual sugarcane vegetation) is equivalent to 2/3 of the energy of barrel of oil. Such biomass can be recovered at relatively low costs and less than half of it is used today. Available technologies may generate additional energy, representing gains of 30% on the value of sugar and ethanol from bagasse and 50% from residual sugarcane vegetation. The development of efficient conversion of biomass into ethanol (expected in the next ten years) may lead to the same again.

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