A sustainable sugar rush

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Amid the ups and downs of Brazil’s ethanol industry – and there have been many recently – Vasco Dias is having a good day.

The chief executive of Raízen, a joint venture between Royal Dutch Shell and Cosan, the nation’s biggest sugar and ethanol exporter, has just asked his board to approve a project that could along with others of its type one day transform the global energy industry.

After years of research with partners Codexis of California and Canada’s Iogen into so-called cellulosic ethanol – fuel produced from bagasse or the leaves, husk and other organic waste from sugar cane production – he is proposing to the board that Raízen set up an industrial-scale plant in Brazil to produce it. With a capacity of about 10m gallons a year, this would be one of the first of its type anywhere.

“This is the cleanest solution possible: taking rubbish – bagasse, biomass – and transforming it into fuel,” says Mr Dias in his office in São Paulo, Brazil’s biggest city and the capital of its main sugar producing state. “As soon as someone can crack this, it’s going to explode.”

Full commercialisation of cellulosic ethanol is still some years away, and faces many challenges – but its promise to double the productivity of Brazilian sugar cane ethanol producers is just one more bright spot in an industry whose potential to generate abundant clean energy as well as plastics, lubricants and other products made from renewable material is virtually unmatched by any other fuel source.

With the lifting of decades-old US tariffs on ethanol imports in December, for the first time Brazil has free access to the giant North American market. There are other potential markets, too – the European Union has pledged to move to increase the proportion of environmentally friendly fuel in petrol to 10 per cent by 2020.

The moment this most Brazilian of industries has always sought – the opportunity to turn sugar cane ethanol into a globalised export commodity – appears finally to have arrived.

For President Dilma Rousseff, struggling with economic growth that slowed dramatically to 2.7 per cent last year as a stronger currency eroded the competitiveness of its manufacturing sector, ethanol remains an area in which Brazil has a clear advantage against other emerging markets. With the nation set to host the Rio+20 global environmental conference next month, the industry is also important to ensure Brazil’s enviable record on renewables, which account for nearly half of its energy use, remains intact as it prepares to tap recent enormous offshore oil discoveries.

But while ethanol may well be the fuel of tomorrow – reflecting the image of Brazil itself as a nation of great but still not fully realised potential – the question is how to realise its promise.

“Any rough calculation indicates one could easily triple the production of ethanol in Brazil with land that is available,” says Professor José Goldemberg, an environmental expert. “That would not replace all the gasoline production but it would make a dent in it. This is is the potential but it is not [yet] happening.”

Brazil’s dominance of the sugar trade is a cornerstone of its agricultural might. It is already the largest producer and exporter, with control of 50 per cent of the global market. It also has enough land suitable for sugar cane production to supply the equivalent of one-fifth of the fuel used in the world’s cars today, according to Unica, the country’s industry association – without deforesting the Amazon. In 2008, the value of the industry was estimated at 2 per cent of Brazilian gross domestic product. It is estimated to be worth about $50bn today.

Ethanol use in Brazil took off after 2003, when “flex-fuel” cars – able to use either petrol or ethanol – were introduced. As of 2010, 80 per cent of new Brazilian cars used flex technology. The country today produces 30 per cent of the world’s ethanol, second only to the US, with 58 per cent.

“Brazil’s economic growth and the rising sales of flex-fuel cars that run on gasoline or ethanol drive the continued expansion of the country’s sugar-ethanol market,” Marianna Waltz, an analyst with Moody’s Investors Service, wrote in a recent report on the industry.

In spite of lingering concerns about sugar cane farmers using fire to manage their crops or competing with pastoralists for land, leading ranchers to deforest new areas, Brazilian ethanol is considered one of the “cleanest” fuels in terms of greenhouse gas emissions. “Sugar cane ethanol is a very high-performance fuel; it’s much better than corn ethanol,” says Melinda Kimble, an expert in biofuels such as ethanol at the UN Foundation, the sustainable development campaign group. A 2010 study by the US Environmental Protection Agency found that corn ethanol generated emissions of between 48 per cent lower and 5 per cent higher than petrol. The average emissions reduction from Brazilian sugar cane-based fuel was 61 per cent.

The US, the world’s largest fuel market, is the obvious target for Brazilian exporters. America’s federal Renewable Fuel Standard this year compels petrol and diesel refiners to blend in 2bn gallons of “advanced biofuel”, a category that includes Brazilian ethanol but excludes US production made from corn. That volume is equivalent to only about 1.2 per cent of the US road fuel market. But this is set to grow quickly. Under the EPA’s latest plan, the advanced biofuel requirement almost triples by 2015 to 5.5bn gallons and rises 10-fold to 21bn gallons by 2022.

With the end of the 54 cent per gallon US tariff, which posed a barrier to cane ethanol imports, the road therefore seems open for Brazilian ethanol in the US.

Almost open but not quite. The problem Brazilian and US ethanol producers are facing is the “blend wall” – a limit on the proportion of biofuel that can be mixed with road fuel in the US. There is a conflict between two sets of regulations. While the RFS is proposing to increase use of biofuels, fuel quality rules impose a ceiling, which is at the moment about 10 per cent, creating a blend known as E10. Already, there is more ethanol coming into the US than can be used under the E10 limit, and the country is starting to export some of its excess, including to Brazil.

In a “somewhat perverse” situation, according to Bob Dinneen, president of the American industry’s Renewable Fuels Association, the US is importing growing volumes of Brazilian ethanol and simultaneously exporting increasing amounts of its own production to countries such as Canada and the UK. The solution would be a move to E15 – a 15 per cent ethanol blend that the EPA has approved in principle for vehicles built since 2001. But the spread will be slow, amid resistance from some oil-producing US states, fuel retailers who complain of added expense and complexity and the US petrol industry.

Yet more worrying than the challenges in the US market could be those of Brazil’s own making, analysts say. The strong growth of the country’s sugar cane industry in the mid 2000s has faded following a lack of investment after the global financial crisis of 2008-09.

This has been compounded by dry weather, which reduced last year’s sugar cane output for the first time in a decade and forced the government to reduce the compulsory mix of ethanol in petrol, and to import significant amounts from the US. This year, the crop is expected to be only marginally better at 500m-520m tonnes, far short of industry crushing capacity.

At Usina Batatais, a plantation and crushing mill near Ribeirão Preto in São Paulo state, the heartland of Brazilian sugar, the fields look lush to the untrained eye. In some areas, the cane is beginning to sag under the weight of juice accumulating after the rainy season. But managers say the region has received rainfall 50 per cent below average in the past two months.

“It’s only once we start crushing that we’ll know the full effects,” says Luiz Gustavo Diniz Junqueira, one of the managers, as the first harvester machines push out into the fields.

The industry is facing regulatory problems in Brazil, too. Petrobras, the state-owned oil company, sells petrol at an estimated 20 per cent below the international market rate to help the government control inflation, analysts say. This has reduced the attractiveness to consumers of sugar cane ethanol, which sells at market prices. Along with higher taxes on ethanol and rising costs, this could kill the country’s cherished flex-fuel car market, warns Marcos Jank, outgoing president of Unica.

The association estimates that Brazil needs to double the amount of cane it grows in 10 years, with an investment of $90bn, just to keep its 50 per cent market share of the world sugar market and to meet today’s level of demand for ethanol in flex-fuel cars. While this sounds like a big number, Mr Jank points to the government’s plans to invest what some estimate to be as much as $1,000bn.

“This energy diversification we have is a fantastic advantage, especially compared with the US and Europe where they are dependent on oil. We should not lose it,” he says.

The government, for its part, argues that when sugar prices are high, cane producers retreat from ethanol, leaving the nation at risk of fuel shortages. Brasília is working on a regulatory framework to try to ensure there are enough reserves of ethanol to tide the country over during lean periods.

Paradoxically, however, the biggest competition to Brazilian ethanol could come from cellulosic ethanol. There have been many false dawns but several commercial-scale cellulosic ethanol plants are being built that could succeed, says Phil New, vice-president for biofuels at London-listed BP, the first international oil company to invest in Brazilian ethanol.

“Cellulosic ethanol will bring many of the advantages of Brazilian production into temperate climates,” he says, meaning it could boost US production at the expense of Brazilian imports. And by avoiding the use of foodstuffs to make fuel, it is unlikely to push up food prices as earlier biofuels did.

Still, Mr Dias of Raízen remains optimistic. He and other Brazilian sugar producers point out that cellulosic ethanol will benefit them as well, given the amount of waste they generate. Following their $12bn joint venture, Shell and Cosan’s Raízen are generating revenue of $30bn a year, with their 24 mills representing nearly 10 per cent of the nation’s crushing capacity. While many might disagree, his argument is that sooner or later the logic of sugar cane ethanol, the nearest thing to a miracle fuel in terms of sustainability, will prevail.

“The US and Brazil will be able to transform ethanol into a worldwide commodity,” he says. “That’s why I’m here.”

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