1

Sustainable biofuels, rural developmentand private sector engagement: What can we learn from Brazil?

Daniele CesanoSustainability Science Fellow 2007/08

15th of April 2008

Center for International Development Kennedy School of Government Harvard University

daniele_cesano@ksg.harvard.edu

Acknowledgments• Sustainability Science program

– Prof William Clark and Dr Nancy Dickson• Italian Ministry of the Environment• Supervisors

– Prof Henry Lee– Prof John Holdren– Prof Calestous Juma

• SSP Fellows– Prof Marcel Bursztyn

• Luciano Rodriguez (UNICA)• Marcelo Leal (COOPERBIO)• Werner Fuchs and Valtair Fernandes Júnior (COOPERBIO Brasil)• Marcos Falcao Gonçalves, Airton Saboya Valente Junior and José Sydrião

de Alencar Júnior (Banco do Nordeste do Brasil)• Jose’ Roberto Moreira (CENBIO)• Denis Delavi and Jose’ Limana (Limana Poliserviços).

2

Agenda

1. Overview on the current biofuel debate2. Ethanol production in Brazil

– Feasibility and sustainability (small vs largescale): COOPERBIO, RGS

3. The Brazilian biodiesel program– Feasibility and sustainability: Quixadá project

4. Discussions

Key issues in biofuel production

• Renewable energy• Sustainability

Economic

Social Environmental

3

Environmental sustainability

• Fargione et al (2008)• Searchinger et al (2008)• New expansions create a

carbon debt that must be repaid– Clearing of rainforests or

savannas (cerrado)• Induced land use change

– Food crops must be replaced

• Sugarcane ethanol– Between 4 to 45 years to

repay the carbon debt

Economic sustainability

• Ethanol (2008)– Sugarcane:

~0.7$/gallon– Corn: ~3 $/gal

• Biodiesel– Soy: ~ 5 $/gal– Sunseed: ~ 7 $/gal

4

Social sustainability• High commodity price• This can have two

opposite effects on poor/rural communities:

1. Make them worse off • Excluded from the

market• More expensive food

and “food insecurity”2. Make them better off

• Included in the “commodity” market

• Producers and sellers

• How to make this link?

Soybean oil price

$-$200.00$400.00$600.00$800.00

$1,000.00$1,200.00$1,400.00$1,600.00

1980

M1

1981

M7

1983

M1

1984

M7

1986

M1

1987

M7

1989

M1

1990

M7

1992

M1

1993

M7

1995

M1

1996

M7

1998

M1

1999

M7

2001

M1

2002

M7

2004

M1

2005

M7

2007

M1

Soybean oil,Chicago(2007$/ton)

Research question

• Is it possible to havea model that is trulysustainable? – Focus on the social

and economicsustainability

– Biofuel as a ruraldevelopment policy

Economic

Social Environmental

5

Biofuels and the Brazilian experience

• Over 30 years experience with biofuels– Sugarcane ethanol is cost-competitive with gasoline

• Second largest producer of ethanol• Large number of projects• Innovative policies

– Biodiesel program is promoting “socially responsible”biofuels

• Availability of different feedstock– Biodiesel

• Large number of small farmers (80%)– Interesting from a rural development perspective

Sugarcane ethanol

Anhydrous ethanol• >99,3º GL• Mixed with gasoline• 22% (law n. 8.723/93)

– Mixture changes in relation tomarket price and volume (20%-25%)

– Today: 25%

Hydrous ethanol• ~93º GL• Used pure in “flex-fuel” cars• About 50% of the ethanol

produced

6

Trends

R$ 0

R$ 20

R$ 40

R$ 60

R$ 80

R$ 100

R$ 120

Jan-

76

Jan-

78

Jan-

80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

R$/

ton

(Nov

200

7)

Sugarcane price: 1976-2007 (Nov 2007 R$)

Sugarcane yield

0102030405060708090

1960

1970

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

ton/

ha Brazil

Trends

>1 $/gal4.05 $/gal Anhydrous ethanol, total cost

1,314 $/Ha3,100 $/HaSugarcane, production cost

98%77%Plant efficiency

200 $/gal890 $/galUnit investment cost

$ 50 M$ 28.5 M Investment cost

260,000 gal/day32,000 gal/dayInstalled capacity

AutonomousAutonomousDistillery type

20071979

Distillery data (Nov 2007 $)

7

Trends

-38.5Crude oil (MJ/l)

83%32.00Gasoline (MJ/l)

53%20.50Hydrous ethanol (MJ/l)

55%21.27Anhydrous ethanol (MJ/l)

Energy content in relation to oilEnergy contentFuel type

$0

$50$100

$150$200

$250$300

$350

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

$/ B

arre

l oil

eq (N

ov 2

007

$USD

)

Anhydrous eth

Hydrous eth

Crude oil

Gasoline, FOBAmst.Gasoline, Brazil

Scale of production

0%

5%

10%

15%

20%

25%

30%

35%

40%

10 50 250 500 1000 2000 4000 8000 16000 32000 64000

Hectares

97%

1000 ha: 10 sq. km

8

Research question

• Is it possible to havea model that is trulysustainable? – Are smaller units more

sustainable?– How smaller?

Economic

Social Environmental

COOPERBIO, Palmeira dasMissões, Rio Grande Do Sul

9

Socio-economic context

• Small farmers– 95.1% of farmers own less than 50 hectares of land

• Poverty– 90% of the families in the region live with less than

400 $/month– The region concentrates 36% of the poorest families

in RGS• One of the largest soy-producers of Brazil

– 4.9% of landowners have 43.9% of the land

10

Why small scale ethanol?

• Transgenic soy– Highly risky for small

farmers– Concentration of

income• Climate change• High ethanol price

– 2% produced in RGS

11

Baseline: soybean yield

2

1

0

500

1000

1500

2000

2500

3000

3500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Yiel

d (K

g/H

a)

Brasil

Paraná

Santa Catarina

Rio Grande do Sul

Palmeira dasMissões - RS

Objectives of COOPERBIO

• Cooperative of small farmers– 23,000 small farmers in the region

• Pilot project– Diversify farmer’s production through small-scale

ethanol unit;– Create a new logistical and distribution system for

ethanol;– Integrate food and biofuel production.

• Project sponsor– Petrobras and Electrosul (about 2 M $)

12

Project outline

• 9 micro-distilleries– Quality standards (?)

• 1 rectification units– Reach ANP standards– Produce ethanol

(1,200 l/day)

Micro-distilleries

Eucalyptus

Animal feed

13

Feedstock production• Negotiated with Bank of Brazil specific credit

conditions for farmers (PRONAF)– 500 $/Ha

• 2% interest rate, 12 years• Seeds or seedlings

– Semi-perennial trees (jatropha, tungue): vegetable oil– Native species: reforestation especially along water course– Energy crops: sugarcane and eucalyptus– Fruits: oranges and apple

– Maximum of 2 Ha per family of sugarcane• Avoid monocultures• Product diversification• Share benefits among families• Borderline effect

14

15

Feasibility analysis: assumptions

Fully operational already from year 1Fully operational already in year 1

All sugarcane (26,638) is planted during the first year

All sugarcane (29.5 hectares) is planted during the first year

Hydrous ethanol is sold to a distributorHydrous ethanol is sold to the final consumers

All production costs keep constant with time, 12 years

All production costs keep constant with time, 12 years

Distillery rents 70% of the land and purchases 30% of the feedstock at market price

Farmers sell sugarcane to the distillery at production cost

The hydrous ethanol will reach the ANP standards

The hydrous ethanol will reach the ANP standards

Some mechanization in harvesting.Manual harvesting

Centralized operator (i.e. investment fund) employing 2,400 workers

Operated by 15 farmersNew project (greenfield)New project (greenfield)

Large-scaleSmall-scale

Feasibility analysis: cash flow

0.751.50Selling price, ethanol (R$/l)-1.89Local price, hydrous ethanol RGS (R$/l)

35 (30% purchased at 35 R$/ton)

7.00Feedstock cost, average 5 years (R$/ton)470470Sugarcane production cost, year 2-5 (R$/Ha)

1,9201,920Sugarcane production cost, year 1 (R$/Ha)2020Depreciation (years)70100Debt (%)125Loan period (years)122Interest rate (%)-10,766Investment per farmer (R$)

240015Total number of farmers or workers105248Unit investment (R$/l)

105,389,000161,500Total investment – turn key (R$)1,000,000650Installed Capacity (l/day)

Large-scaleSmall-scale

16

Feasibility analysis: technical input

97%75%Production efficiency, milling (%)

2424Operating hours

180180Operating days/year

1,000,000650Installed Capacity (l/day)

8766Sugarcane yield (ton/Ha)

25,86230Area required (Ha)

LargeSmall

Results

R$ 0.00

R$ 0.20

R$ 0.40

R$ 0.60

R$ 0.80

R$ 1.00

R$ 1.20

R$ 1.40

1 2 3 4 5 6 7 8 9 10 11 12

Years

R$/l

Production cost,large scale (R$/l)

Production costs,micro-distillery(R$/l)

• Small scale: more expensive• 0.73 R$/l equivalent to:

• 96 $/barrel oil eq or• 2.11 $/gallon of gasoline

• Large scale: less expensive• 0.47 R$/l equivalent to:

• 61 $/barrel oil eq or• 1.35 $/gallon of gasoline

17

Economic sustainability: payback

-R$ 400,000

-R$ 200,000

R$ 0

R$ 200,000

R$ 400,000

R$ 600,000

R$ 800,000

R$ 1,000,000

R$ 1,200,000

1 2 3 4 5 6 7 8 9 10 11 12 13

Years

R$

-R$ 200,000,000

-R$ 100,000,000

R$ 0R$ 100,000,000

R$ 200,000,000

R$ 300,000,000

R$ 400,000,000

R$ 500,000,000R$ 600,000,000

R$ 700,000,000

R$ 800,000,000

0 1 2 3 4 5 6 7 8 9 10 11 12

Small

Large

Social sustainability: income

Minimum salary: 415 R$/month

R$ 0.00

R$ 500.00

R$ 1,000.00

R$ 1,500.00

R$ 2,000.00

R$ 2,500.00

R$ 3,000.00

R$ 3,500.00

Inco

me

(R$)

Small producer, ethanol (R$/Ha)

Small producer, sugarcane(R$/Ha)

Sugarcane cutter (R$/month)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Small producer, ethanolSmall producer, sugarcaneSugarcane cutter

18

Sustainability: other factors• Job created/$ invested

– 1980’s: $ 23,000/direct job (nominal) – 1991: $ 41,000/job in 35 leading sectors– 2007

• Large scale: 44,285 $/job created• Small scale: 27,726 $/job created (*)

• Job quality• Number of jobs

– 44,800 in the 5,600 municipalities (a new Petrobras)• Food security • Environmental impacts

– New crops: displace food crop and induced Amazon or “cerrado”deforestation

• Roundtable on sustainable biofuels (labor rights, food security, poverty alleviation, land rights)

* Including subsidies

Key issues• Commercialization

– Auto-production and consumption– Niche market

• New ANP resolution (through Petrobras) where microdistilleries up to 5,000 l/day can have own retailers

• “Socially responsible ethanol” (certification or fair trade product)• Avoid “dumping” effect

– Airplanes used in agriculture• Quality standards (ANP)

– Achivable if there will be a market• Financing

– Currently, too risky– New financing mechanisms there will be a niche

19

Job quality• “Blitz in Alagoas gives freedom

to over 550 workers in a sugarcane distillery”– “…terrible working conditions”

• “several people living in one room”

• “no windows”• “workers felt humiliated and

treated like slaves”– “The auditor that was in

charge of the operations said that it will be very difficult to export ethanol under these [working] conditions”

March 2008

Conclusions• Microdistilleries are viable and sustainable

– The can occupy a portion (i.e. 5 %) of the market share

• Several socio-economic benefits compared to large scale

• However their dissemination is fully dependent on the creation of a protected niche market– There are the conditions that this will happen

• Can some of these features be scaled-up to larger plants?

20

Biodiesel

Biodiesel• It is a renewable energy

source that can be used for:– Transport (when blended

with diesel – B5; B20; B100)– Energy generation

• It comes from the transesterification of vegetable oils or animal fats

1. Seeds that have oil2. Press them to get the oil out3. Refinery: add methanol or

ethanol + catalyst (NaOH)– Biodiesel– Glycerol

21

• Introduced in 2004– 2% blend by 2008; and – 5% blend by 2013

• Brazil imports ~9% of its diesel– About 3 Billion US$

• Keep leadership in biofuel

• Link poverty reduction to biofuel– President Lula’s social

policy

National Biodiesel Program (PNPB)

The Social Fuel Certification

• Tax incentives to biodiesel producers that buy feedstock from small farmers– Small farmers and

water scarcity 70%30%South70%30%Southeast90%10%Center-west

50%50%Northeast and semi-arid

90%10%North

Participation of intensive agriculture (%)

Participation of family agriculture (%)

Geographical region

67.90%67.90%67.90%67.90%67.90%Any raw material

30.50%100%30.50%100%Palm tree

30.50%100%30.50%100%Castor seed

Small farmers

Small farmers

Small farmers

OtherSmall farmers

OtherSmall farmers

SouthSouth East

Center-west

Northeast and semi-arid region

North region

22

Research question

• Is it possible to havea model that is trulysustainable? – Can an “energy

production” policy help reducing poverty?

Economic

Social Environmental

Quixadá biodiesel plant, Ceará

23

Quixadá biodiesel plant, Ceará• Developed by Petrobras

– Model for other 4 plants• Capacity: 50 Million l/year• About 45 M$ • Located in the semi-arid

region of Brazil– Poorest– Potential for some oil

seeds• Castor• Jatropha• Cotton• Palm

Project outline

24

Incentives to farmers

• Minimum price for the seeds– 0.35 to 0.5 $/kg

• Cash (75 $/Ha)• Free seeds• Technical assistance (EMATERCE and BNB)• 50% of the cost for chemical stabilization of land

• BNB (regional development bank) helps in setting up the financial structure of the project

Project outline• Multiple feedstock vsquality standards

• Community based management

• Type of feedstock

• Capacity building andorganization

• Drying

• Storage facilities

• Transport

25

Social benefits: assumptions• Baseline: minimum

salary (200 $/month)• Production cost, any

oilseed (300 $/Ha)• Yield

– Castor– Sunflower– Cotton

• Transport cost• No pressing cost

• Price to producers: seeds

• Price to producers: oil

• Price to producers: cake/protein meal

Preliminary results

1.82.20.811.30.40.3Sunflower (R$/Ha)

---1.31.71.31.7Castor

bean, BRS En (R$/Ha)

---0.40.70.40.7Castor

bean, NE (R$/Ha)

2.12.41.30.81.21.41.8Cotton (R$/Ha)

1111111Baseline (R$/Ha)

Without incentives

With incentives

Without incentives

With incentives

Without incentive

With incentive

D - Selling oil and mealC - Selling meal

B - Selling oilA - Selling seeds

26

General considerations• Still work on progress

– Weekly changes– Why castor bean?

• Crop modifications may increase yield

• Conflict of interests between small farmers and biodiesel producers– The largest biodiesel producer

did not pay what agreed with the farmers

• Net losses of 20 M$ in 2007 (0.1 $/l)

• Smaller “local scale” units or larger “regional” ones?– Pressing units and biodiesel– Start from a “social”

perspective

0

0.2

0.4

0.6

0.8

1

1.2

diesel vegetable oil

2008 priceR$/l

Micro-entrepreneurship

27

Final considerations• It is possible to link poverty and rural

development to the commodity market– Quiet a lot of work needs to be done

• Next steps– Ethanol

• Understand the carbon balance• Can some of the features that characterize small scale plants

be scaled up?– Biodiesel

• Refine a business model that is viable at a local and national level

• Work with the private sector to look at all the different components

Thanks