Brazil’s International Ethanol Strategy: Lula’s Quest for a Global Biofuels Market

By Thomas Fröhlich

Under the governments of Lula da Silva and Dilma Rousseff, Brazil aimed at creating a global market for ethanol as a green transport fuel, and ethanol diplomacy became a signature component of Brazil’s international insertion at the time. This study examines Brazil’s international ethanol strategy and creates a comprehensive overview of the theoretical and practical approaches that Brazil undertook to promote ethanol as a tool to achieve energy security and combat climate change in a framework of South-South cooperation.

• Language: English
• Publisher: Anthem Press
• Release date: Feb 8, 2022
• ISBN: 9781839980268

Book preview

Brazil’s International Ethanol Strategy

Brazil’s International Ethanol Strategy

Lula’s Quest for a Global Biofuels Market

Thomas Fröhlich

Anthem Press

An imprint of Wimbledon Publishing Company

www.anthempress.com

This edition first published in UK and USA 2022

by ANTHEM PRESS

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Copyright © Thomas Fröhlich 2022

The author asserts the moral right to be identified as the author of this work.

All rights reserved. Without limiting the rights under copyright reserved above,

no part of this publication may be reproduced, stored or introduced into

a retrieval system, or transmitted, in any form or by any means

(electronic, mechanical, photocopying, recording or otherwise),

without the prior written permission of both the copyright

owner and the above publisher of this book.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2021948444

ISBN-13: 978-1-83998-024-4 (Hbk)

ISBN-10: 1-83998-024-9 (Hbk)

Cover credit: sugar cane industry. By mailsonpignata/Shutterstock.com

This title is also available as an e-book.

CONTENTS

List of Illustrations

Preface

Acknowledgements

List of Abbreviations

Introduction

Hypotheses

Background: A Brief History of Ethanol in Brazil

Background: The Comeback of Ethanol in Brazil

Background: The International Environment

Climate Change

Climate Change and Energy Security

South–South Cooperation

1. Theoretical Framework

Introduction: How to Explain State Behaviour in International Relations?

Neoclassical Realism

A Neoclassical Realist Theory of Foreign Policy

A Wave of NCR Research

A Neoclassical Realist Theory of International Politics

The Intervening Variable

NCR’s Explanatory Value for Brazil’s International Ethanol Strategy

Concepts in Realist IR

Soft Power

Political Strategies Based on Realism

Theoretical Framework – Conclusion

2. Methodology

Quantitative versus Qualitative Social Science Research

Case Study Research

Case Selection

Definition of Variables

Process Tracing

Definition of the Critical Junctures – Necessary Points of Analysis

Information Gathering

Document Research

Expert Interviews

The Selection of Interviewees

Research Design

3. Literature Review

Literature on Global Biofuel Markets

Outlining the Official Strategy

The Ethanol Complex

Strategic Assessment of Ethanol Diplomacy

The South–South Context

United States–Brazil

Literature on the US–Brazil Relationship

Literature on the US–Brazil Biofuels Partnership

Brazil–Mozambique

World Trade Organization

4. The Brazil–US Ethanol Relationship

Introduction

The Structural Environment

Background

Brazil–US Production of and Trade in Ethanol

Brazil as a Strategic Proxy of the United States: Balancing Venezuela

US FDI and Development Aid in Brazil

US Attitudes towards the Use and Trade of Biofuels

Trade and Market Barriers

Actors and Institutions

Brazil

The United States

From the Strategic Energy Dialogue to the 2007 MoU on Biofuels

The 2007 MoU on Biofuels

The Implementation of the 2007 MoU until the NSA Spy Scandal

Broken Relations due to the NSA Spy Scandal

Final Remarks

5. The Brazil–Mozambique Ethanol Relationship

Introduction

Background

Trade

Actors and Institutions

The Mozambican Agriculture Sector and Policy Initiatives

Reconstructing Brazil’s Ethanol Diplomacy towards Mozambique

The Biofuels MoU

The ProSavana Project

Summary and Final Remarks

2007 MoU

ProSavana

The Brazilian Narrative

ProSavana in the South–South Context

Brazil as a Realist Actor

6. Brazil’s Multilateral Ethanol Diplomacy

Introduction

Background

The Structural Environment

Actors and Institutions

Brazil’s Successes within the WTO System

Bali and Environmental Goods

Brazil’s Options and Possible Strategies

The State of Doha

The Bali Ministerial

The Outcome of Bali: Agriculture and the Volatility of Brazilian Leadership

Brazil’s Suggestion: Environmental Goods

Forum Shopping and Parallel Initiatives

Outcomes of Brazil’s Multilateral Ethanol Diplomacy

Summary

7. Summary and Outlook

Brazil and the United States

Brazil and Mozambique

Brazil’s Multilateral Ethanol Diplomacy

Answering the Research Question

What Was the Ethanol Strategy?

Why Did Brazil Fail to Achieve the Global Market for Ethanol?

Contribution to the Literature

Expanding on Neoclassical Realism

Insights into Brazilian Foreign Policy Making

Implications for Emerging Powers Research

Venues for Further Research

Expand Neoclassical Realism

Generalisation for Brazilian Foreign Policy

Generalise the Research for Emerging Powers

Final Remarks

Appendix

List of Interviews

Key Events in Brazil’s WTO Insertion (2003–14)

Key People in Brazil’s Ethanol Diplomacy (2003–14)

Stakeholder Mapping

Relevant groups in the WTO Doha Round Negotiations

Ethanol/Biofuels MoUs Signed by Brazil 2003–14

References

Index

ILLUSTRATIONS

Figures

1Brazilian ethanol exports, 2002–15

2Spot oil prices, 2000–15

3Ethanol at the centre of international discourses

4Neoclassical Realist Model of international politics

5Research design

6Brazilian sugar and ethanol production, 2003–14

7US fuel ethanol production in thousand litres, 2004–14

8Ethanol trade between the United States and Brazil, 2003–11

9Trade flows between Brazil and Mozambique, 2000–15

10Brazilian and Mozambican GDP per capita, 2000–16

11Brazil’s energy mix in 2014

Tables

1Hypotheses

2Overview of Classical Realism, Liberalism, and Neoclassical Realism

PREFACE

Brazil, the world’s largest sugar producer, fulfils 16 per cent of its energy consumption and approximately three quarters of its transport fuels with sugarcane-based ethanol. During Brazil’s internationalisation under President Lula da Silva, and to a lesser extent in President Rousseff’s first term, the country aimed at creating a global market for ethanol. The time seemed right to steer foreign policy towards this goal due to a benevolent structural environment with global discussions about energy security, climate change and South–South cooperation.

Within a Neoclassical Realist framework, I show how Brazil failed to bring its ethanol diplomacy to success and to create a global market for ethanol. Neoclassical Realism sheds light on the area of energy security. This is an approach that so far has mainly been applied to hard security questions.

The analysis covers three analytical levels: the bilateral with Brazil in power deficit, the bilateral with Brazil in power surplus and the multilateral, represented in three empirical chapters: Brazil–US, Brazil–Mozambique and Brazil’s multilateral ethanol diplomacy.

Process tracing based on primary-source research and expert interviews leads to the conclusion that the Brazilian foreign policy complex (FPC) failed to formulate and implement a coherent ethanol strategy. Ethanol diplomacy was never a top priority for Brazil’s Ministry of Foreign Affairs, representing a lack of cohesion in the FPC. In international negotiations, Brazil has deficits in predicting its negotiating partners’ preferences and therefore lacks the ability to form long-term alliances with converging interests, rather than merely convening disruptive ad hoc coalitions.

This study shows that Neoclassical Realism can combine foreign policy output with international politics outcome research and is useful to analyse policy outside the hard security realm. It offers a basis for further research towards an understanding of Brazil’s overall foreign policy and the foreign policies of other emerging powers.

ACKNOWLEDGEMENTS

This book is based on my doctoral research that I concluded by submitting a version of this manuscript in August 2017. With the support of the team at Anthem and the insights of my anonymous reviewers, we managed to successfully conclude this fascinating project.

I would like to express my special appreciation and thanks to my PhD supervisors, Anthony Pereira, Jeff Garmany and Álvaro Comim, for their guidance, support and patience.

I gratefully acknowledge the support of a King’s College Global Research Grant, a King’s College London Small Research Bursary Award, a King’s College London Study Abroad Student Award, a KCL PI Incentivisation Grant, an ESRC-funded postdoctoral fellowship (grant ref ES/T00892X/1), a visiting fellowship at the Fundação Getúlio Vargas in São Paulo and several King’s Interdisciplinary Social Sciences Doctoral Training Centre travel and conference awards.

I highly appreciate the time and commitment of all my interviewees, in particular former foreign minister Celso Amorim; the former heads of renewable energy at Itamaraty, Claudia Santos and Emerson Kloss; Counsellor Joaquim Pedro Penna at the Brazilian Permanent Representation to the International Organisations in London; the Africa and Asia manager at Agência Brasileira de Cooperação, Paulo Roberto Barbosa Lima; the general coordinator for ethanol at the Brazilian Ministry for Mines and Energy Marlon, Arraes Jardim; the ethanol coordinator at the Brazilian Ministry of Agriculture, Cid Caldas; the former ethanol coordinator at the Brazilian Ministry of Agriculture, Alexandre Strapasson; the adviser at the Brazilian Ministry of Agriculture, Luis Job; the president of the International Sugar Organisation, José Orive; the former president of the International Sugar Organisation, Peter Baron; the chief economist of the International Sugar Organisation, Leonardo Rocha; the ethanol expert at the Inter-American Development Bank in Washington, DC, Arnaldo Vieira; experts from the US Department of Commerce, Maria Cameron, Braeden Young and Cora Dickinson; the executive director of the Brazil Industries Coalition in Washington, DC, Antonio Josino Meirelles; Laís Thomaz and Dawn Alexandra Brown, who helped facilitate many interviews in Washington, DC; the president and CEO of UNICA (União da Indústria de Cana-de-Açúcar (Brazilian Sugarcane Industry Association)) in São Paulo, Elisabeth Farina; the head of international affairs and senior international adviser to the president of UNICA, Geraldine Kutas; the president of ED&F Man Brasil, S. A. Carlos Guimarães; the head of ethanol at ED&F Man Brasil, S. A. Eduardo Puertas; the president of bioagencia, Tarcilo Rodrigues; the sugar expert at bioagencia, Paulo Trucco; and all the other interviewees who donated their time and knowledge but asked to remain anonymous.

I would furthermore thank my friends in the Brazilian diplomatic service, Bruno Quadros e Quadros, Leonardo Azevedo and Rafael Prince; my friends at the Friedrich-Ebert-Foundation’s offices in Latin America and Mozambique, Claudia Detsch, Thomas Manz and Tina Henneken; my friends and colleagues at Fundação Getúlio Vargas (Getulio Vargas Foundation), Oliver Stuenkel, Matias Spektor, Guilherme Casarões and Vinícius Rodrigues Vieira, who provided valuable insights for my understanding of Brazilian politics and foreign policy; and my friends and colleagues at UN Development Program International Policy Center for Inclusive Growth in Brasília who are too many to name.

I am grateful for the support of my friends and colleagues at King’s Brazil Institute, Michael St Aldwyn and Vinicius Mariano de Carvalho, who facilitated a number of interviews.

A special thanks to my fellow PhD students at King’s College London, who are a constant source of funspiration.

Finally, I would like to thank my family, Anja, Barbara, Werner, and Edith and John, without whose support in every life situation, I would not have been able to go through with this project.

Words cannot express how grateful I am to my partner, Nikki Shure, who encouraged me to take a risk and start this project and supported me with her sweat and tears. I owe this to you!

ABBREVIATIONS

INTRODUCTION

Brazilian ethanol has been a strategic energy commodity in the South American country since the 1970s. The efficiency of sugarcane-based ethanol and the abundance of its primary resource convinced the military leadership of the 1970s to use this commodity to supplement the national gasoline market and thereby decrease the dependency on international oil markets.

After the 2003 introduction of the flex fuel engine, a car engine that can run on any mixture of ethanol and gasoline, ethanol expanded its market reach and thereby increased its strategic value for Brazil’s energy mix. The Brazilian government that came into power in 2003 under the presidency of Lula da Silva understood the implications of this rise in internal ethanol consumption and saw the international potential that sugarcane-based ethanol offered for Brazil.

For one thing, with a consumption rate that equalled that of gasoline in 2010 (about two billion litres), ethanol provided a suitable substitute for fossil fuels and decreased dependence on international oil markets; however, at the same time, it created a new dependence on domestic production capacities. As the world’s largest producer of sugarcane-based ethanol, Brazil cannot count on an international market to supplement the consumption of domestic production in the case of low production caused by droughts, flooding or other unforeseeable events.

Hence, Brazil has been working towards creating an international market for ethanol that would both reduce Brazil’s dependency on the internal market and leave the country in a position as the technological leader in an increasingly important economic sector. To achieve this, it is important to broaden the consumer base of ethanol as a fuel as well as to increase the number of producers internationally. Furthermore, ethanol lacks international standardisation, which is one of the main reasons why the World Trade Organization (WTO) has not yet specifically addressed the product.

Additionally, promoting ethanol internationally gave Brazil the opportunity to position itself at the pinnacle of the climate change discourse of the 2000s and develop strong ties, mainly with other developing nations, through new ‘South–South cooperation’ that has gained importance since the rise of the emerging markets and their turn to the ‘Global South’ in the early 2000s. The rise of South–South cooperation has laid the foundation for Brazil to convince other states from the Global South of the merits of sugar-based ethanol and broaden ethanol’s consumer base.

Brazil has pursued the issue on several levels: the bilateral level (and trilateral level in development cooperation), en bloc – or regional level – within MercoSul, and the multilateral level within the WTO and other fora. All these state-sanctioned actions, whether carried out by the Brazilian diplomatic service, the presidency or other government agencies as well as the actions carried out internationally by the respective industrial corporations or their associations will be summarised under the term ‘ethanol diplomacy’. Understanding the strategy and methods applied by the Brazilian government to this issue also helps to paint a broader picture of the Brazilian approach to foreign policy and to conceptualise it within the framework of international relations theory.

Despite the efforts undergone within the framework of ethanol diplomacy, Brazil has not achieved its explicit goal to create a global ethanol market in the two terms of the Lula government and the first term of the Dilma government. The research question therefore is: Why has Brazil failed to create a global ethanol market despite the beneficial international context?

To answer this question, I will bring together Brazil’s multilevelled international ethanol strategy in one coherent analysis and apply the approach of Neoclassical Realism (NCR) to understand the way foreign policy decisions have come to play. This will be guided by the following sub-questions:

•What is Brazil’s international ethanol strategy?

•How was Brazil’s international ethanol strategy elaborated and by whom?

•Who are the central stakeholders within Brazil and abroad that are involved in the process of implementing Brazil’s international ethanol strategy?

•What power relationships are at play within Brazil and towards its partners that influence the implementation of Brazil’s international ethanol strategy?

•What are the turning points in Brazil’s ethanol diplomacy and how did these happen?

•How can the processes and outcomes be explained within the realm of international relations theory?

Hypotheses

This study will apply a Neoclassical Realist approach of foreign policy analysis (FPA) to answer these research questions. The analysis will be guided by the following hypotheses, which may be deducted from the main strands of international relations theory (Table 1).

Table 1 Hypotheses

How these hypotheses were derived and why the Neoclassical Realist approach to FPA seems most appropriate for the case at hand will be discussed later in the section on the theoretical framework.

NCR enhances the structural (neo-)Realist argument that international constraints shape foreign policy with the understanding that sub-state actors influence the way the international context is understood and to how it is reacted (modelled as an intervening variable). The study will follow a case study design with three empirical chapters (Brazil–United States, Brazil–Mozambique and Brazil’s multilateral ethanol diplomacy) that analyse the critical junctures of each of the examples at hand according to George and Bennett’s (2005) approach to theory-guided process tracing.

Background: A Brief History of Ethanol in Brazil

With its vast arable land and its history of sugarcane cultivation, Brazil entered the production of ethanol as a fuel before World War II. It was not, however, until the oil crisis of 1973 that Brazil started to fully take advantage of this resource.

In 1975, the military government introduced the National Program for Alcohol (Programa Nacional do Álcool – ‘Proálcool’) which had four explicit goals: first, to even out the trade balance by reducing the demand for fossil fuel imports; secondly, to create agricultural income in underdeveloped areas of the country; thirdly, to create growth by increasing the use of agricultural land and labour; and finally, to increase the demand for technological products in the sector (Hira and de Oliveira 2009: 2452).

The four main political tools of Proálcool, which enabled Brazil to pursue these goals, were: the guaranteed purchase of ethanol by Brazil’s national oil company Petrobras, low-interest loans for ethanol producers, a price control for the consumer market and a production quota as well as export controls for sugar (Hira and de Oliveira 2009: 2452).

Puppim de Oliveira analyses the formation of these policies with the concepts of ‘interests, values and knowledge’. Surprisingly, he portrays this policy as a ‘result of interest groups in an appropriate occasion’ – an implicit description of a bottom-up policy-making process (2002: 137). However, it becomes clear in the study that the reference point for all decisions was indeedthe military government and its genuine interests, values and knowledge, which unintentionally makes the case for a top-down policy-making process – a fact that is important to keep in mind when putting ethanol diplomacy in an international relations context. To anticipate the theoretical understanding of the matter at hand, NCR seems to fit both the assumption that the international context defines political options to a great extent and the understanding that national stakeholders can influence decision making to a certain degree (modelled as an intervening variable).

Hira and de Olivera (2009: 2453) call the years between 1979 and 1985 the ‘honeymoon phase’ of Proálcool. After the second oil crisis in 1979, the decision of the military government to focus on fossil fuel substitution proved right. The automotive industry started manufacturing alcohol-fuelled cars, which in December 1980 accounted for over 70 per cent of new cars sold (Hira and de Oliveira 2009: 2453). The mandatory blend remained above 20 per cent (Goldemberg 2013: 17), so by the mid-1980s ethanol accounted for about 50 per cent of Brazil’s liquid fuel supply (Sandalow 2006: 2).

After the drop in oil prices and the increase in sugar prices in the late 1980s, however, the situation changed; the government phased out subsidies and gradually opened up the sugar market (Hira and de Oliveira 2009: 2454; Goldemberg 2013: 18). In 1990, the sale of alcohol-fuelled cars dropped by almost 80 per cent (Hira and de Oliveira 2009: 2455) due to the shortage of ‘appropriate’ fuel (Goldemberg 2013: 18).

The 1990s were characterised by low oil prices and market deregulation. By 1999, the Brazilian government had deregulated sugarcane, ethanol – including the expensive guaranteed purchase by Petrobras, and gasoline prices (Hira and de Oliveira 2009: 2454), which resulted in a comparative disadvantage for ethanol.

This brief history of ethanol in Brazil demonstrates how the international context, and in particular the exogenous shock of the oil crisis, prompted the military government to adjust its domestic policy and install a regime to support the domestic ethanol industry. The decision to diversify the energy mix towards ethanol was based on the existing knowledge and interests of national stakeholders, which helped to shape the direction of the reorientation of the official policy.

Background: The Comeback of Ethanol in Brazil

In 2003, driven by tax incentives of the Brazilian government (Hira and de Oliveira 2009: 2454), the automotive industry presented the first cars that could run on any blend of gasoline and ethanol, so-called flex-fuel vehicles (FFV). The high oil prices of the time facilitated the acceptance of FFV by consumers, and by 2005, the numbers of FFV sold surpassed the combined numbers of gasoline- and alcohol-fuelled cars (Hira and de Oliveira 2009: 2455). According to the Brazilian Automotive Association – ANFAVEA – , FFV accounted for 87 per cent of new cars sold as of January 2013, a number which had been fairly constant since the beginning of 2006 (see Joseph 2013: 13). This trend will increase the share of FFV in the Brazilian automobile fleet, which was at about 60 per cent in 2011 (2013: 5), and reflects the consumer side of the internal ethanol market. It is noteworthy that the increase in FFV accounts for the growth of the ethanol industry, while the ethanol/gasoline blend of over 20 per cent guarantees a constant minimum demand for the industry. In the 2012–13 farming season, Brazil produced 23.2 billion litres of ethanol, of which 19.7 billion litres were dedicated to domestic consumption and 3.5 billion litres to export (UNICA 2013: 17). FFV have clearly played a major role in the comeback of ethanol as a crucial commodity in the Brazilian energy mix (Figure 1).

Figure 1 Brazilian ethanol exports, 2000–15 ( Source : UNICA (2015)).

Background: The International Environment

In many ways, the international environment has been highly favourable for the development of an international biofuels market. This is due to the combination of the market’s nascent state coupled with increasing demand for biofuels, which creates large growth potential and high returns for the countries that invest early.

Internationally, the market for ethanol is underdeveloped. According to the Renewable Fuels Association, in 2013, the three biggest producers of fuel ethanol were the United States (59 billion litres), Brazil (28.5 billion litres) and the European Union (6.2 billion litres), followed by China (3.2 billion litres), India (2.5 billion litres) and Canada (2.4 billion litres), each of them producing only slightly less than the rest of the world combined (3.3 billion litres). There is room for growth, and as the second largest producer, Brazil, could capitalise quite a lot on this, hence the Brazilian government’s focus on ethanol diplomacy.

The market also shows promise due to the growing importance of three major global themes: climate change, energy security in an era of rising oil prices and the emancipation of the Global South, including the new era of South–South cooperation. In the following paragraphs, I will discuss each of these trends in detail and show how they have helped to foster a positive environment for the development of an international biofuels market (Figure 2).