Prospects for Biofuel Production in Brazil: Role of Market and Policy Uncertainties

Biofuel production in Brazil has been motivated by a desire to reduce dependence on fossil fuels and encourage rural economic development. Policies and technologies over the past 25 years have lowered production costs and created profitable opportunities. The industry grew through political willingness to support an infant industry, continuous technological advances in both biofuel production and complementary industries (e.g., automotive), ability to utilize agricultural byproducts, and income growth in rural areas. It was confronted by the challenges of price instability due in large part to changing oil prices, uncertainty about the prospects of biofuels as a viable source of energy, the ability to create and maintain policies conducive to its growth, and, finally limited access to credit. This paper demonstrates the importance of political economy factors in the evolution of the biofuel sector in Brazil and suggests their importance to understand the evolution of this sector in other parts of the world.