02 June, 2010

Brazil drops incentives to electric cars

Sergio Abranches

After a few days of internal squabbling president Lula decided to drop a proposal from the Ministers of Finance and Science & Technology to launch a program to incentivize domestic production of electric cars.

The decision came after pressure from the Development Minister, responding to the auto industry and ethanol lobbies. He argued that incentives to electric cars would jeopardize the ethanol economy. Brazil is the leading producer of sugarcane ethanol, and according to the Development Minister, the Brazilian car fleet is progressively becoming mostly sustainable.

President Lula seems to have agreed. To justify his decision to drop the incentive plan he said that “almost 100% of the cars sold in Brazil have flex-fuel engines, and 60% of flex car owners prefer ethanol to gasoline.”

But this is not entirely true. Today, almost 100% of popular cars sold in the country are, in fact, flex-fuel cars. Flex-fuel engines can run on either ethanol or gasoline or any possible mix of the two. But fuel consumption increases significantly when engines run on ethanol. Because of the relevant consumption differential, what determines the choice of fuel is the price at the pump.

Over the last several months, ethanol prices have been higher, on average, and the difference between ethanol and gasoline at the pump has been reduced. Higher sugarcane prices and vigorous export sales have led to decreased production of ethanol for domestic consumption, resulting in raising ethanol prices at the pump.

I’ve been talking to flex car owners at gas stations and with cab drivers using flex-fuel engines instead of natural gas (mostly used in the cities of Rio de Janeiro and São Paulo). Everyone to whom I asked has told me that the fuel of their choice was presently “gasoline”. The reason: the price of ethanol is too high. A cab driver who travels almost daily between neighboring cities in the States of São Paulo and Minas Gerais told me he is now choosing ethanol when he is in São Paulo, and gasoline, when in Minas Gerais, because in São Paulo ethanol is cheaper than in Minas Gerais.

This means that Brazilian flex cars are not that sustainable. It will always depend on the price difference between ethanol and gasoline at the pump. Price variability is intrinsic to the ethanol economy because producers’ strategies will always be dictated by the commercial advantages of the relative balance between sugar and ethanol production. Unless the government subsidizes ethanol to maintain a ceiling to its price, totally distorting the economic equation of the industry, this variability will always mean cycles of greater use of gasoline alternating with cycles of greater consumption of ethanol.

The best policy solution would be to create incentives for the development of hybrids running on ethanol and of electric cars, leading to a diverse fleet with the aim of increasing overall sustainability and the lower emissions rate possible.

Policy, however, is not determined by intelligence or technical rationality. The main factor behind policy choices still is lobby power. And the ethanol lobby is among the most powerful in the country. When allied to traditional carmakers it becomes almost invincible.

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