Brazil is the world’s second largest biofuel market after the U.S. and, like Europe, Brazil is converging in a number of ways with the U.S. To understand Brazil’s biofuel market, it’s necessary to understand the policies driving the demand for these fuels. To that end, in this article we provide an overview of Brazil’s biofuel policy and legislative framework.
Context
Brazil’s biofuel policy dates back to the 1975 Proálcool program – a pro-ethanol response to the oil shock, twined with the desire to support Brazil’s agricultural sector. More recently, the goal of reducing greenhouse gas (GHG) emissions has become an added policy driver.
Sugarcane ethanol is Brazil’s flagship biofuel sector, with around half of Brazil’s sugarcane crop used to produce ethanol that supplies ~50% of total gasoline demand. Brazil has two ethanol grades: anhydrous ethanol (0.5% water), used in blending in Gasoline C and as an export grade; and hydrous ethanol (5% water), for use as E100 in Flex-Fuel Vehicles (FFVs).
In addition, corn and wheat ethanol, biodiesel, and renewable natural gas (RNG) sectors have also developed, as shown in the figure below. Total Brazilian biofuel production is currently just over 11.5 billion gallons per year (bgy) of which around 80% is ethanol.
Figure 1: Brazilian Biofuel Production 2013-2024
Historically, Brazil has used federal and state tax structures in addition to specification mandates as the primary mechanisms to support biofuels. Below, we explore these support mechanisms for ethanol, biodiesel, and sustainable aviation fuel (SAF) in turn.
Ethanol
Two different mechanisms drive demand for the two grades of ethanol (anhydrous and hydrous) in Brazil.
- The Gasoline C Ethanol Volume-Specification Mandate: This specification range is 18-27.5% percent volume per volume (%v/v) and the spec is currently set at 27%. There are technical studies currently underway to increase the max specification range to 30%. Around 40% of the ethanol incorporated into the gasoline pool is anhydrous in Gasoline C. In Brazil, unblended fossil gasoline (Gasoline A) is only allowed as a wholesale grade.
- Hydrous Ethanol Used in Flex-Fuel Vehicles (FFV): In Brazil over 90% of passenger cars are FFVs and can run either Gasoline C or Hydrous Ethanol. Motorists have the option of filling up with either grade at the pump, so Hydrous demand is driven by pump price competition with motorists adept in understanding relative differences in energy content (i.e., mileage) between the two grades. This price competition between Gasoline C and Hydrous Ethanol is enabled by two drivers: firstly, the intrinsic cost competitiveness of sugarcane ethanol given its yield, scale, and other efficiencies; and secondly ethanol’s relative tax treatment versus gasoline. Taxation in Brazil is complex, and currently gasoline and ethanol are subject to three taxes, as set out in Figure 2.
Figure 2: Brazil Federal and State Gasoline and Ethanol Taxes*
* Current YTD R$ / US$ exchange rate 5.3 R$/US$
** Since 2023 a single federal flat-rate ICMS applies to Gasoline A and Anhydrous Ethanol
*** Varies by State and applied at several points in the supply chain
Figure 3 shows the historic pump price ratio of Hydrous Ethanol to Gasoline C in Brazil’s Southeast (the center of the cane sector). When the Hydrous / Gasoline C pump price parity ratio dips below ~70% (the energy price parity ratio), motorists favor Hydrous and vice-versa. Typically, Hydrous Ethanol makes up ~60% of total ethanol demand. In the long-run average, Hydrous Ethanol equilibrates with the Gasoline C pump price. Once de-taxed, Hydrous Ethanol typically prices at a small discount to Gasoline A at a wholesale level, with Anhydrous Ethanol pricing at a premium to Hydrous due to the additional processing / de-watering requirement.
Figure 3: Southeast Hydrous Ethanol / Gasoline C Pump Price Ratio
Brazil is in the process of reforming its complex indirect tax structure. Some moves have already been made in terms of introducing a single federal wide flat rate ICMS on Gasoline A and Anhydrous Ethanol, to replace the various percentage rates set at a state level, and capping the state ICMS rates on Hydrous Ethanol. Further reform is in the pipeline: PLP 68/2024 will consolidate Brazil’s five indirect/sales taxes (including ICMS) into two sales taxes, one set at a federal level (CBS) and the other at a state/municipal level (IBS). This will be phased in over a 7-year period. Implications for ethanol appear minor given that previous constitutional amendments 123 and 132 guarantee competitiveness and a favorable tax regime for biofuels vs. fossil fuels.
Biodiesel
Brazil’s biodiesel program dates back to 2008 when a 2% volume (B2) mandate was introduced. This has been progressively increased to as high as 13% (B13) in 2021 before being reduced to 10% due to the cost impact. The current mandate has been increased in 2024 from B12 to B14, with B15 expected to come into force in 2025.
Prior to 2020, biodiesel was sold via auctions managed by the Brazilian Agency of Petroleum, Natural Gas and Biofuels (ANP); now, however, contracts are freely negotiated between producers and fuel distributors. Previously, biodiesel also benefited from tax exemptions, but from 2018 the CIDE tax has been zero rated for all diesel, and PIS/COFINS has likewise been zero-rated from April 2023.
Utilization of Brazil’s 3.9-billion-gallon (14.6-million-cubic-meter) biodiesel capacity is around 50%, and soybean oil makes up ~70% of the feedstock mix.
Sustainable Aviation Fuel (SAF)
ProBioQAV (Programa Nacional de Combustível Sustentável de Aviação): A SAF mandate will come into force in 2027 that will target a 1% reduction in the aviation sector’s 2026 emissions from domestic flights increasing by 1% per year to 10% by 2037.
RenovaBio (Brazil’s National Biofuels Policy)
Arguably the most significant and substantial piece of biofuel legislation recently introduced in Brazil, RenovaBio is a clean fuel standard introduced in 2019 that has twin goals of helping Brazil to meet its Paris Accords Nationally Determined Contributions (NDCs) and introducing an incentive for low-carbon advanced biofuels.
Similar to the California Low Carbon Fuel Standard (LCFS), RenovaBio sets a carbon intensity (CI) reduction target on road transport fuel distributors of 11.1% by 2033 vs a 2018 baseline, and uses a carbon credit mechanism (CBio) representing 1 metric ton (MT) of carbon dioxide (CO2) mitigated.
Figure 4: RenovaBio carbon intensity and GHG emission reduction targets
Under RenovaBio, biofuel producers receive their assessed NEEA (Energetic-Environmental Biofuel Index) which is the difference of their biofuel’s CI and the fossil fuel comparator. CBio credits are generated by multiplying a plant’s NEEA by the eligible volume of biofuel. While RenovaBio’s CI calculation does not include indirect land use change impacts, it does include sustainability / eligibility requirements, namely:
- No native vegetation suppression is allowed from November 2018 on (i.e., zero deforestation in biomass production),
- Compliance with local environmental legislation (e.g., Brazilian Farm Environmental Registration – CAR),
- Compliance with agro ecological zoning (if applicable).
Brazil’s sugarcane trade association, Unica, provides a useful dashboard that displays the CI of each registered biofuel facility, volumes of CBios generated, volume obligations of fuel distributors, and CBios traded prices. Currently, 342 facilities are registered with an overall average CI of 26.1 grams of carbon dioxide equivalent per megajoule (gCO2 e/MJ)1.
In essence, the sale of CBios provides Brazilian bioethanol and biodiesel producers with an extra revenue stream that is linked to their plant’s CI reduction performance.
As shown in figure 5, at the start of RenovaBio, CBios initially traded at a modest 20-40 Brazilian Real per metric ton of CO2 (R$/MT) (5-10 US$/MT), but then ramped up in response to weather-related sugarcane ethanol supply disruptions in the drought in 2021-2022. Furthermore, the government’s moves to reduce taxes on gasoline and diesel to curb inflation had a knock-on impact to hydrous ethanol pump price competitiveness. CBio prices fell back following subsequent changes to RenovaBio in terms of lowering the 2023 target and delaying compliance targets.
Prices have now stabilized at around 80 R$/MT (15 US$/MT) following the reimposition of taxes on gasoline and diesel, President’s Lula election win in October 2022, and the fact that Brazil’s sugarcane crop (a semi-perennial crop) was still recovering from the 2021-2022 drought. Future expectations are for CBio prices to firm going forward, given expectations of continued growth of Brazil’s transport fuel demand, limited expectations of significant new sugarcane ethanol capacity additions, and with increasing RenovaBio targets. While CBios provide a useful premium for first-generation technologies, current prices are unlikely alone to remunerate second-generation processes.
Figure 5: RenovaBio CBio Pricing (June 2020-Sept 2024)
Conclusions and implications for the U.S.
Preferential tax treatment and specification mandates remain the primary support mechanisms for biofuels in Brazil. While Brazilian administrations have a track record of changes to those tax structures to mitigate inflation and curb cost of living pressures, those changes tend to be temporary and are either reversed or their impact otherwise offset by other measures. Agriculture is one of the most important sectors in Brazil both economically and politically. Therefore, the domestic market appears set to continue to be buttressed by the existing tax structures.
Brazil has an undoubtedly strong biomass resource base, both for first- and second-generation bio feedstocks, but we are yet to see significant investment in new capacity. The last round of major investment in the sugarcane sector was early in the last decade, and Brazil has yet to commission its first renewable diesel (RD) project. In the area of second-generation biofuels, only Raizen (a Cosan and Shell joint venture, and Brazil’s largest sugarcane milling company) is notable in its success, after protracted efforts, of commercializing cellulosic ethanol from bagasse (dry pulpy fibrous material that remains after crushing sugarcane or sorghum stalks to extract their juice).
While CBio price levels under RenovaBio are currently not at levels high enough to support new investment in either first- or second-generation biofuel production capacity, there appear to be strong drivers for upward pressure on prices. Specifically, Brazil’s total gasoline and diesel demand continues to grow by 8.7% and 4.5% per year, respectively, since 2020 driven by growing passenger car and truck fleets as the economy continues to develop. Coupled with this, Brazil is also short refining capacity, and Petrobras, the state-owned Brazilian multinational corporation with a near monopolistic refinery position in Brazil, appears unlikely to be in the financial position to invest in additional capacity. Petrobras is also in the unenviable position of being the importer of last resort to close the gasoline and diesel supply gap.
Therefore, additional supply of biofuels, in particular ethanol, appears to be required in the long-term to close Brazil’s supply gap while also meeting future RenovaBio targets. In addition, new capacity is also likely to seek export opportunities, utilizing Brazil’s feedstock base advantages and higher biofuel remunerations available in the U.S. and Europe, particularly for low-CI advanced biofuels.
Consequently, after a retrenchment over the last 5-8 years from the international biofuels market, we are already seeing Brazil biofuel exports recover from the pre-pandemic lows including flows to the U.S. This trend is likely to continue, including sugarcane ethanol, not just for direct gasoline blending but also as a feedstock for RD and SAF as HEFA capacity is built out, and assuming successful commercialization, second-generation biofuels as well. This is likely to drive the intersection of Brazil’s biofuel market with the U.S., both from a volume perspective and the dynamics and interactions of the various biofuel regulations and support mechanisms.
Addendum – Enactment of the Fuel of the Future Law:
Following the original publication of this article, the Brazilian government enacted the Fuel of the Future law (Law No. 528/2020) on October 9, 2024. This law confirms a number of key pieces of legislation flagged in the note, namely:
- The ethanol blend specification range in gasoline C is being increased from 18-27.5% to 22-35% with the intention to increase the current target of 27.5-30% in the near future.
- The biomass-based diesel blend in diesel will increase by 1% per year from its current 14% until it reaches 20% by 2030.
- The SAF mandate (ProBioQAV) is confirmed, targeting a 1% reduction in domestic GHG emissions from Jet starting in 2027, increasing to 10% by 2037.
- A national program for biogas will be introduced, together with incentives, aiming to foster the use of biogas in Brazil’s energy matrix.
We see things others miss.
From understanding policy shifts to emerging technology, we'll help you navigate the challenges in the transportation fuels market.