Brazil’s All-Powerful Sugar Industry Is Souring the Country on EVs

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(Bloomberg) — For two decades, Brazil’s unique solution to curb tailpipe emissions — specialty cars powered by any mix of gasoline and ethanol — helped it boast a fraction of the roadway pollution of other countries its size. Now, it threatens to hold it back.

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As governments in many of the world’s other top economies lay out detailed plans to eventually end the sale of combustion-engine cars, Brazil is digging in its heels. The country’s most popular models are so-called flexible-fuel vehicles capable of running completely on biofuel produced from sugar cane, making them by most accounts cleaner than pure gasoline engines. When Brazil releases its updated auto-industry policy as soon as next month, it will plot a path to reduce its reliance on cars that run entirely on gasoline, Secretary for Industrial Development Uallace Moreira Lima told Bloomberg News — but it won’t touch the beloved flex-fuel models.

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“Brazil will be the last among its peers to shift to electrics,” said Eder Vieito, senior commodity analyst at Green Pool Commodity Specialists. “And that’s because of ethanol.”

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Since their introduction 20 years ago this spring, flex-fuel cars have become dominant in Brazil, making up a whopping 84.5% of all auto sales in June, according to the Brazilian Association of Automotive Vehicle Manufacturers, known as Anfavea. That same month, electric cars comprised less than 0.5% of the market. By comparison, almost one in four passenger vehicle sales in China this year will be battery-powered. Even the US, a fossil fuel diehard, will see EVs comprise almost 8% of sales this year, GlobalData estimates. By 2030, battery-electric vehicles will account for around 7% of the light vehicles sold in Brazil, Bright Consulting projects, far below the expected world average of 37%.

Brazil’s slower adoption of EVs isn’t a fluke. Big-name automakers, the prominent sugar industry and government authorities are pushing hard to keep ethanol in drivers’ gas tanks. That support takes several forms: a series of pro-ethanol regulations, including lower taxes than gasoline at the pump and a federal carbon-credit program that essentially rewards ethanol mills, plus scant investment in the charging infrastructure or battery production needed to make widespread acceptance of EVs a reality.

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Changing course would be complicated for leftist President Luiz Inacio Lula da Silva. Phase out flex cars, and he’d lose the massive economic boost created each year by ethanol in the world’s largest producer of sugar cane, where agribusiness represents about a fourth of GDP. But keep the popular, affordable and locally made flex-fuel models, and they’ll continue to elbow out EVs, which would be among the world’s cleanest given that more than 80% of Brazil’s electricity comes from renewable sources like hydropower, wind, solar and biomass. That makes them cleaner than flex-fuel cars over the lifetime of the vehicles.

So far, Lula’s government is trying to support both technologies in a precarious balancing act. To appease the sugar industry, it will keep incentives for ethanol in place while simultaneously courting electric-car makers from China scouting new overseas factory sites with a compelling sales pitch: proximity to local battery-metal deposits, a growing domestic middle class and access to other Latin American markets with their own discretionary incomes to spend. It has worked, with at least two of China’s biggest carmakers — BYD Co. and Great Wall Motor Co. — planning to bring their vehicle production to the country’s shores. But even they plan to add some ethanol-fueled hybrids to their Brazilian lineups in what looks like a friendly — and savvy — gesture.

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The discussion about electric cars is “very important for Brazil and for the world,” said Renan Filho, Brazil’s transport minister. But ethanol should be part of the conversation, too, he said. “Ethanol emits much less.”

Read More: BYD Picks Brazil for Its First Electric-Vehicle Hub Outside Asia

The longer Brazil waits to start mapping out its path to battery cars, the harder it will be to keep up with the dizzying evolution of EV technology. Transitions take time, and the country may find itself trapped in an outdated system if it delays putting in place the kinds of programs, incentives and municipal projects other countries have found are key to bringing down prices for consumers and spurring adoption.

Like many other emerging economies, where local supply chains primarily focus on affordable vehicles, EVs remain out of reach for many Brazilian households. The cheapest EV in the local market costs more than 140,000 Brazilian reais ($29,000), twice the price of the most affordable flex car. 

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Meanwhile, Brazil only had one public charger per 12.9 EVs at the end of 2020, BloombergNEF estimates, compared to one for every 5.4 in China, or every 3 in the Netherlands.

“Brazil needs to step out of its comfort zone if it does not want to become isolated from the rest of the world,” said Lourenço Faria, a researcher at University of Copenhagen.

Pure ethanol cars first arrived on Brazilian streets in 1979 when Fiat, the brand now owned by Stellantis NV, introduced a biofuel-powered model. Several powerful industrial and political forces were behind the move. For one, it offered Brazil a way to better shield itself from future petroleum shortages like the one that decimated its economy earlier that decade.

The push into ethanol cars also created a massive new market for the influential five-century-old sugar industry. The sector has deep political connections that are embedded in the nation’s history: Sugar gave birth to Brazil’s very first agricultural elite in a time when landowners profited by exploiting the work of enslaved people trafficked from Africa. This year, Brazil’s sugar-cane production and its subproducts will be worth 105.6 billion Brazilian reais ($22 billion).

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The ethanol-only models made from the late-1970s onward were eventually dethroned by flex-fuel vehicles, starting with Volkswagen AG’s subcompact Gol Flex in 2003. In the last two decades, they’ve secured a seemingly unshakable foothold. VW in 2021 announced the creation of a research and development center in Brazil to explore expanding the applications of ethanol and other biofuels in emerging markets, and nearly every carmaker operating in Brazil plans to keep ethanol it its lineup in some form going forward.

Some players in the auto sector, including industry group Anfavea, are even lobbying for the end of a tax exemption for EV imports in a bid to promote Brazil’s domestic carmaking and ethanol refining; the plea has the support of sugar-cane industry group Unica. The carmakers’ group also wants to establish temporary import quotas for EVs landing on Brazilian shores to give local manufacturers more time if they want to develop their own domestic EV production. With no local manufacturing currently, 100% of light electric vehicles on the market have to be shipped in.

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By most measures, Brazil’s flex-fuel autos have been a rare success story among developing markets that are in many other cases behind in the race to clean up their car sectors. And unlike other so-called solutions, like VW’s “clean diesels” that appeared greener than they actually were, the country’s unique reliance on ethanol has brought some tangible benefits.

For one, tailpipe emissions per capita are better than in most developed economies and other middle-income, populous nations like Russia or Mexico, International Energy Agency data show. According to data from BloombergNEF and the International Council on Clean Transportation, a flex-fuel Brazilian car made in 2020 will emit 16.7 tons of carbon dioxide over the course of its life, a fraction of the roughly 40 to 50 tons produced by combustion cars in other major economies. Sugar-cane fields can capture carbon from the atmosphere, too, the industry argues.

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Because of its use of biofuels in light-vehicle transportation, Brazil avoided around 35 million tons of CO2-equivalent emissions last year, a study by think tank Getulio Vargas Foundation found. That’s the same as shutting down nine US coal plants for a year, according to US Environmental Protection Agency data.

But the ability of flex-fuel cars to run on biofuel doesn’t mean they always do. The BloombergNEF and ICCT study, for instance, assumes a 48% share of ethanol in flex-fuel cars. In reality, consumers often choose to fill their tanks solely with gasoline. A common rule of thumb is that selecting ethanol at the pump only makes sense when it’s priced below 70% of the cost of gas. While fuel costs vary a lot by region, the biofuel hasn’t been competitive in Brazil’s most important market, Sao Paulo, for much of the past two years. In fact, pure ethanol accounted for about 20% of Brazil’s car-fuel consumption in the past year. That figure rises to 42% when blending is considered, sugar-cane industry group Unica estimates.

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And although Brazil’s flex models perform well in comparison to combustion-engine cars globally, they aren’t nearly as clean as the battery-powered vehicles that could replace them if the political will were there. Over the course of a car’s life, a pure EV operating in Brazil would produce half the carbon emissions of a flex vehicle — and less still if the batteries were made domestically instead of in a Chinese factory.

And yet, only 618 fully electric cars were sold in the country during the entire month of June, a pittance for an emerging economy with well over 200 million people. Flex cars reign supreme, and that’s likely to continue, especially if a group of nearly 350 members of Parliament who defend the interests of agribusiness are able to secure for ethanol-fueled cars the same incentives as EVs when an update to the Rota 2030 policy comes out as soon as next month.

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“With the public already sold on the reduced environmental impact from driving on ethanol, it makes the argument for switching to a battery considerably more challenging,” said Kevin Riddell, a senior manager at GlobalData.

For now, most automakers operating in Brazil are sticking firm to their commitment to ethanol, but with a new spin: a hybrid model that includes a flex engine, plus a battery.

“It is not about denying the electric vehicles, but ethanol still holds a place in Brazil’s journey for the next 10 to 15 years, especially because hybrids increase efficiency,” said Paula Kovarsky, chief strategy officer at Brazil’s biggest sugar-cane processor, Raizen.

Toyota Motor Corp. has already started selling a hybrid flex version of its Corolla that can run on gasoline, ethanol or electricity. Other major carmakers are plotting a similar path that lets Brazil keep ethanol in the fuel tank.

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Stellantis, which sells almost one in three new cars in Brazil, aims to develop its own flex-hybrid technology by the end of this year. China’s BYD, which will build a production complex in the northeastern state of Bahia state, told Bloomberg it will make EVs as well as flex-fuel hybrids. China’s Great Wall Motor plans to start assembling a flex hybrid model locally in 2024; it’s even in talks with Chinese suppliers and local authorities to develop a local supply chain for EV batteries. Brazil is already being aggressively mined for metals including copper and nickel used to make batteries in other countries, and it sits on relevant reserves of lithium, so producing EV parts locally would be a chance for the country to regain some ownership in the energy-transition economy.

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“Why should we deny this solution, which needs no additional infrastructure and uses such a clean fuel?” said Rafael Chang, president of Toyota Brazil, when asked about flex-fuel hybrids. Ciro Possobom, the head of VW in Brazil, makes a similar case: “Cars are going to be electric in the future, but that’s going to take a long time,” he said. In the meantime, “we strongly believe in a hybrid with ethanol.”

General Motors Co. is one of the only major carmakers skeptical that ethanol cars have a future in Brazil. The company, which has laid out goals to be carbon neutral by 2040, wants to replicate locally its global focus on EVs. Electric vehicles made in Brazil could be exported to any other country, while flex-fuel cars have only one real market, said Santiago Chamorro, GM’s president for South America. The company also doesn’t think EVs and flex hybrids are equals in terms of carbon emissions.

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“Brazil has the potential to be the third-largest global market for electrics,” said Fabio Rua, a vice president at GM South America. “So why would we accept delaying that progress?”

For now, ethanol remains so popular — among consumers as well as policymakers — that during a recent car show featuring more than 40 EVs in the nation’s capital that was meant to highlight the need to build charging infrastructure, Brazilian Vice President Geraldo Alckmin chose to take pictures inside the sole flex-hybrid car on display. While recognizing Brazil’s need to explore EV technology, he also spoke at the event about initiatives for fostering ethanol.

Until Brazil looks beyond ethanol, the country risks stalling out its emissions gains or failing to land a place for itself in the global automotive supply chain.

“Ethanol is a fine fuel, but wrapped in this topic is the desire that many have of not facing the real challenges ahead,” said Robson Cruz, a partner at Barassa & Cruz Consulting and a proponent of electrification. “Addressing carbon emissions with ethanol is cheaper for automakers, but it does not mean that’s the best option for Brazil.”

—With assistance from Tatiana Freitas and Beatriz Reis.

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