Building Resilience In Brazil’s Biofuel Market
Published: August, 2017
João Paulo Pessoa and Leonardo Rezende are also authors of this report
Brazil is home to one of the largest and most successful biofuel programs in the world. The nation’s energy mix consists of 40% renewable energy overall, which is three times the world average and qualifies Brazil as a low-carbon economy. A new study shows increased flex-car fleet pays off at the pump for nonflex car drivers, highlighting how targeted climate policies can also lead to consumer benefits. Using weekly retail pricing data at the station level, they examined the impact on retail prices and margins, the price spread between gasoline and ethanol, and the correlation between gasoline and ethanol prices.
The analysts observe that the rise of flex cars is a key channel for improving consumer benefits and should be taken into consideration by policymakers, especially when they consider expanding production and markets for alternative fuels, such as hydrogen and electricity. As Brazil sets course for achieving its NDC and continues its transition away from fossil-fuel use, policymakers can continue to build on the strong foundations of the biofuel industry with greater confidence based on these findings.
The working paper is organized as follows: section 2 provides a brief summary of the general characteristics of the Brazilian fuel market. Section 3 presents a model of oligopolistic competition among fuel stations supplying both types of fuel. Section 4 describes the data we use and also shows some descriptive statistics. We present the empirical results in two parts: In section 5 we employ panel data methods to establish some relationships between flex car penetration and fuel retail pricing. In section 6, we exploit these relationships to estimate demand functions for fuel. We make some concluding remarks in section 7.