Brazil Moves to Cut Back Its Pioneering Alcohol Fuel Program

Brazil is taking measures to curtail the growth of its pioneering alcohol fuel program, which has saved gasoline and reduced pollution but has caused economic distortions and cost the nation billions of dollars.

The government has whittled away price incentives for using pure alcohol fuel, diminished the amount of alcohol added to gasoline, and told auto manufacturers to begin producing fewer alcohol-powered cars.

As Brazil retrenches, the Bush Administration is pushing for increased use of alcohol fuel. Last Monday, President Bush proposed that the use of “clean fuels” distilled from grain or natural gas be required for reducing urban air pollution.

Brazil launched its huge alcohol fuel program in 1975 as a response to the 1973-74 world petroleum crisis. The government has spent more than $6 billion in subsidies for the industry, and tax incentives have cost it billions of dollars more.

By 1987, all but 6% of new cars sold in Brazil ran on ethanol, distilled from sugar cane. And all gasoline contained 22% ethanol.

But as international oil prices fell, the $40 cost for each barrel of Brazilian alcohol became an increasing burden on the government and consumers. To cover the cost and make sure alcohol remains cheaper than gasoline for the consumer, the government has to keep retail gas prices artificially high.

Meanwhile, increasing amounts of surplus gasoline from Brazilian oil refineries has had to be sold abroad, mostly to the United States. Nearly two-thirds of Brazil’s 12 million cars still run on gasoline, but the number is declining as older gasoline-burning cars are replaced by alcohol models.

To slow that process, and avert more serious problems, the government has gradually increased the retail price of alcohol from 65% of gasoline’s price to 75%. With the previous difference, motorists got more miles for their money with alcohol, but now the cost-per-mile advantage of alcohol is negligible.

In March, the government reduced the amount of alcohol in gasoline from 22% to 18%. According to a Sao Paulo state environment agency, that measure increased the amount of carbon monoxide pollution in the city of Sao Paulo by about 12%.

With government policy changes and the recent alcohol shortages, demand for alcohol-burning cars has slumped. In May, 69% of new cars sold in Brazil used alcohol.

“Drivers are afraid of buying an alcohol car today and not being able to take it out of the garage tomorrow,” said Paulo Peixoto, a new car dealer in the southern city of Porto Alegre.