The Development of Bioethanol Markets under Sustainability Requirements

Sammanfattning: This thesis is a theoretical and empirical examination of the developmentof bioethanol markets since 2005 when sustainability regulations forbiofuels were introduced globally. The experiences of Brazil and Sweden,and the influence of European regulations on the development ofbioethanol markets receive special attention. The work is based onprimary and secondary data sources gathered between 2009 and 2014,including interviews, field research, data from public and private sources,as well as an extensive literature review. The thesis uses case examples ofcountries that have adopted bioethanol as a transport fuel, such as Braziland Sweden.The research is structured using a bottom-up approach, and addressesthree specific angles of the complex issue of how bioethanol marketshave developed under sustainability requirements.The first part introduces an economic sustainability view of ethanol. Thecharacteristics of bioethanol fuel are presented together with conceptsand a theoretical framework for analysing biofuel sustainability. Policytools are also discussed, particularly those used to introduce fuel ethanolin the transport sector. The discussion is centred on the competitionbetween ethanol and gasoline, considering the hypothesis that consumersare sensitive to prices and tend to choose fuels based on their cost-perenergyunit. The analysis is supported by the case examples of Brazil andSweden, with special focus on the delicate balance between fueleconomies of bioethanol and gasoline systems in the face of differentways oil products are priced in those countries. Findings show thatdrivers tend to choose between bioethanol (E85/E100) or gasoline (E5-E25) depending on the relative prices between the two fuels. Theresearch results suggest that different pricing strategies for bioethanoland gasoline affect how consumers perceive the attractiveness of eachfuel. The examples of E100 in Brazil and E85 in Sweden provide insightson the elastic consumer behaviour that new markets may experience,serving to guide strategies in different contexts.The second part of this work bridges experiences in national contextswith the recent trend for biofuel sustainability regulation in internationalmarkets. Based on the hypothesis that the ethanol industry is responsiveto sustainability regulations, an examination of the development of theiiBrazilian bioethanol industry is carried out. This provides a comparisonframework drawing patterns between the industry's reaction to nationalregulations (past) and international regulations (recent). For this purpose,a comparison between the European sustainability requirements forethanol and the industry’s status quo is explored. Findings show that theEU sustainability criteria for biofuels are likely to have three effects onthe bioethanol industry: (i) compliance through incrementalimprovements in sustainability practices and certification; (ii) riskdiversification by engaging in multi-output production models; and (iii)market leakage towards less-regulated markets.The third part of the thesis brings together the first two parts. Itexamines how in a fuel competition context, the incorporation of costsrelated to sustainability certification can change the attractiveness ofhigh-bioethanol blends for consumers. The model of sustainabilityadopted by major international markets is based on regulations enforcedby mandatory certification. As biofuel market share increased, producerswere faced with costs for sustainability certification in order to obtainmarket access. While it was expected that ‘sustainably’ produced biofuelswould be rewarded with higher prices in the EU, this work found thatprice premiums for ethanol have in general been very small or inexistent,with certified fuels becoming the new norm in the market. New costsbrought into the market through sustainability certification can make itdifficult to balance between national policies heavily reliant on consumerchoice between fuels (and associated price-elasticities), and thedeployment of high blends of ethanol, such as E100 and E85.By analysing the three aspects (consumer behaviour and marketdynamics for ethanol in Brazil and Sweden, the introduction ofsustainability criteria for biofuels, and the implications of sustainabilityfor consumer choice between fuels) this work seeks to increaseunderstanding of the highly complex issue of biofuel market formationin the face of sustainability requirements. The key finding is thatsustainability certification has a cost, which needs to be orchestrated withother sectors of the economy to achieve the desired objectives. Thisthesis suggests that crucial areas of economic and environmentalsustainability have been often dealt with separately in biofuelpolicymaking, which has created weaknesses that deserve attention infuture policy efforts in order to improve biofuel systems.