Emergence of the Biofuel Sector in Brazil and in the US – The Role of Innovation Policy with focus on Public Procurement

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Andersen, Allan Dahl
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Biofuel is an issue that currently receives much attention worldwide due to its potential for lowering greenhouse gas (GHG) emission rates from transport and because the currently high, and still rising, oil prices have (in some regions) made ethanol production cost-competitive with fossil fuel. A longer-term perspective on energy sources also seems to be in favour of biofuels - in 2007, fossil fuels made up about 80% of the total world energy supply. At constant (continuation of recent growth in consumption) production and consumption, presently known reserves of oil will last about 41 years, natural gas 64 years and coal 155 years (Goldemberg, 2007). As a reaction to the latter, policies requiring ethanol blended with gasoline (in various proportions) are becoming widespread in OECD countries which is estimated to result in a demand for about 26 billion litres of ethanol in the short run (CREM, 2006, 27). It seems undeniable that the demand for biofuel will surge in both the near and medium-term future – the remaining question is who will produce it? Currently a wide range of countries are currently launching public funded ethanol programs in order to get a foothold in the sector for both strategic, environmental and economic reasons. Even though it will not be dealt with in this paper, the framework governing international trade will have a decisive impact on who will produce and thus export ethanol (Matthews, 2007). The idea with writing this paper is to take a first step towards understanding my main research interest which is fairly encapsulated in the question: What are the “potentials” for poor countries to benefit from the up-coming market for bio-ethanol as both producers and users? That several poor countries have the possibility to produce ethanol is unquestionable. This possibility mainly consists of the right resource endowment inter alia including available arable land, favourable climate and low wage level. Twidell and Weir (2006) estimate that Latin America and Africa are the continents with the largest potential for producing biofuel. Still, to benefit (short or long term) from this will depend on whether a given country is capable of gardening such a production sector through policy measures. Several scholars are of the opinion that other countries, developed and developing, can learn important lessons from Brazil’s history (Goldemberg, 2007; ESMAP, 2005). In the light of my main research interest, this paper considers the policy management that has taken place in the world’s two largest bio-ethanol producers – the US and Brazil. If any lessons can be learned it is likely to be from them. Therefore the paper is a step towards getting a firmer grasp on my future research. My focus in the policy analysis will be on innovation policy because establishing an ethanol sector per se may only be a matter of investments and thus reallocation of resources. Making the sector competitive/sustainable is another issue - an issue which in this case concerns productivity, technological development and how to manage the sector’s broader impact on society through inter alia institutional innovation.
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