The Political-Economy of Biofuel and Cheap Oil Policies in Brazil

Brazil has pursued a mix of policy interventions in the fuel sector to achieve multiple objectives of economic and social development, promoting biofuels and reducing dependence on oil. We develop a welfare economic framework to analyze the rationale the fuel policy choices in Brazil and to analyze the trade-offs they have engendered in the fuel and sugar sectors. We also examine their distributional impacts on producers and consumers in the sugar, oil and biofuel sectors and on government revenues. Additionally, we undertake a normative analysis for the purpose of comparing the welfare and environmental impacts of existing policies with those justified by the goal of maximizing social welfare and addressing market failure. The ex-post analysis of the outcomes for different stakeholders in the fuel and sugar sectors provides insights on the likely political-economic factors guiding policy choices. We find that the status quo policies are likely to have been motivated by the objectives of exporting oil, raising government revenue and promoting rural development through the sugarcane sector and have had a significant adverse effect on fuel and sugar consumers and aggregate social welfare in Brazil