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Brazilian Ethanol: A Gift or Threat to the Environment and Regional Development?

The Brazilian government has been pushing for changes to the United States’ extensive barriers to ethanol imports. However, removing these barriers would have uncertain consequences for the environment and regional development in Brazil. Expansion in sugarcane production required to produce more ethanol could lead to greater deforestation. In terms of regional development, wealthier regions of Brazil could expand production more rapidly, actually reinforcing regional inequality. This paper addresses these two issues by developing and estimating a general equilibrium model of regional agricultural and labor markets. I find that the threat to forests is minimal. The greatest expansion in sugarcane cultivation occurs in Sao Paulo, away from the most environmentally sensitive areas. Concerning the regional development issue, I find that ethanol expansion leads to a significant rise in expected wages in all regions, with some of the largest proportional increases in very poor regions. Still, the gap in expected wages between wealthier and poorer regions does not close in general. Most of the earnings gains accrue to workers who were already working in sugarcane prior to the policy change. As a result, within many regions wage inequality actually increases.